The unusual thing about the current crisis – in economic terms at least – is that it doesn’t stem from some innate dysfunction with the Irish economy.
In contrast to the 2008 financial shock, which was magnified by a domestic property crash and a deeply indebted banking system, the current shock was triggered not by an economic imbalance but by a health crisis and a series of self-imposed lockdowns.
The hope is that many of the driving forces behind Ireland’s recent economic success – the forces that drove us to near full employment prior to the pandemic – can pick up where they left off.
That’s not to underestimate the impact Covid-19 has had on certain sectors like hospitality and retail or the fact that it has ushered in never-before-seen levels of unemployment, which may take several years to unwind. Just that in the absence of some unsustainable dynamic, the economy here should be able to recover more quickly. Here are the five reasons to be hopeful.
1. Ireland’s Covid export boom
With so much focus on the health implications of the virus, it’s easy to overlook the fact that we’re in the middle of an export boom. Strong demand for exports of medical and pharmaceutical products as well as computer services is expected to push growth in GDP terms to a near record 11.1 per cent this year, the Economic and Social Research Institute (ESRI) said in its latest economic commentary this week.
The ESRI expects net exports to be just under €132 billion this year, up from €109 billion in 2020
As part of the report, the think tank modelled several key aggregates of the Irish economy to see how they are performing against a baseline in which the pandemic never happened. It found that exports would have grown by 6.9 per cent this year in the absence of the pandemic, but will instead grow by 13.3 per cent. It just so happens that the twin pillars of Ireland’s multinational-dominated export sector – pharma and IT – are the two things in most demand. Pharma because we’re in midst of a global pandemic; IT because everyone is working remotely or forced to spend more time at home.
The ESRI expects net exports – the value of exports over imports – to be just under €132 billion this year, up from €109 billion in 2020. And remember this incorporates the disruption in trade with Britain caused by Brexit. Exports – in tandem with massive foreign direct investment (FDI) – have been one of the key constants in the Irish economy. They kickstarted a moribund economy in 2011 and drove us to near full employment nine years later. They’re playing a similar – if not bigger – role now.
2. Unprecedented Government supports
Spending on the Government’s two wage support programmes – the Pandemic Unemployment Payment and the Employment Wage Subsidy Scheme (EWSS) – have blown a hole in the public finances. But they’ve also cushioned the labour market and the wider economy from a more severe shock.
Additional spending on Covid-related measures – the lion’s share of which has been taken up by wage and business supports – is expected to be in region of €25 billion for 2020 and 2021. We’ve never had a government step in and support wages like this before. It has, in effect, nationalised part of the private sector wage bill in a bid to keep workers and firms afloat.
Without these safety nets incomes would have collapsed by 15-20 per cent last year, according to the most reliable estimates. They have prevented deeper scarring, which should allow the economy to bounce back quicker. They are among the most positive things to come out of the pandemic and provide a template for how we might deal with future economic crises. And while the Government is under pressure to roll them back before the hole in the public finances gets too large, borrowing costs are exceptionally low and the economy is growing strongly, which means we’ll be able to shoulder the additional debt that bit more easily.
3. The unwinding of savings
Central to the ESRI’s bullish forecast is a pick-up in household consumption, which is expected to increase by 7.5 per cent this year – it contracted by 9 per cent last year. Given the distortions in headline GDP, household consumption is perhaps one of the best measures of the “real feel” of the Irish economy. While the lifting of restrictions is expected to trigger a natural bounce-back in consumer spending, the unwinding of excess savings will provide an additional stimulus, mimicking – in many ways – the impact of a fiscal stimulus.
The Central Bank calculates that about €5 billion will flow back out into the economy in the form of spending once the restrictions are lifted
The massive build-up of household savings – they rose by almost €15 billion in the 12 months to the end of April – has been one of the surprise elements of the crisis. The Central Bank estimates that about €10 billion of these savings are "forced savings" arising from people's inability to spend, rather than precautionary savings, which is money put aside to deal with future threats.
Based on previous spending patterns, it calculates that about €5 billion will flow back out into the economy in the form of spending once the restrictions are lifted, providing an additional stimulus to domestic demand.
“A considerable recovery in consumption is expected as households unwind savings balances and undertake postponed expenditure as the economy reopens,” the ESRI says.
4. The asysmmetrical nature of the shock
As you might expect with an airborne virus , the worst-hit sectors of the economy are the most consumer-facing ones – hospitality, retail, transport. According to the Central Statistics Office's Labour Force Survey, published on Wednesday, three sectors accounted for nearly all the job losses over the past 12 months: accommodation and food (-74,000), other personal services (-35,000) and administration and support (-33,000). The long-lasting impact of the pandemic will therefore depend on how well these sectors recover.
Because they were hit hard by restrictions, they should benefit most from the easing of restrictions. “The concentration of job losses in those sectors most directly affected by health-related restrictions on activity provides some encouragement that the gradual re-opening of the economy should produce a marked improvement in the employment picture later this year,” says KBC economist Austin Hughes. Of course, this presumes the permanent and sustained relaxation of public health measures which, in turn, presumes that the current suite of vaccines continue to work against new variants. Recent data indicate that vaccines are effective against the delta variant, now the dominant variant in several countries.
Goodbody economist Dermot O’Leary also points out that the worst-hit sectors are dependent on a recovery in domestic spending.“Central Bank card data show that spending has already returned to pre-pandemic levels, while there is anecdotal evidence of difficulties in the supply of labour in the hospitality sector even before a full reopening,” he says. This suggests recovery in these sectors can happen quickly.
5. ECB’s accommodative monetary policy and low interest rates
European Central Bank (ECB) support has kept interest rates on the floor, making borrowing easier. The National Treasury Management Agency (NTMA), the State's debt managing agency, has raised €13.25 billion of debt so far this year, following on from €24 billion last year. The additional debt has been issued at record low interest rates and the bond auctions have been heavily oversubscribed – a testament to the borrowing-friendly environment and Ireland's strong financial reputation.
The ECB is unlikely to change this low-rate policy despite the recent pick-up in inflation. Central banks typically counter inflation with higher interest rates.
These positive factors must, of course, be juxtaposed with the lasting impacts of the pandemic; higher unemployment and an impaired housing supply
However, Frankfurt views the recent strengthening of price growth in Europe and North America as “transitory” – connected to the resumption of economic activity after lockdown and higher oil prices. That means lower rates aren’t going to change any time soon, which will allow the State to continue to borrow to support businesses and households.
Historic low interest rates and record borrowing have allowed us pursue a counter-cyclical response to the current economic shock – in other words to spend more – in contrast to the austerity which followed the financial collapse in 2008. Economists typically advocate pulling against the wind; spending in a downturn, cutting in an upswing. In the past, we’ve opted for or being forced to pursue pro-cyclical policies, which have made things worse. This time, we’ve got it right.
These positive factors must, of course, be juxtaposed with the lasting impacts of the pandemic; higher unemployment and an impaired housing supply, which the ESRI says will worsen our existing housing problem. In its report, the institute calculates that the cost of the pandemic – in output terms – in 2020 and 2021 would be in the region of €24 billion. By the same token, it predicts that a rapid bounce back will return the economy to pre-pandemic levels of output by as early as 2022, which is significantly earlier than previously envisaged. After 15 long months of lockdowns and restrictions, there are grounds for optimism.