First we thought we were shutting the economy down for a few weeks. Then it quickly became clear that we were in a longer-running battle. Now we have seen a significant lift in activity as the worst of the early restrictions were lifted, but the outlook is clouded again by the fear that parts of the economy will open and close for a prolonged period as the virus ebbs and flows.
We appear to be on some kind of strange economic plateau. Activity has risen from the valley of the initial shutdown but it is not clear what further progress we can make in climbing back to the previous level of activity. The latest restrictions in Dublin and Donegal, and talk of more to come, now pose another threat, with business sources reporting a definite pulling back in business plans across the economy to “wait and see” what happens.
In turn this means the State will have to keep pumping in money to replace falling activity in the private sector.
It is the strangest of recessions. Some sectors continue to operate successfully – if differently – while others are shattered. Many incomes remain unaffected – public servants will get a pay hike next week – while hundreds of thousands now rely solely on State supports.
It is incomparable with anything that has gone before. And so we have no real template to judge what happens next.
The “big mo” - or momentum – is a phrase originating from US sports. Winning teams tend to keep on winning. Economic recovery needs momentum too – a steady improvement in confidence that leads consumers to spend and businesses to invest. We did see a big jump back in consumer and business confidence over the summer, after the first wave of restrictions were lifted. Those queues outside Woodies and B&Q were not just a temporary catch-up – people have money to spend.
But what happens now? How can economic momentum be built if we are facing rolling waves of restrictions? Or are we just hanging on for a vaccine?
There is one word appearing in all the forecasts for the months ahead: uncertainty. The autumn and winter will see nervousness about how the virus story plays out and tetchiness as different sectors seek more help.
Business-planning horizons in many sectors are now down to weeks – no one has a clue how things will play out.
The political consensus has already shattered. Citizens are worried about what happens next. And the public finances have plunged into deficit – which could rise to €30 billion this year – to pay for it all.
"Economic forecasting is not a precise science at the best of times," according to Martina Lawless, research professor at the Economic and Social Research Institute (ESRI), but with the outlook now reliant on infection rates and what this means for public health restrictions, we face a period of " incredible uncertainty".
“We can realistically hope next year will be a better one for the economy than this year,” Lawless says, as we now have increased knowledge about dealing with the virus and more targeted restrictions than the initial shutdown in March. But precise estimates are impossible, and if there are ongoing restrictions these could still take a heavy toll, she says.
The Irish Fiscal Advisory Council (IFAC), the budget watchdog, says in its latest report that while the initial hit to the economy was not as bad as its worst fears, "there is substantial uncertainty surrounding the path for the economy and health risks" in the months ahead, added to by fears of how Brexit will play out.
The gap between the possible scenarios it outlines cover an outcome that would be difficult but manageable, to something significantly worse. Yet so far tax revenue has held up much better than expected and the economic fall-out so far has been, overall, towards the lower end of what IFAC and the Government had anticipated.
GDP, a measure of the size of the economy, dropped by 6 per cent in the second quarter . This was the biggest quarterly fall on record – but also not quite as bad as most forecasters had anticipated.
How do we explain this? Parts of the economy continue to do “surprisingly well”, says Lawless, with exports boosted by pharma and medical devices. There is a huge gap in output trends between the modern, multinational sector and more traditional industries that depend more on the home market.
The kind of widescale collapse in tax revenue that led to the need for massive tax hikes and spending cuts in the teeth of the financial crisis are not evident this time, she points out, meaning the Government has more room for manoeuvre.
However it has been “off the scale” in terms of how some sectors like hospitality and tourism were hit, as Lawless puts it. The outlook for these sectors is clouded with uncertainty. IFAC calculates that, excluding the multinational sector, the domestic economy collapsed by an astonishing 18 per cent in the second quarter – though it has bounced back significantly since then. In the latest survey from Chambers Ireland, the mainly small and medium-sized enterprises (SMEs) that make up its membership estimate that turnover is down by about a third.
In hospitality, tourism, entertainment and parts of the retail sector there has been little short of devastation
How is business confidence? "Brittle is the way I would describe it," says Gerard Brady, chief economist at the Irish Business and Employers Confederation (Ibec). "Many companies are finding it impossible to forecast with any confidence – those depending on consumer demand are often only working two to three weeks ahead."
And a range of business sources now express nervousness about the impact on confidence of the new restrictions in Dublin and Donegal, and the talk of more to come. Preliminary Dublin footfall figures have been down sharply in recent days – running up to 20 per cent below the previous week and close to 50 per cent down on the previous year. Early indications are that the city is emptying out earlier each day, particularly at weekends.
"If this pattern becomes the norm, the city will be eerie, empty and dark from early evening as we head into winter," according to Richard Guiney of the Dublin Town retail group, which compiles the data.
In hospitality, tourism, entertainment and parts of the retail sector there has been little short of devastation. And this points to the clearest evidence of the economic price – soaring unemployment. Central Statistics Office (CSO) data shows the overall unemployment rate when Pandemic Unemployment Payment (PUP) recipients are added peaking close to 30 per cent in May before falling to around 15 per cent. The rate was 12.6 per cent in August for those over 25.
The concept of a “K-shaped” recovery, with some sectors doing well and others heading downhill has gained traction internationally. In the US it has been characterised as a recovery sitting on top of a depression – of the well-off cashing in and stockmarkets soaring, while the less well-off lose out.
Here, too, the defining factor of the recession is the way its impact has focused on certain areas of the economy. For many, incomes have been steady and it has just been a case of working from home and perhaps cancelling a foreign holiday.
However, businesses and lives have been turned upside down in the sectors that rely on interaction with consumers, including travel, hospitality, entertainment, the arts and non-food retail.
The predominantly younger and lower-paid workforce in these sectors is by far the most exposed. The unemployment rate among 15-24-year-olds is far from a perfect indicator , but counting in those on PUP – and even allowing for the fact that many of these will return to education – it is now flashing red at 38 per cent. For every job that now returns, there will be many applicants. We are heading into a youth unemployment crisis. And Government policy to address this – via training, reskilling, job placements and so on – will have to move to a whole new level.
“It’s clear that young adults have borne the brunt of job losses to date,”according to ESRI economist Barra Roantree. “CSO statistics show that at their peak, claims for the PUP amounted to 50 per cent of 2019 employment levels for 18-24 year-olds, 28 per cent for 25-34 year olds, and far above 22 per cent for 35-66 year olds.
“While the reopening of the economy has reduced the numbers claiming the PUP substantially,” young adults are still about twice as likely to be on the PUP as workers in their 40s or 50s” says Roantree. “Young workers – especially those with lower levels of education – are less likely to be able to work from home and more likely to work in sectors such as hospitality and entertainment.”
And there is a huge difference between city centres – half deserted – and suburbia, where businesses are busier as people working from home frequent their local area. Google Mobility data shows Dublin workplaces, literally, half empty. Estimates are that offices are at most one quarter full on average – and that was before the latest restrictions.
Guiney points to the absence of office workers as a key factor: “They stop for coffee in the morning, meet friends and colleagues for lunch, arrange hair and beauty appointments, meet friends for a meal or drink after work.”
Yet in the suburbs shops are generally busier. A straw poll of restaurant and café owners, including some with premises in both Dublin city centre and the suburbs, shows city centre sales in the region of 20-30 per cent of last year, while in the suburbs business can be in line with or not far off 2019 levels. The latest restrictions, of course, will provide a further hit.
Yet most retailers report that they are beating revised targets and in some cases are even ahead of last year
At Dundrum Town Centre in Dublin's south suburbs, centre director Don Nugent says that since the lockdown ended footfall has improved week on week and has been close to 2019 levels, though has fallen back a bit after the latest restrictions as some people become more cautious about leaving home. However shopping habits have changed.
“Everyone who comes in is on a mission,” he says, heading for the store and the purchase they want. “People are not browsing” and so they amount of time they spend in the centre has fallen back.
Yet most retailers report that they are beating revised targets and in some cases are even ahead of last year. The centre is now planning its Christmas and end-of year activity, but these will look very different from the past, with numbers strictly limited.
Santa will still arrive but the typical large gatherings to welcome him in shopping centres around the country and the queues to visit will not happen. The socially distanced Santa will be a strange phenomenon.
The economic debate in the autumn is taking shape. It will be framed, here and in many other countries, by the question of whether we can “live with” the virus without opening and closing big parts of the country as numbers ebb and flow. The more the restrictions and the greater their duration, the bigger the economic hit. Yet the conundrum is the same as it was from the start – while restrictions do short-term damage to some sectors, controlling the virus is vital for economic as well as health reasons.
The Government’s recent five-stage plan was concerned with suppressing the virus; the political pressure now will be on whether it can come up with a strategy to live with it, without causing such massive economic and social damage.
Another theme will be soaring youth unemployment. It is unclear where the unemployment rate will settle for the under-30s, but it will be at a high level.
“That really worries me because we know that job losses have persistent ‘scarring’ effects on future prospects,” says Roantree of the ESRI. “Young adults will therefore need continued income supports and access to effective retraining programmes if we are to avoid a lost Covid generation.”
Brady of Ibec agrees. “This is the first time since the second World War that we have seen significant numbers of unemployed, like this, without the ‘release valve’ of emigration,” he says. “There are obvious implications for the State in terms of economic and social scarring, people’s health, and political stability from having over 400,000, mostly young, people left unemployed for any extended period of time. There is a gargantuan task ahead for areas like re-training, upskilling, and hiring supports.”
As well as supporting this group, the debate will be framed in the weeks ahead by the need to continue to support businesses and keep people in work, and by a huge political brawl about who gets what and when.
When we went into the crisis in 2008 that figure was minus €70 billion
Lawless of the ESRI, who recently worked on a study of the impact on SMEs, said she would be concerned that many companies who survived one hit during the lockdown could be vulnerable if they now face multiple hits as restrictions come and go.
In a note to clients this week, Dermot O’Leary, chief economist at Goodbody Stockbrokers, said the rising threat of additional restrictions may now “necessitate a rethink” of Government supports. As the virus drags on, “public sector replacement of private sector demand looks like it will continue for some time”.
A real issue is how best to frame these supports in the longer term. The Economist magazine posited that after Covid-19 we might be looking at a “90 per cent economy” – in other words, with a chunk of activity lost. We don’t know if this will be the case, but there are real questions about the future shape and size of sectors such as pubs, hospitality, tourism and aviation – and about the long-term and appropriate shape of Government support.
There is hope. Forecasters generally do not see Covid-19 as causing the same long-drawn out recession as the financial crash – even if Brexit does add a threat of a double whammy. (This would apply to different sectors than those most exposed to Covid-19.)
A lot of this will be about confidence. Brady points out that the amount of cash Irish households have in their bank accounts now outstrips their borrowing from the banking system by over €20 billion. When we went into the crisis in 2008 that figure was minus €70 billion.
The State can, for now, borrow cheaply, even if a big hole has already been blown in its finances as borrowing soars, adding to already-high national debt. We have exporting sectors which continue to thrive. If a vaccine appears in 2021, or there is some combination of a vaccine on the horizon and better treatments, real recovery could take hold. If not, then we face the more difficult and economically costly task of living with the virus for a longer period.
Until then the uncertainty continues. And the risk is that if we don’t find a better way to live with the virus in the meantime we will be left crawling slowly from the wreckage of the Covid-19 economic collapse.
Fingers crossed.
