Danny McCoy: Covid-19 crisis a threat to both health and economics

The Covid-19 global pandemic continues to progress with substantial tolls for both morbidity and mortality but with continuing uncertainties for populations and businesses.

The uncertainties play out in many dimensions, not least on how to reopen our society and economies in a safe manner to avoid future restrictions. The Government’s response to phased reopening rightly continues to place a high emphasis on the public health dimension of the virus. It now acknowledges that the compression of the health system and economy will have consequence for other health outcomes, too, which are as yet undermined but certain to be there.

The other certainty resulting from the sharp compression of economic and social activity is the economic crisis, which is now becoming revealed. The “temporary” nature of both crises is becoming dispelled and we now have to accept that the impact of living with the virus is likely to felt for a year or more.

If it turns out to be shorter we can be relieved but for now it becomes imperative that the strategy for temporary disruption is replaced by a different and economically sustainable response.

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This unprecedented shutdown of the Irish economy has left one in every three people of working age reliant on the State for their income. Despite wide-ranging income supports for households, we have seen a sharp contraction in domestic economic activity, with Central Bank of Ireland figures showing a 40 per cent fall in spending on cards or withdrawals from ATMs since the start of March.

For many sectors, the reality is that demand has disappeared completely. A recent Ibec survey of more than 550 chief executives showed that over 80 per cent have seen a hit to their profitability in 2020. Two-thirds of those companies have suffered substantial losses.

Reawakening demand

Almost 20 per cent of chief executive have had to close their organisation completely. There has been no time to adjust. This has left many business owners in the lurch with bills piling up, expensive stock sitting on the shelves and payment timelines stretched. While we begin to talk about reopening the economy, many companies are wondering where they will get the cash to survive.

In the same Ibec survey, almost half of the chief executives expect a return to pre-Covid-19 demand to take six months or more. As a result of ongoing social distancing, most companies in consumer-facing sectors may remain loss-making until the end of the year. On the other hand, the research shows that more than 50 per cent of SMEs and 45 per cent of mid-caps have less than three months of cash reserves.

The growing business frustration at the pace and scale of supports have been tempered by the announcements over the weekend.. In this regard scale is important - the economy is set to contract by between €35 billion and €50 billion this year. The focus of policy thus far has been on deferring debts for another day and offering near market rate loans. This storing up of balance sheet problems if left unresolved will significantly impair our ability to recover from the crisis.

Contrary to political and public discourse, this is not a question of capacity. The Government’s stability and growth pact update estimates Ireland’s direct fiscal measures to combat the impact of Covid-19 at 2 per cent of gross domestic product.

The average scale of national direct fiscal measures introduced by comparable international counterparts is 7.1 per cent of GDP. Many of these direct measures have been further supplemented by large-scale public loan schemes and guarantees multiple times that size. Not only must we do more but our society and economy are better served by doing more.

Swiss model

We must look at successful measures adopted internationally to head off irreparable balance sheet damage. A key observation is Switzerland. The Swiss liquidity scheme saw 100,000 zero- or low-interest loans to the value of €15 billion distributed to SMEs through on-lenders in under three weeks. This speed was achieved through the use of state guarantees of 100 per cent up to €475,000 and 85 per cent up to €19 million, which avoided much of the complicated and costly underwriting process. Other schemes internationally, with lower guarantee rates have seen poor take-up and slow approval times.

Some countries have circumvented the lending process completely and instead relied on the direct cash model successfully introduced here for households. Germany has given €15,000 over three months to small business owners and the self-employed to cover their fixed costs for the duration of business closures. Denmark has gone a step further by introducing a €5.4 billion package of no-strings cash compensation for companies badly impacted by Covid-19. The package would pay out up to €8 million per company to cover fixed costs over the closure period, proportionate to turnover.

These examples may now be guiding Irish policymakers thinking in designing innovative ways to inject money into the economy rapidly and with precision to where it is needed. Debt alone is not a panacea. In some cases, direct grants, debt restructuring and equity investment from the State are being considered. In all cases, early engagement with solutions will provide vastly improved outcomes.

Failure to properly execute plans to support companies through this crisis risks confidence lagging, negative feedback loops emerging and a significantly longer recovery timeline.

The significant negative impact of Covid-19 on the economy will be reflected in the Government finances. The deficit may hit double digits, as a percentage of GDP, in 2020. Far from being a negative, this will be a sign that the Government has done the right thing. In a world where central banks are committed to keeping financing costs low, we should do whatever it takes to combat the economic crisis.

The only sustainable way to tackle the twin crises for public health and public finances is to reopen the economy in a phased manner but with significant pace.

Assessment of modifications of restrictions can’t be singularly on the Covid-19-related health statistics but also now need to have explicit economic criteria too. Gaps of three-week intervals to assess the impact of public health measures have their own contained logic, but at what economic cost to livelihoods and capacity of businesses to survive while awaiting a future reopening phase?

Danny McCoy is chief executive of business lobby group Ibec