Economy

Willingness to spend our lockdown cash key to economic recovery

Bank deposits up to €5.3bn between April and June but recovery turns on expenditure

At some point it will be necessary to crystallise the losses we’ve suffered. File photograph: PA

Tue Aug 25 2020 - 01:00

Irish households have built up a reserve of savings during the pandemic. Central Bank data show bank deposits rose to €5.3 billion between April and the end of June. That compares with just €2 billion for the same quarter last year. Being stuck at home has had financial advantages in terms of less spending on childcare, transport and recreation.

How this money is viewed will dictate the speed of economic recovery, however. If households see it as an insurance against a worsening economic climate, they will hold off spending on goods and services, perpetuating the fall-off in activity, a scenario the Government and business are keen to avoid. If they believe the outlook is brightening, they’ll be more inclined to spend and support businesses. Consumer spending is after all the ultimate driver of activity in modern, service-led economies.

The problem is economic activity here and elsewhere is being dictated not by economics itself, but by coronavirus and our reaction to it. Another nationwide lockdown will destroy thousands of businesses, many already hanging on by a thread, in consumer-facing sectors. Even a series of mini lockdowns will create uncertainty and uncertainty is the enemy of consumer spending.

Government wage supports have been vital, but they’re keeping the economy on an artificial footing and at some stage we’re going to have to crystallise the losses we’ve suffered. The hope was to gradually wind these supports down as the economic cycle takes off again. But the economic cycle is in a state of limbo. The Government’s main priority is to get schools reopened successfully, a crucial plank in the resumption of normal economic activity. A lot of workers can’t return to work until their children return to school.

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How we deal with the inevitable rise in infections that will come as schools reopen will determine the economic outlook for the next few months, and whether that bulwark of savings built up during lockdown washes back out into the economy or stays on deposit.

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