ESRI warns of recession if outbreak lasts more than three months

The Irish economy may fall into recession if the coronavirus outbreak persists for longer than three months, the Economic and Social Research Institute (ESRI) has warned.

The ESRI’s Kieran McQuinn said if the outbreak can be contained to a single quarter and “if by June/July things are returning to normal then the Irish economy should still register positive growth this year”.

However, he warned if the issue and particularly the “lockdown” goes beyond that period “we’re looking at zero or even negative growth for the year”. In other words, a full-blown recession.

Both the ESRI and the Government have predicted growth for the Irish economy of 3-4 per cent for this year. However, the forecasts were made before the Covid-19 pandemic hit and both have hinted they will be revising their forecasts downwards in the coming weeks.

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While many economic commentators are comparing the outbreak to the financial crisis of 2008, Prof McQuinn said Ireland should be better able to cope with the fallout from the coronavirus.

“In terms of a comparison with the 2008 financial crisis, there are key differences with, say, the financial crisis in that we were especially hit hard by that crisis because of the particular weaknesses in our financial sector,” he said.

“We are still dealing with issues associated with that in terms of arrears, NPLs [non-performing loans] on the balance sheets of the banks 13 years later,” he said.

Nonetheless he warned that as a small, open economy, heavily reliant on international trade, Ireland could be hit hard by a global downturn, which he said was “very likely to occur”.

Overall the Irish economy was set to perform quite well this year until the virus hit, Prof McQuinn said, “so the underlying dynamics are strong, and so the economy is reasonably well placed to weather a significant one quarter downturn, after that though I think it’s impossible to call.”

The temporary easing of the Brexit uncertainty at the end of last year had triggered a bounce in consumer confidence here. However, this has been overtaken by the coronavirus outbreak.

European Central Bank chief Christine Lagarde's comments on Thursday that it was not the ECB's job to help virus-stricken countries struggling in the debt markets, such as Italy, has further unnerved investors and caused a sharp sell-off in Italian government bonds.

ECB chief economist Philip Lane attempted to allay tensions today with a more supportive message. "We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions of the euro area," Prof Lane said in a surprise blog post on Friday.