Ireland’s next chapter will be a tale of two economies

Now for the tricky bit.

Turning the economy off was like flicking a switch. Turning it back on again will be another matter entirely – like an old set of Christmas tree lights, it will take time to untangle the wire and some of the bulbs just won’t come back on.

Unemployment will fall from the extraordinary peak of 28 per cent plus we see now – but we will face a wave of temporary lay-offs becoming permanent and of people currently on wage subsidies being made redundant. The scale of the jobs crisis is now extraordinary, with more than 400,000 on wage supports in addition to those on unemployment payments. You could scarcely choose a trickier and more uncertain backdrop for government formation talks.

Consider what is ahead.

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The narrative at the end of March was that the economy was going to be put to sleep, to be awoken in 12 weeks. It was always clear that it was not going to be that easy. Now the prolonged fight against the virus is leading to increasingly pessimistic economic forecasts for this year.

The scale and speed of economic decline is unprecedented in modern times – the European Commission said this week that the EU economy could shrink 8 per cent this year but many believe a 10 per cent to 12 per cent fall is more likely. Most forecasters are pencilling in some kind of a bounce for 2021 – but really nobody knows.

In Ireland, we are looking at a tale of two economies. Some sectors should restart okay if – and this is a big if – they can traverse the safety issues successfully. These include two big players, construction, which is to restart in a week and manufacturing, much of which has remained open right through anyway.

Around 80,000 people could return to work in the next few weeks and tens of thousands more as we work through the early reopening phases. Much of the public service continues to work from home, as do big international digital companies and the Irish professional services sector.

If the demand from the public is for a bigger State, then we need to start scoping out how to pay for this

So far,so okay. Look under the bonnet, of course and many – in fact most – organisations face enormous challenges from falling demand and uncertain pipelines.

The FDI sector was a big support for the economy through the last recession and into the recovery – it will hold on through this one, though whether it can resume forward momentum we just don’t know. So we have one part of the economy able to restart back to some kind of normal functioning – albeit facing a hugely uncertain economic backdrop.

Tourism sector

In our tale of two economies, we know that the most serious damage will be in the other part – the domestic consumer-focused sectors like hospitality, food, the wider tourism sector and part of the retail industry. Many businesses in these sectors will not be able to reopen now, many not at all and those who can will do so on a reduced and restructured basis.

There is a big wave of temporary lay-offs going to turn into longer-term redundancies here. Many people on the Covid-19 payment will not be rehired and some on the wage subsidy programme will be let go, as this scheme is run down at some stage. Reality will hit in the months ahead.

Demand has simply disappeared for many services and shrunk or changed in nature for others. Ingenuity will get some companies through – but for some it will just be impossible. Tourism, hospitality and parts of retail face not only short-term challenges but also changes in the structure of demand which could last for a long period.

The Government has done a good job in protecting jobs and incomes in the short term – it now faces a really difficult call in how to recalibrate and gradually reduce these supports as sectors reopen, as well as intervening directly, especially to help vulnerable younger employees and really troubled sectors .

This will leave the next government walking a tightrope. Continuing the wage and income supports as they are now for months into the future would threaten to blow up the public finances. Cutting them too soon is tricky politically and economically could lead to higher unemployment and big income falls for some.

A gradual wind down, with new measures to try to get people back to work, is likely– but this is really tricky and whatever happens we will emerge from the health crisis with many more unemployed than when we went in.

Yes, we can and must borrow and spend now – heavily – to combat this. But there is a limit. Where it is , exactly, we don't know. And the help of the European Central Bank in the market is vital. The Government's latest forecasts say borrowing is likely to be €23 billion this year – and could rise to €30 billion if the economic outlook worsens.

The cap on what we could safely fund this year, without risking a significant rise in borrowing costs, may well be around this €30 billion level, which is roughly 10 per cent of GDP. And we need leeway next year to spend more money to get the economy going.

The reality of all this makes talks to form a new government fraught with difficulty. It is going to take a bag of money to dig ourselves out of this mess – and so there is no point pretending another bag is readily available to pay for a vast number of additional commitments and investments.

The choices ahead involve not only what kind of economy and society we want, but also how we will pay for it. If shouts of “ austerity” greet each and every suggestion of where cash should be raised, then we won’t get very far.

If the demand from the public is for a bigger State, then we need to start scoping out how to pay for this. We may get through the crisis by borrowing on the “never never”, but we can’t rebuild our economy into the future on this basis too.