Second Covid-19 outbreak and no-deal Brexit an appalling vista

Central Bank’s report shuns forecasts in the face of what is now extreme uncertainty

When there’s extreme uncertainty, the pathways almost polar opposites, forecasting is out the window.

Think of a no-deal Brexit with introduction of trade tariffs or a second wave of Covid-19 and a second shutdown. These entirely plausible outcomes make forecasting treacherous. That’s why we’re increasingly turning to scenarios.

The Central Bank’s latest quarterly analysis is a case in point. Given the scale of uncertainty surrounding the economic outlook, the bank sets out of two scenarios for the economy.

The “baseline” involves gradual reopening of the State this year and a rebound in economic activity – the one we hope we’re on – suggests the economy contracting by 9 per cent this year, but expanding by 5.7 per cent in 2021.

The more “severe” model would mean the economy contracting by nearly 14 per cent in 2020 with unemployment staying elevated for several years after that. This scenario assumes the lockdown period has a more damaging impact on economic activity and that there is a virus resurgence at some point over the next year, In this scenario, it would take until 2023-24 before the economy rebounds fully from Covid-19.

Significantly, the Central Bank does not speculate on the probability of either outcome, suggesting it's a public health matter and therefore outside its bailiwick.

The severe scenario is, however, not the worst case. That would be if no vaccine arrives and the new world order involves constant social distancing and disease vigilance. But the bank does not consider this in its report as the ramifications are probably too difficult to gauge.

What about Brexit?

Underlying the Covid-19 scenarios are three possible Brexit varieties: a trade deal between the EU and the UK; no deal with an orderly transition to tariffs; and a disorderly, no-deal outcome. The two Covid-19 scenarios presented assume a trade deal is brokered.

Without going into all the various possible hits to growth, a breakdown in the Brexit talks would significantly amplify the Covid-19 shock.

The Dracula scenario would be if a second wave of the virus and a disorderly no-deal Brexit hit at the same time.

Ironically, the Central Bank speculates that Covid-19 may fast-track some of the expected business failures under Brexit. In other words some of Brexit effects that would have been expected next year have been front-loaded into the economy as a result of the shutdown.

The Central Bank also speculates in its report about the impact of the virus on the housing crisis. It expects 30,000 fewer homes to be built in the coming three years as a result of the pandemic even as the State is struggling to deliver sufficient numbers to meet demand.

“The uncertainty around prices, financing and demand increases the likelihood that some projects will be postponed, reducing supply over the projection horizon,” it said.

It could be that you get a short-run negative effect on price due to a fall-off in demand linked to falling incomes and unemployment – in other words prices falling. But, in the longer term, with a lower level of supply, prices could be bid up again, accentuating the current affordability issues.