Even if the coronavirus and lockdown are gone by June, the economy we know will not be waiting for us on the other side.
Many commentators and market analysts are hanging on the notion of a V-shaped recovery, where the economy suffers a sharp but brief period of decline followed by an equally rapid bounce back, but that’s an illusion or at best wishful thinking.
Big crises leave scar tissue. They change the way we behave, sometimes permanently. They make consumers wary about spending. This one may make them wary of about even going out. The appetite for mass gatherings – concerts, sporting events, pubs, which are a sizeable component of the domestic demand – is unlikely to bounce back rapidly, not while the threat of the virus lingers.
The "big danger" for the pub industry when pubs eventually reopen is that people will have got too used to drinking at home and won't return to pubs in the same numbers, Dublin publican Charlie Chawke said this week.
The recourse to buying and doing things online is also likely to have been accelerated by the lockdown, potentially exacerbating the woes of traditional bricks-and-mortar industries.
And cautious doesn’t capture the predicament of the 350,000 people expected to lose their jobs as a result of the crisis, nor the fall-off in demand from their reduced buying power. Employment reversals of this magnitude take time to heal. It took us exactly 10 years – from 2008 to 2018 – to recoup the jobs lost in the economy from the 2008 crash. And that was on the back of turbo-charged growth led by multinational investment. Can we be assured of that this time around?
The weaker consumer environment is also likely to feed into a more cautious business environment with companies failing or stalling investment in the face of weaker demand. This is just the way recessions work. What’s unusual about this one is not that it is predicated on a global pandemic but that it involves the voluntary shutting down of vast swathes of the economy. A suppression rather than a recession might be a better description. Recessions are natural manifestations of the economic cycle, typically involving 2-3 per cent of the economy coming to a standstill, maybe 10 per cent in the case of a bad one, but people are encouraged to work and spend, not isolate themselves.
On the basis of official estimates of the jobs at risk and the threat to businesses, we might reasonably assume that 20-60 per cent of the Irish economy has currently been mothballed, an unprecedented scenario, the implications of which are difficult to gauge.
A U-shaped recovery – with an extended but not a prolonged trough – is probably the best we can hope for. But even this may require a major fiscal stimulus, over and above the financial supports already announced.
Recovery stimulus
KBC Bank economist Austin Hughes draws a distinction between what he calls fiscal respite – the €15 billion in income supports, benefits and credit guarantees unveiled by the Government, which are aimed at easing the pain – and a recovery stimulus designed to reboot the economy once the restrictions are lifted.
“Think of the way financial markets froze in the financial crisis, they didn’t thaw automatically themselves, they needed very dramatic central bank intervention,” he says, the implication being that a comparatively big stimulus will be needed this time for the real economy.
And here there is a possible silver lining. Ireland has for some time needed a massive investment in infrastructure, particularly in areas such as housing, but has been constrained from doing so because of the European Union's fiscal rules and more recently because of capacity issues, the lack of workers. These impediments have now been removed.
A massive State spend on badly-needed infrastructure could cure some of the country’s most pressing problems while acting as a recovery stimulus and an employment boost at the same time. As Rahm Emanuel, former US president Barack Obama’s chief of staff, put it back in 2008, “Never let a good crisis go to waste.”
With a big stimulus we’d be turning this increased capacity to our advantage and, unlike the post-2008 period, we wouldn’t be tied into the austerity-led policies of creditors.
The alternative is an overhang of weak production and weak demand driven by caution and uncertainty.
The Organisation for Economic Co-operation and Development (OECD) says Ireland is likely to suffer the mildest reversal of all OECD countries in terms of gross domestic product (GDP). The Paris-based think tank estimates that the shutdown to slow the spread of the virus could reduce economic activity here – in GDP terms – by 15 per cent, compared with contractions of 35 per cent in Greece and 29 per cent in Germany.
And this reflects one of the other inherent strengths of the Irish economy, namely that exports are dominated by pharma and IT, non-cyclical industries, which are unlikely to see the same fall-off in demand as other sectors. In the case of IT, the lockdowns imposed in many countries may actually boost demand.
But everything hangs on successful containment and the swiftest possible lifting of restrictions. June is the optimistic scenario, August or later is the worst-case one.
