Why this recession will not be as enduring as the last
John FitzGerald: Covid-19 vaccine could rapidly boost consumer confidence
‘The dismal economic outturn has nothing to do with unwise behaviour by consumers or governments. It is due to the pandemic.’ Photograph: Dara Mac Dónaill
It has been clear since early in the current crisis that society and the economy will return to normal only when a vaccine has been developed and widely deployed. It was also pretty clear from April that the earliest that these conditions were likely to be met was the middle of next year and, given the scientific and logistical challenges, it was more likely to be the end of next year. These expectations underpinned the forecasts for the economy produced by the Department of Finance in the spring, forecasts that still seem realistic, possibly even a little pessimistic.
While the difficulties that the entertainment, hospitality and transport sectors face will continue for another year, their main problem is not the regulations and restrictions imposed by governments. Even without government action, the public themselves would have responded by dramatically reducing their consumption of risky services. The costs to these sectors of an out-of-control pandemic would likely be even greater.
Because a full economic recovery probably cannot take place until 2022, there is widespread concern that, as in the case of previous crises, there may be longer-lasting effects. You cannot easily put an economy into cold storage and take it out again after two years fully intact. There are a number of ways that longer-lasting damage may occur.
Research has shown that when people are unemployed for a sustained period, they may lose skills, making labour market re-entry difficult. The troika, looking at Ireland in 2010, felt this problem could blight the Irish recovery, although the labour market proved reasonably resilient, and long-term unemployment fell rapidly in the recovery. This time around, many of those not working have maintained a link with their employer, which should facilitate a rapid restart once conditions permit.
In the last economic crash, many building workers emigrated, and many of them did not return. This time around, we are unlikely to see much outward migration of skilled workers, but neither will we replenish depleted skills through inward migration. However, the recovery period may see migration flows re-established.
The dismal economic outturn has nothing to do with unwise behaviour by consumers or governments
One of the problems with a recession is that many of the jobs lost may not reappear in a recovery, because businesses have closed and capital equipment has been sold off. This can be a greater problem than the loss of labour market skills. It is likely, however, when it is safe to do so, there will be a surge in spending on the leisure services that people were unable to flock to during Covid. It is much easier to reopen a pub or a hotel than to re-equip a factory with new machinery. Thus, I would be hopeful that the unemployment rate will fall rapidly in 2022.
Another channel which may hinder recovery of the business sector is a legacy of debt. After the last crash, both households and companies were burdened with heavy debts. This greatly slowed the recovery as it made the financing of new investment very difficult. But although many companies in the worst-hit sectors are facing debts, others are building up savings.
The government is incurring large debts on our behalf, but with the help of an accommodating monetary policy by the European Central Bank it has locked in this borrowing at an exceptionally low interest rate. Thus, public debt should not prove an albatross holding back a recovery.
Ten years ago, household spending was muted as families tried to reduce indebtedness. This time around the household sector, taken as a whole, is accumulating large savings because normal spending has been curtailed. However, research suggests that an economic crisis can make consumers much more cautious in the long term, slowing a recovery in consumption, as was the case in Ireland after the last two recessions.
This time the effects of the recession may be rather different. The dismal economic outturn has nothing to do with unwise behaviour by consumers or governments. It is due to the pandemic. If a vaccine lifts the risk of disease, it could rapidly convince consumers that things are back to “normal”.
Ireland’s experience after the second World War may prove relevant. The scale of that war posed a much bigger threat to life and limb, even in neutral Ireland, than the current pandemic. However, when the war ended, that threat was lifted and in 1946 and 1947 consumers splurged the savings they had built up.
Hopefully, when the pandemic threat has passed and normal life resumes, Irish consumers will spend with confidence and set the wheels of the economy turning apace.