Might Brexit and the coronarvirus paradoxically help the Irish economy? After five years of supercharged growth the economy has run out of road.
Capacity constraints – in housing, health, water, transport – are bearing down from all directions, limiting the potential for further growth. Perhaps the biggest one of all is manpower. The eight-year slide in unemployment has stalled at just under 5 per cent, suggesting we’re now at full employment.
The next stop on the line for an economy travelling at this speed is usually overheating, particularly if it lacks autonomy on interest rates. When employers chase a shrinking pool of labour, wages get bid up, which in turn forces companies to put up prices. When such a wage-price spiral develops it can be difficult to peg back.
Currently wages are rising at an annual rate of 4 per cent, which is double the 1.9 per cent rate recorded in 2017 and a multiple of the 0.4 per cent recorded in 2014, but perhaps not enough to meet the definition of overheating.
This raises the possibility that certain countervailing forces such as Brexit, which led to a slump in consumer confidence last year, may be inadvertently helping to cool the economy or at least stop it from slipping into an overheating cycle.
Kieran McQuinn of the Economic and Social Research Institute (ESRI) said as much at the recent Dublin Economics Workshop in Wexford.
“In a strange way it [Brexit ]has helped cool the economy by having a contractionary impact on things like investment and consumption,” he said, while noting the Brexit-related weakness in sterling may have also helped suppress inflation.
That isn’t to say Brexit is a positive. That would be absurd given the bilateral trade at stake, just that the uncertainty in advance of the UK’s exit hasn’t been that negative and maybe even working in our favour.
The Department of Finance’s chief economist John McCarthy said recently that the Irish economy was now operating close to full capacity with signs of overheating beginning to emerge but warned this could rapidly reverse into “underheating” as a result of a cyclical downturn triggered by Brexit.
Little is known about the possible impact of an influenza pandemic on a nation’s economy but a 2009 paper by UK economist Simon Wren-Lewis and others is instructive.
It suggests that the impact would be transmitted primarily through “the consumption patterns of uninfected people” rather than work days lost through ill health. Or as Wren-Lewis put it on Twitter last week, “the biggest economic cost is when people stay away from pubs, restaurants, sports events, supermarkets etc”.
Google’s 8,000 staff here are a case in point. Most were told to stay away from work on Tuesday after a member of staff reported flu-like symptoms. Played out across the economy this type of response could dent consumption and not unlike the Brexit uncertainty last year cool overheating pressures.
That said, it’s next to impossible to forecast what’s likely to occur here as the outbreak has only gone global in recent weeks.
The Wren-Lewis study concludes that after a big initial impact in the quarter in which the pandemic occurs – equating to more than 3 per cent of gross domestic product (GDP), the impact moderates into a more benign 0.6 per cent hit over the year.
Forecasts are likely to follow the study’s example and consider the economic impacts of a four-week or six-week quarantine period with mass school and workplace closures.
The impact of slowing global growth or a global recession on foot of the virus is likely to be a bigger negative for Ireland’s export-heavy economy.
"A global slowdown in growth is likely to have negative consequences for the Irish growth, the labour market and public finances," the Department of Finance said in a statement yesterday.
It said it was closely monitoring incoming data and would present an assessment of the economic and budgetary implications in next month’s Stability Programme Update (SPU).
The Organisation for Economic Co-operation and Development (OECD) sent a fresh wave of panic through markets on Monday when warning Covid-19 posed the “greatest danger” to the global economy since the 2008 financial crisis. And the Federal Reserve’s emergency move to cut interest rates to shield the US economy from the impact of the coronavirus attests to how serious it views the threat.
But Bank of England governor Mark Carney appeared to play down the threat, noting that while it had the potential to hurt economic growth for one or two calendar quarters, it wouldn't have anything like the impact of the financial crisis.
If his assessment plays out, Ireland is likely to escape with a modest hit to consumption and GDP.