A sharp jolt downwards in economic activity will now happen as the Government increases the level of its response. There are already signs of slower spending in some areas – on holidays, restaurants and so on – and indications that business life is slowing. The unprecedented measures now announced will accelerate this significantly, as well as causing operational difficulties for many companies, notably for those with staff who need to mind children who are off school.
There are three vital questions, in economic terms. How long will this last for – and in the short term what happens after March 29th, when the current measures are due to end? When the worst is over, will there still be sufficient concerns to worry people enough to limit their spending, or to lead businesses to hold off investment and hiring – or re-hiring? And what lasting economic damage – bankrupt companies, jobs lost, pressure on business finances and so on – will be left in its wake?
1. The signs
Warning lights were already starting to flash. The following are just some examples. These trends will now accelerate, as consumers and businesses get to grips with the new restrictions and spending falls off further. So far:
– Half of 400 companies in a Dublin Chamber of Commerce Survey said their sales had already been affected. While the majority of these had seen reductions of less than 10 per cent, a significant minority – four out of ten of those experiencing a decline – had seen a bigger hit. Not surprisingly, nearly all companies said they were either “very concerned” or “somewhat concerned”. Those in the frontline of consumer spending, retail, wholesale, accommodation and food services were most affected.
Ian Talbot, chief executive of Chambers Ireland, the umbrella body for the chambers of commerce, said that as well as the immediate uncertainty for businesses , sectors such as tourism – and the many businesses reliant on it – faced serious medium-term worries over bookings for the rest of the year. Consumers worldwide were holding off making holiday bookings and while staycations might make up for some of this, Irish consumers would be likely to sit on their hands for now as well.
The aviation sector is hugely exposed and is already cutting capacity, with more to come
Goodbody economist Dermot O'Leary has pointed out that 10 per cent of Irish jobs are in tourism, above the OECD average of 7 per cent and while US president Trump's travel ban does not specifically cover Ireland, it is likely to lead to fewer US tourists coming here. Visitors from Europe are also likely to fall sharply. The aviation sector, meanwhile, is hugely exposed and is already cutting capacity, with more to come.
– Travel sector: As well as those relying on inward travel, one of group at the frontline and immediately vulnerable to falling consumer demand is travel agents. Many agents were seeing bookings down by 60 to 80 per cent on the same period last year, according to John Spollen, president of the Irish Travel Agents Association and director of Cassidy Travel. There were also cancellations – particularly for the next couple of months. Spollen said he was seeing some booking interest for later in the year – September, the October bank holiday weekend and even next Christmas.
There are the first signs of a fall-off in traffic on public transport and the roads
– Footfall on Dublin's main shopping streets is down. Richard Guiney of the Dublin Town group, speaking before the announcement on Friday,said footfall was down by over 5 per cent last week on the same week in 2019. He said: "Streets with a large restaurant/pub offer such as South William Street and Dame Court, saw the greatest declines, South William Street being down by 10.8 per cent while Dame Court saw a reduction of 11.8 per cent compared with the 2019 outturn." This week is proving to be extremely tough for members, according to Guiney, with large reductions in all sectors, including retail as well as hospitality. Restrictions on events and working from home will further cut movement around the city.
– Traffic: There are the first signs of a fall-off in traffic on public transport and the roads. NTA data shows a drop of around 5 per cent in public transport traffic from normal levels, and anecdotal evidence suggests this may be accelerating as the weeks goes on. Transport Infrastructure Ireland figures also give some early hints of a fall-off in traffic volumes. While too much should not be read into short-term figures, an examination of data for a range of roads nationwide – from the M50, to suburban Dublin roads, commuter country roads in Wicklow and Kildare, major road sections in Cork and others, a general fall of between about 1.5per cent and 5.5 per cent was evident this week on Tuesday and Wednesday, compared to the same days last week. With the imminent closure of schools and more people working from home, these trends will now swiftly accelerate.
2. What next?
The unusual factor is not only the extent of the fall-off in demand facing some companies, but also the speed with which it is hitting. The more general measures now announced, including the inevitable cancellation of many events, will speed this up this significantly and require many companies in areas such as food services to lay off staff, at least temporarily. Ironically, the first news after Thursday's announcement was of a surge in grocery spending, but there is no doubt that in the weeks ahead demand in other areas will be significantly lower.
As spending in the economy declines, higher spending by Government will make up some of the gap – the €3 billion package announced in the Republic is significant and there may well be more to come, With around half the jobs in the State relying on foreign demand, O’Leary of Goodbody has pointed out that it also matters to Ireland what foreign governments do to support their economies.
We all have to live and eat, but discretionary spending will fall sharply as people stay at home
Some industries will already be cutting shifts and ditching hiring plans and it will now only be a matter of days before we hear of lay-offs, short-time work plans, protective notice, a raft of temporary closures and so on. We all have to live and eat, but discretionary spending will fall sharply as people stay at home. The ban on large indoor gatherings will hit many parts of the economy.
It was always clear that the greater the restrictions imposed, the bigger the immediate economic hit. The flipside is that getting some control on the situation, even though it will take time, is a necessary condition for the start of a return of economic confidence. The current level of uncertainty is hugely damaging economically. Consumers and businesses can only guess what the next few months will look like and when this will be over.
3. Disruption or destruction?
Outgoing Bank of England governor Mark Carney has said that he believes that a large economic shock is in prospect though it will bring "disruption, not destruction". What he meant was that this crisis was serious, but was not a re-run of 2008, after which holes in the financial system and the legacy of massive debts took years to deal with, at significant economic cost.
In some cases arrangements which were to be put in place in case of a hard Brexit are being repurposed
The key job for policymakers here and internationally is to try to cushion the blow and limit the long-term damage. Already schemes are being put in place here to try to limit the damage from the first hit to many companies, which will be to their liquidity. In some cases arrangements which were to be put in place in case of a hard Brexit are being repurposed. However the speed of all this happening will make this difficult to manage. And companies and their employees now have to deal with the disruptions caused by the measures announced today as well. A key issue for the Government is that this will hit many thousands of small companies who have little or no contact with official agencies and no quick route to advice or assistance.
It is very difficult to model the economic impact. And very difficult to deal with it. In some cases company turnover will simply collapse – in many others cashflow will be under huge pressure . Some estimate that the Italian economy is now operating 15 per cent below normal and you can only expect this number is rising. A 2006 US Congressional Budget Office study on the possibly impact of an avian fly pandemic guesstimated that demand in sectors such as travel, restaurants and leisure could fall by up to 80 per cent for a three-month period in a severe scenario.
Pressure will also be put on the banks to take a lenient view – and some have said they will
The changes announced here to sick pay are designed in part to encourage people to stay home if they are ill. Against this backdrop of a sudden hit, pressure will also grow on Government to give further support to businesses via a deferral on VAT or PAYE or other measures to support cashflow. Pressure will also be put on the banks to take a lenient view – and some have said they will. No matter what is offered, jobs will be lost and some companies will close. In economic, as well of course as public health terms, we can only hope that this passes reasonably quickly. But all the economic forecasts and plans for 2020 are now scrapped.
