There are some things you want to avoid reading. But like heading into the next chapter of a Stephen King novel, or turning the page on some dark Scandinavian thriller already littered with too many bodies, sometimes it has to be done. And so I have started looking back at the chapters in the documents published by the various forecasting bodies outlining the more pessimistic scenarios if the Covid-19 virus lingers and further lockdowns occur.
The main forecasting agencies – the Irish Fiscal Advisory Council, the ESRI and the Central Bank – have all looked at a range of different scenarios for the economy over the next few years. So far most of the focus has been on forecasts which see the economy gradually completing its reopening over the coming months, leading to relatively strong growth in 2021. It led to hopes of a Nike swoosh-shaped recovery, a sharp downturn followed by steady, if slow, progress.
But the latest surge of the virus and talk of more measures being needed to tackle it put this in doubt. The more pessimistic economic scenarios are coming back into play.
Shutdowns have an economic cost – and Minister for Health Stephen Donnelly no doubt knew that when he said during the week that the pandemic is close to having us shut down the country again.
Threatening to do this again does suggest we are a bit at sea in policy terms. Successive periods of shutting down and opening would carry a huge economic price. Do we feel this might be necessary? If yes, how will we deal with it?
We took the economic pain last time, and this saved many lives and safeguard the health system. But now we don’t seem to be in a better position in terms of controlling the virus than other countries who had shorter or less strict lockdowns. So what do we do next?
I don’t pretend to know the right answer to this – and even the learned scientific experts are arguing about it. But the economic models looking at the impact of further shutdowns are indeed a bit of a horror story.
The fall in GDP would be greater this year if the consumer-facing parts of the economy are disrupted again – a decline of 9-10 per cent in a more benign scenario could move well into double figures. A hoped-for bounceback in growth next year could turn into something much more tepid.
The unemployment rate by next year could remain stuck at above 12 per cent on Central Bank forecasts of a more severe scenario. People remaining out of work is a key way in which a recession leaves lasting costs behind, and why so much Government money is being spent to try to stop this happening.
And longer lockdowns also spread the damage more widely across the economy. Companies close, bad debts rise, confidence is hit and on it goes. And in turn this risks longer-term impacts on economic growth in the years ahead.
Unexploded bombs
Fortunately we don’t have the same unexploded bombs in the property market and bank loan books as we did last time. The Irish Fiscal Advisory Council (IFAC) has said that in a severe scenario it might take 3½ years to get back to where we were before the crisis hit. After 2008 it took 11 years. But nonetheless some of the losses we face would be permanent.
And while we entered this recession in better shape in that respect, we also did so with a much higher debt level than was the case in 2008. Now the Government must decide how much more it will borrow to deal with the damage.We entered the crisis with debt at an elevated level of around €200 billion, or just below 100 per cent of GNI*, the new measure developed by the CSO to try to give a better picture of the size of the economy.
Under a severe scenario we could face the need to borrow another €45 billion to €50 billion between 2020 and 2021, and more in subsequent years. IFAC calculations see debt rising to 140 per cent of GNI* in a severe scenario, or maybe more if, whisper it, the banks were to get into trouble again.
There is a decision to be made on how far we push the boat out – and when. Interest rates are at rock bottom and the interest cost on borrowing is negligible. But debt raised now needs to be refinanced at some stage, likely at higher rates.
And while we can borrow for once-off costs, ongoing higher spending needs to be paid for by taxes. You can borrow to bail out businesses, in other words, assuming they can get back on their feet, but as the annual cost of running the health service rises you need to find a way to pay for it.
We need to retain the confidence of lenders, and this requires not letting what we borrow get too far ahead of what other countries are doing, and having a longer-term, credible plan for the public finances. In other words, there is a limit.
Overall strategy
The second related question is what the overall strategy is now. We are promised a traffic light system to explain what will happen under various circumstances as the virus numbers rise and fall. Businesses and consumers – and society – need this clearly explained. We can’t be waiting every Friday not knowing what will happen.
If we think “wet” pubs and nightclubs will have to stay shut into next year, then best tell the owners and deal with it.
We have had a succession of Ministers telling us that it is not all black and white any more, and it is harder to manage. This is true – but we have to understand how the grey is going to work, and how the Government proposes to deal with the consequences.