Lockdown restrictions cast shadow over economic outlook

The Irish economy begins 2021 in a precarious position. Record coronavirus infections and a return to a full-scale lockdown clouds the outlook and limits the chances of a speedy recovery.

Everything seems to hang on the vaccine rollout, but that could takes many months, and the initial evidence suggests Ireland is off to a slow start in comparison to other countries.

It’s also not clear what percentage of the population needs to be vaccinated to prevent further outbreaks.

At the same time Government controls to curtail rising infection rates have left us with an unemployment rate of more than 20 per cent, which equates to over 500,000 people. This is worse than anything seen in the wake of the 2008 financial crisis.

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The controls have also pushed many businesses in the worst-hit hospitality and services sectors to the brink of extinction. Many simply won’t open again, while others are amassing debts that may aggravate their future viability.

And yet there are positives. The hit to the public finances has been significantly less than expected, putting us in a better position to support vulnerable workers and businesses. Foreign direct investment (FDI), particularly from the US, continues to come here, propping up the State’s export trade. And we’ve avoided a no-deal Brexit, which would have been a disaster for the food and drink sector.

Here are five indicators through which to view Ireland’s economic prospects in the coming year.

GDP

Technically the Irish economy fell into recession in the second quarter of 2020 after recording consecutive quarters of negative growth. Gross Domestic Product (GDP) figures for the third quarter show the economy rebounded strongly from the first lockdown, notching up double-digit growth (11 per cent) on the back of resurgent consumer spending and exports.

As a result we are likely to record positive growth for 2020 as a whole. While the figures have yet to be published, the expectation is for something in the region of 1 per cent to 2 per cent GDP growth.

This would make Ireland one of the fastest growing economies in the world in 2020. Most industrialised countries, with the exception of China, are expected to record an economic contraction, triggered by a collapse in activity from repeated Covid lockdowns.

GDP, the standard yardstick of growth, has, however, never been a good indicator of the “real feel” in the Irish economy, and so it has to be taken with a pinch of salt.

Large transactions by multinationals inflate our GDP numbers, making us look richer and economically healthier than we are. Modified domestic demand, which zeroes in on personal consumption, investment by firms and government spending while weeding out multinational transactions, particularly those related to intellectual property, will perhaps provide a more accurate reading of the Covid impact.

The outlook for 2021 is predicated on several assumptions, none bigger than the path of the virus itself. In its latest commentary the Economic and Social Research Institute (ESRI) forecast growth of 4.9 per cent for 2021 on the assumption that we have six weeks of Level 5 restrictions in the first half of the year and a strong rebound in the second half. The explosion in case numbers has cast doubt on that assumption.

Unemployment

This time last year we were haggling over what constitutes full employment. An eight-year long growth spurt from 2012 had sent the Republic’s jobless rate to just 4 per cent. That was obliterated in the space of few weeks by the virus and a wholesale lockdown of the economy in late March and April.

The Covid-adjusted unemployment rate, which includes people on the Government’s Pandemic Unemployment Payment (PUP), shot to a record 28 per cent in April it was 16 per cent at the height of the financial crisis. The latest headline rate for December was 20.4 per cent, equating to 510,000 people.

This is, however, likely to get worse before it gets better as the lockdown has got tighter since then, and has dragged in other sectors like construction, which had been permitted to operate under the previous restrictions.

The Central Bank of Ireland and the ESRI are predicting that unemployment will average 15 per cent this year, falling to around 10 per cent by the end of the year. That means 240,000 people facing Christmas 2021 without a job.

Former Central Bank governor Patrick Honohan always maintained that employment was the best lens through which to view the Irish economy.

“In terms of the labour market, and getting unemployment going back to around 5 per cent, I’d say you’re talking about 2023 at this stage if not 2024,” the ESRI’s Kieran McQuinn says.

That’s a long time away. The Government’s two wage support programmes – the Pandemic Unemployment Payment and the Employment Wage Subsidy Scheme (EWSS) – have muted the impact of Covid on the labour market and the wider economy.

The EWSS safety net is one of the most positive things to come out of the pandemic, and appears to provide a template for how we might deal with economic crises in the future. However, the Government is in a race to eradicate the virus, restart the economy and roll back these schemes before the hole in the public finances gets too large.

Public finances

The buzz word is resilience. The Government’s tax take for 2020, as detailed in the latest exchequer returns published this week, was remarkable in the context of what’s happened. At €57.1 billion it was only 3.6 per cent or €2.1 billion down on the previous year despite a rapid and uncontrollable spike in unemployment and a series of economic shutdowns.

This is because the workers who lost their jobs were in the main from low-paying sectors of the economy, mitigating the impact on income tax receipts, while multinationals in the pharma and IT sectors traded strongly, bolstering corporation tax receipts. As a result most of the fall-off in indirect taxes like VAT and excise from the collapse in personal consumption has been offset

That said, the coronavirus has punched a €21 billion hole in the State's finances, primarily as a result of increased spending on health and wage supports. The Department of Finance is also forecasting a budget deficit of about €20.5 billion for 2021, rising to €25 billion "if subsequent waves of the virus trigger more stringent-than-assumed containment measures".

These figures are a world away from the budget surpluses being generated in 2018 and 2019 even if low interest rates allow us to borrow cheaply.

The old adage about generals fighting the last war applies, in part at least to the current administration. Much of the focus has been and still is on budgetary arithmetic, a throwback to the financial crisis which ripped through the government’s balance sheet. However, this time the underlying problem is not financial but health. The focus, therefore, needs to be on remedying the financial health of workers and businesses affected.

Thousands of workers who availed of State wage subsidies are now facing hefty tax bills, while businesses that warehoused their tax liabilities may simply be storing up problems for the future.

"My own preference is that they [the Government] don't race towards surplus because the key task is to mend the economy rather than the public finances – that means using some of the fiscal buoyancy from an improving economy to address structural issues in health, housing, digital and green infrastructure," says KBC Bank Ireland chief economist Austin Hughes.

“In that respect the question is not how fast we get to balance but how well we use the funds in the interim,” he says.

Foreign direct investment

The head of the State agency responsible for securing foreign direct investment (FDI) warned this week that global investment flows were likely to be significantly curtailed in 2021 because of the ongoing impact of the pandemic. This would leave Ireland fighting for "a much smaller pool" of investment, said Martin Shanahan, the chief executive of IDA Ireland.

He was speaking as the agency launched its annual results for 2020, which showed it secured 246 investments last year, only marginally down on the 250 in 2019, and that 20,123 new jobs were created.

This represented a net jobs gain of almost 9,000 and brought the numbers directly employed by multinationals here to an all-time high of 257,394.

Another act of resilience in the face of the pandemic. Nonetheless Shanahan warned there had been a lower level of investment activity here since March and that the full impact of this was still to play out.

While the agency has developed a number of virtual workarounds, he said prospective investors still needed to be able to visit the country. This a major problem for small, open economies like the Irish one, which rely heavily on global investment.

Multinational investment in Ireland has been perhaps our greatest economic triumph. In 2019 investment in the Irish economy totalled €162 billion or €3 billion a week. No other country in the world had a bigger per capita inflow. And even when change, potentially damaging change, comes along – the ending of our so-called “double Irish” tax scheme; the European Commission’s €13 billion Apple tax ruling; Donald Trump’s tax reforms in the US; new OECD rules – we still seem to come out on top.

“The one bright spot in the Irish economy, though, is the performance of the internationally traded sectors,” Goodbody economist Dermot O’Leary says.

“This is evident in the expansion of output and exports in 2020, and the growth in corporation tax revenues.”

Multinational exports kickstarted a moribund Irish economy in 2011 and drove us to near full employment nine years later – the sector’s role in the current recovery can’t be underestimated.

House prices

Despite a raft of predictions that we would see a plunge in property values this year, the opposite has materialised. According to MyHome.ie, asking prices on its website rose 6 per cent last year, the fastest pace of growth in almost three years. In Dublin the average asking price was just under €400,000.

The official Property Price Register from the Central Statistics Office (CSO), which is based on actual sales prices, is likely to paint a different picture, but nothing like the collapse that was forecast.

Economists typically see rising house prices as a reflection of a strong economy, but it is more nuanced than that. Rising property values here run alongside major housing shortages and homelessness issues, and if anything have made Ireland a more inequitable country.

The acceleration in mortgage activity in recent months reflects the financial wellbeing of a relatively small number of households, which have been able to save during the lockdown and probably had greater buying power to begin with. Workers upended by the restrictions are now farther than ever from the property ladder. Of all the mega-trends that Covid-19 has accelerated, the modern era’s growing property divide is one.

DNG chief executive Keith Lowe says his company has in recent months sold more than 50 homes in the €1 million-plus category and that the strongest performing price range in Dublin was houses in the €1 million to €2 million category. And this at a time of 20 per cent unemployment.

Lowe believes house prices will rise 3-5 per cent this year, with transactions reverting to 2019 levels of 55,000 to 60,000.

Ibec’s director of policy and public affairs Fergal O’Brien says policy-makers must keep “reimagining priorities for the country” – those needed to improve the quality of life. For many that means changing the current dynamic on housing.

“The current mid-term review of the National Development Plan is a golden opportunity to accelerate the provision of the sustainable infrastructure needed in areas such as housing, transport, environment, regional development and the shared island agenda,” O’Brien says.

Ireland begins the year at a tricky juncture. The successful rollout of a vaccine could result in a strong rebound in economic activity in the second half of 2021 and a continuation of employment-rich growth seen prior to Covid.

However, the spike in infections and the reimposition of a complete lockdown akin to last April still casts a long, dark shadow over the country.