Large parts of the economy are in lockdown again. How do we assess the economic costs of this? Data, outlined below, shows how many people never returned to work after the first lockdown in the most-affected sector. The worry now is a ratcheting upwards of the numbers out of work as lockdowns come and go.Yet huge uncertainty continues to cloud the outlook. How we do assess the economic damage of the latest move to Level 5 ?
1. The immediate hit
The Government estimates that some 150,000 to 200,000 people will now be put on to the Pandemic Unemployment Payment, many for the second time. It is impossible to estimate this exactly as some employers will chose to try to keep people in work, helped by wage subsidies, while others will be unable to do so. The State will pay either way.
The Department of Finance has estimated that additional borrowing of around €1.5 billion will be needed to pay the bills. This means the deficit – using the EU general government deficit measure – will rise to around €23 billion this year, compared to the €21.5 billion budget day target.
While guessing what Irish GDP figures will show has turned into a bit of a pointless lottery, the estimate now is that GDP will fall by 3.5 per cent this year, above the 2.75 per cent budget forecast. But the key point is that the domestic economy will take another hit – Central Bank governor Gabriel Makhlouf said thatthe fall in domestic demand this year would now be above its earlier 7 per cent forecasts. The severity of the initial lockdown meant that the fall in household spending – around 22 per cent at its worst – was above most other countries. Now the same dynamic will apply, spending will tank and already high savings rates will soar further.
Estimates of the costs to incomes are difficult to make – the previous shutdown hit younger, less well-off people the most and this one will too. State supports offset a fair bit of the hit, especially for people on lower incomes, But with many people moving back out of work for a second time and a substantial group in industries which have never reopened, the financial impact on some households is now really significant. Those in work are building up their savings – more than one in every three euro of disposable income is now being saved, twice the average. But those who have been hit hardest are running their deposit accounts down.
2. The impact on jobs
The short-term impact on jobs will be clear soon enough. But what about moving into next year? This is trickier to judge, as we don’t know how many people will return to work when the lockdown is – we hope– lifted in six weeks’ time. So what does the evidence show?
Well, in broad terms a lot of people did not return to work after the first lockdown ended. The numbers on the PUP peaked at 600,000 in May and fell to almost 200,000 recently, before rising again to 244,000 as restrictions started to tighten, Now the total is heading back to perhaps 450,000.
One reason why the PUP numbers did not fall further was that some sectors – travel, entertainment and so on – stayed largely closed. But even in sectors which did reopen, employment did not return to previous levels. In retail, for example, PUP numbers peaked at over 75,000 in May but were still over 23,500 on recent figures, after the sector had fully reopened. They rose back towards 30,000 more recently as restrictions were tightened in Border counties. In hospitality, in which some businesses did stay closed, numbers peaked at 120,000 but were still over 46,000 on recent figures.
The concern now is that as more businesses run into financial trouble, even with Government supports, many will not make it through, or will only do so as smaller enterprises. And so, next time the economy reopens, the PUP numbers will not even fall back to the 200,000 level. Not only are many employees in the most exposed sectors now moving on to PUP, jobs in these sectors also account for a significant share of those supported by wage subsidies.
The long-term viability of many positions is thus in question. The latest figures show more than 700,000 people either on the Live Register, the PUP or supported by wage subsidies.
3.Squeezed business finances
A study of SME finances by the ESRI – Covid-19 Pandemic and SME Revenues in Ireland; What’s the Gap? – showed that many were vulnerable.Close to half of SMEs typically have cash reserves that fall short of a single month’s expenditure.
Two in five of the micro firms – one- or two-person operations mainly – and half of the larger SMEs faced a revenue shortfall from May to June during the first lockdown. A large shortfall in reserves compared to the revenue shortfall was expected by the end of the year – the total could be €4 billion to €8 billion across the economy by the end of 2020, the ESRI researchers estimated, and the lockdown now is a more extreme situation than they had modelled.
Having spent much of their reserves in the first lockdown, many firms are now exposed. Beefed up State supports will help, but some will still not make it.Economist Chris Johns told this week's Irish Times Inside Business podcast that there was a risk that the rate of damage to the economy could now accelerate, given the kind of factors outlined above.
4. Support from the operating economy
There is no doubt that the continued operation of much of the economy has been vital and that some multinational sectors in particular have done much better than might have been expected. An analysis by the NTMA in its latest investor presentation estimates that around 50 per cent of the economy (as measured by gross value added) was able to continue “normally” through the pandemic, including foreign-dominated industry sectors and all of the public service. In turn this has supported tax revenues and many better-paid jobs. This has given us some leeway to pay for the latest lockdown – remember just a few months ago the deficit was forecast to go to €30 billion. Now, even with the latest setback, it will be €23 billion or so.
Some 40 per cent of the Irish wage bill is in the most-affected sectors, according to the NTMA presentation – in many countries it is 45 per cent or more. However the hit to employment here is still at the high end of the international average. This is explained by the fact that many of the jobs lost have been lower paid.
5. Does extra state borrowing matter?
The numbers have been so big that we have got a bit blasé about an extra billion here or there. And extra money can be borrowed at zero interest rates now, or very close to it. Irish ten-year debt is now trading at an interest rate of minus 0.25 per cent – in common with other euro zone debt, it is benefiting from massive buying by the ECB. The Republic is also seen as a decent bet by lenders, a big change from ten years ago when we slumped into a bailout. An extra €1.5 billion this year won't make a huge difference. However, what will worry Finance Minister Paschal Donohoe is the risk of successive rolling lockdowns in 2021 .
The Department of Finance estimated that this kind of scenario could push the deficit to €25 billion next year from an expected €20.5 billion. The momentum of improvement in the exchequer finances would disappear.
6. The outlook
The concern now is a succession of shutdowns moving through 2021 which would slowly strangle much of the domestic-facing sectors of the economy. The Department of Finance estimates published with Budget 2021 said that repeated severe restrictions would lead to continued recession next year, with GDP falling by 2.1 per cent, leaving “ a long and protracted road to recovery”. The unemployment rate next year would be 14 per cent, rather than the expected fall to 10 per cent.
One concern would be that the damage would spread more widely through the economy – suppliers to affected businesses would run into trouble, consumer spending would stall, investment tail off, bad loans would rise and so on. The duration of restrictions and their severity is the vital ingredient here.
Still, we are dealing with great uncertainty. Vaccines and treatments would have a big impact moving into 2021 – we just don’t know if or when they might come. If this were to happen, the vast sums in the savings accounts of people who have not been affected could start to be spent. There would still be a lot of damage and really significant youth unemployment, but a recovery with momentum would give some options to deal with this.
