Can we beat Covid-19 without wrecking the economy?

Usually speculation in the week before the budget is all about who will get what. But these aren’t normal times. In the wake of the row between the Government and the National Public Health Emergency Team (Nphet) about whether the State should be moved to Level 5 – shutting down large parts of the economy – there is no doubt that the issue of further restriction are back on the agenda. Maybe this is where we are heading – but the way restrictions are managed will be vital. And there is a strong case for urgent discussions and analysis of the data to try to clarify which businesses need to close if we do go to Level 4 or 5, as the existing plans would see a much heavier hit on businesses and jobs in the Republic than pretty much anywhere else in Europe.

1. Does everything need to close if restrictions go up to Level 4 or 5?

In economic terms the move from Level 3 to Level 4 is the key one, if the Government’s current plan is followed. Some recent commentary to the effect that Level 4 would spare many SMEs is simply incorrect. The Government guidelines clearly state that under Level 4 “only businesses and services which are essential will be open”.

There are some small differences for businesses between Levels 4 and 5, but they are minor – principally outdoor businesses such as garden centres can stay open at Level 4 and hotels can serve existing guests. But that is it.

At Level 4, as currently outlined, key sectors employing a lot of people would close. These include the non-food retail sector ( except for those who can operate outdoors), construction, parts of manufacturing, and the leisure industry. This is in addition to the hospitality sector, much of which is closed or hugely constrained and sectors such as events which have never reopened.

I was confused by the new hospitality regulations, then upset and then angry

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Covid-19: Nphet not recommending move to higher level of restrictions as 506 new cases reported

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Donnelly says he discussed moving to Level 4 restrictions with CMO before Nphet meeting on Sunday

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Boris Johnson contacted Taoiseach over prospect of Level 5, FF meeting told

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At the peak there were 600,000 people on the Pandemic Unemployment Payment (PUP) during the initial lockdown, which fell to 217,000 as the economy reopened, though is now rising again. Some 17,000 applied for the PUP in the days after Level 3 restrictions were extended to the entire State – mainly pub and hospitality staff presumably – and Taoiseach Micheál Martin said he expects an influx of 50,000 in the coming days.

A wider lockdown would take unemployment, including the PUP, back towards the highs seen during the early days of the crisis. There would also be serious concern that, given the strained balance sheets of many SMEs, their ability to survive another period of lockdown would be questionable, even with Government supports. Recent research from the Central Bank and ESRI has clearly highlighted a significant group of companies which are now financially vulnerable.

In Paris, as cases surge, they closed bars and indoor sports areas such as gyms this week and told restaurants stricter protocols are needed

So a key question is whether all of the sectors need to close – certainly at Level 4 – or could some be classified as essential and allowed to continue? In Paris, as cases surge, they closed bars and indoor sports areas such as gyms this week and told restaurants stricter protocols are needed . They have limited the capacity in shopping centres. But while people are being told to work from home, the rest of the economy continues to operate. Here, the next step, as outlined, closes much of the domestic economy.

2. Which restrictions are vital?

A fundamental question is whether it is the social restrictions – on the number of people who can meet in houses, gather, attend events, go to funerals and weddings and so on – which are vital, or the economic ones? Or can they be separated? Analysis of this using any available Irish and international data is now crucial, as further restrictions remain possible in the weeks ahead.

One key decision relates to the construction sector. At the moment 150,000 employees are operating on 1,100 sites, according to the Construction Industry Federation, which argues its members' activities should be classified as essential as they are building badly needed houses and also infrastructure for manufacturing and other sectors. The CIF says sites have been operating with minimal incidents since reopening – there were a couple of reported incidents in the early days.

The definition of which manufacturing operations are "essential" and can continue to operate will be important

Beyond that, the definition of which manufacturing operations are “essential” and can continue to operate will be important. Many manufacturers remained open during the initial lockdown – including sectors such as pharma and much of the IT manufacturing sector– as they were judged to be producing vital products or be involved in critical supply lines. However, businesses employing around 40,000 people closed. Again, it would be worth seeing any evidence to judge whether this should be repeated. Meat factories – open as food manufacturers – have been a large reported source of sectoral outbreaks, but they operate under specific conditions favourable to the virus.

The other big job numbers are in non-food retail, which would also shut under existing Level 4 plans. So would the leisure sector and personal care – hairdressers, beauticians and so on. Much of the rest of the services sector involves activities which can continue with people working from home.

As sectors such as retail involve movements of significant numbers of people in a less controlled way, it might be more difficult to sustain an argument for them staying open. Again, the evidence here and internationally would need to be examined. Many retailers have gone to extraordinary lengths to make their premises as safe as possible. Could they stay open at Level 4 ?

Examining the evidence and coming up with a game plan for the different sectors, aiming to keep as much of the economy as possible open, based on evidence, seems a vital task now.

3. The importance of supports

Moving to a higher level of restriction would put pressure on the Government to extend existing supports for business and people losing jobs and come forward with new ones. Senior ministers have hinted at as much in recent days, without being specific. Central Bank economists in their latest report say that in a severe scenario involving successive further shutdowns, further measures beyond those announced already would likely be needed if the economy was to eventually return to its pre-Covid trajectory.The problem is that the longer the crisis goes on, the bigger the risk of permanent damage, via the closure of firms, the loss of skilled employment, the damage to balance sheets hindering investment and, crucially, the risk of large numbers slipping into long-term unemployment.

So as well as the loss of tax revenue and the immediate costs of higher unemployment and of more people relying on State supports, a series of prolonged closures of sectors or large parts of the economy would also threaten wider damage to the economy’s fabric – and to the lives of tens of thousands of people.

Most firms might get through another few months, with help

The problem in designing supports is that you would take a different course if, for example, you thought the worst of this might be over by next summer, compared to what you would do if it went into 2022. Most firms might get through another few months, with help, but the longer it continues the greater the risk of a change to the structure of consumer demand. For example, will the pub of the future be a socially distant pale shadow of the past, or the more familiar gathering point? When will people feel safe flying again? These consumer behaviours will be vital to the longer-term prospects of businesses across the country.

For now, the Government will support as many companies as it feels it can afford, probably well into 2021. Beyond that, nobody yet knows.

4.The wider impact

The good news is that in terms of the size of the overall economy, the pandemic has done less damage so far than expected. This is because of the extraordinary strength of sectors such as pharma, medical devices and computer services, where soaring exports have supported GDP. However the domestic economy has collapsed, losing not far off a fifth in value before bouncing a bit and sending unemployment sky-rocketing. And because of the persistence of the pandemic and the risk of a no trade deal Brexit, growth forecasts for next year have been pulled back.

In its assessment this week, for example, the Central Bank estimated that in a severe scenario where restrictions and shutdowns continued through 2021 and into 2022, GDP and the domestic economy could both fall slightly again next year, hit by falling international demand and weakness in the consumer economy. A big problem, if heavy restrictions continue and – for example – the entire non-food retail sector closes, is that consumers, many with incomes unaffected and bulging savings accounts, will not have the opportunity to increase spending. Or they will be nervous about resuming any kind of normal economic life. Likewise business investment would be at risk.

This is the economic price of further widespread lockdowns

The Central Bank numbers see the unemployment rate stuck at 12.5 per cent next year in a severe scenario and still above 10 per cent in 2022. This is the economic price of further widespread lockdowns internationally and in Ireland. Of course this may not happen. But the resurgence of the virus across much of Western Europe has nerves on edge. Every country is now trying to work out which key buttons to press to try to get the numbers back under control.

The prize, if a way can be worked out, or a vaccine appears,is of course,enormous.