Post-pandemic ‘rapid rebound’ could well be bumpy ride

Cantillon: Budget policy must grapple with risk of slump being replaced by overheating

One reason for the huge spending during the pandemic was to reduce “scarring” – the long-term damage to the economy from higher unemployment and closed businesses.

One reason for the huge spending during the pandemic was to reduce “scarring” – the long-term damage to the economy from higher unemployment and closed businesses.

 

The National Economic Dialogue (NED) takes place next week, the annual event where Ministers and various interest groups discuss policy, the economy and the forthcoming budget. The documents to set the scene for attendees – written we presume by public servants rather than Ministers – give a flavour of the bumpy exit from the worst of the pandemic and the big questions that will dominate the autumn.

The plus side is that the economic signals are good – at least looking at the broader economy. The document speaks of a “rapid rebound” and a separate analysis from Goodbody Stockbrokers on Friday forecasts a V-shaped recovery in core domestic demand, which it says could rise by 6.5 per cent this year, the strongest rate since 2005.

‘Scarring’ avoidance

This raises interesting questions about the appropriate shape of budget policy. One rationale for the huge spending during the pandemic was to reduce “scarring” – the long-term damage to the economy from higher unemployment and closed businesses. But another reason was to replace the cash not being spent by the private sector with State money, to support the overall level of economic activity.

The NED document argues that “with the private sector recovery gaining momentum, it is necessary for public supports to be rolled back so as not to overheat the economy”. The risk of a slump, it argues, has been replaced by the risk of overheating.

Inflationary pressures

This seems strange in one respect, as unemployment will stay high and some sectors will remain in deep trouble. But alongside this there is likely to be strong demand and skills shortages in other sectors. Some inflationary pressures are already emerging, though these seem due to the impact of the pandemic on the supply side of the economy, rather than big demand.

The logic would be to reduce the general supports – such as the pandemic unemployment payment and wage subsidies – while continuing to support the most troubled sectors with specific packages. The problem is that politically this will be really difficult, as some companies will just close. Just as the Covid-19 downturn was an unprecedented event, the recovery promises to present challenges we have never seen before.

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