Cliff Taylor: Coronavirus means Ireland's economic outlook hangs in the balance

Supplies and health pose risks parallel to Brexit and require new financial forecasts

China and its Wuhan region are big producers of ingredients for pharmaceutical companies and some big players with operations here, such as Pfizer and Mylan, have warned about disruption. Photograph: Geert Vanden Wijngaert/Bloomberg

China and its Wuhan region are big producers of ingredients for pharmaceutical companies and some big players with operations here, such as Pfizer and Mylan, have warned about disruption. Photograph: Geert Vanden Wijngaert/Bloomberg

 

Whoever ends up negotiating the programme for the new government will need to realise that the growth outlook for this year is hanging in the balance. Whatever the exposure of Ireland to the public health impact of the coronavirus, as a small, open economy, we are particularly vulnerable to the economic hit. The key question now – which is impossible to answer – is whether this will be a temporary disruption, in the sense that it lasts a few months, or something which drags on significantly longer.

There isn’t much point in me speculating about the likely spread of the coronavirus, or the potential impact on public health and all lifestyles over the next few months. Many of the headlines are striking and worrying – towns in Germany and Italy in quarantine, Switzerland banning gatherings of more than 1,000 people and so on. But it is clear, talking to businesses and their representatives this week, that this is already starting to have an impact, in the first place on the supply chains which companies use to source inputs and their efforts to get product to their customers.

The falls we have seen in global share prices over the past week suggest investors are worried the hit could be significantly more than they were counting on

This was seen initially as a “China” issue – affecting those importing inputs from that market or selling there. This was always going to be serious, as China now accounts for not far off 20 per cent of global gross domestic product, but the initial bet in financial markets was that it would be contained. Now, however, it is spreading – and quickly. And so just as the public health impact of this now seems to be in the balance – between something containable in a few months to something more serious– so the economic outlook is in the balance too.

If the worse of this passes in a few months, then the supply chains will fix and demand will recover. There may even be a period of “bounce back”, though there could also be longer-term impacts. For now, we just don’t know. And the significant falls we have seen in global share prices over the past week suggest investors are worried that the hit could be significantly more than they were counting on. And as yet they don’t know where the “bottom” is – in other words when we will be able to say that things are getting better again. The US central bank may cut interest rates to try to boost confidence, but it’s doubtful if this will have much impact.

The first impact will mainly be on supply – possibly leading to product shortages and disruptions in some companies. The globalisation of business – with inputs often sourced from multiple countries – and the trend for companies to keep low stocks and get deliveries “just-in-time” makes dealing with this more complicated.

Many companies have inputs from China in their supply chains. Typically these products travel by boat, taking six or seven weeks, so we will start to see the impact of disruption in a few weeks as stocks run down. Firms will be scrambling to secure alternative supplies, some will be using air freight, but some level of disruption is inevitable, particularly as more countries get affected.

China and its Wuhan region are big producers of ingredients for pharmaceutical companies and some big players with operations here, such as Pfizer and Mylan, have warned about disruption. Companies in many other manufacturing sectors also rely on inputs from China – engineered products, packaging and so on. Globally the ICT sector – including big companies like Apple with sizeable operations here – and the automotive sector are seriously affected.

The coronavirus is another example of how an external shock can threaten Ireland quickly  when others – such as Brexit – are also in the air

Trade bodies such as the Irish Exporters’ Association have expressed concern that this could lead to temporary closures and layoffs or cuts in production at some plants – and the threat is now deepening as the virus spreads and the first reports emerge of companies having problems dealing with Italy. And soon with other countries too, no doubt. In turn, this will cause liquidity problems for some firms. And if the virus does spread in Ireland, we could see wider disruption in workplaces. Again, how long this lasts would be vital.

But there is a second leg to the economic threat – the impact on demand – spending by Irish consumers and those who buy our exports. Here, the travel sector and hotels will already be seeing bookings collapse from both consumers and businesses. Tourism, one of our big domestic employers. may be exposed here, though more “staycations” might help a bit. But beyond that there is clearly a wider risk to demand as confidence and incomes are hit across the world.

The coronavirus – like Brexit or the other threats we face – is not a reason for whoever is planning the next government programme to throw their hands in the air. But it is another example of how an external shock can threaten Ireland quickly and just when others – such as Brexit – are also in the air. It is an argument for some caution in planning how to spend public money over the next few years.

The key issues, of course, are about public health. But having spent the last few years concerned about the risks of a hit from Brexit, or from trade wars, we now have an unexpected, sudden and more imminent threat to economic growth. In time this may raise longer-term issues, too, such as the risks from globalisation and how these are dealt with – playing into the kind of nationalist economic agendas we see in the US and UK and concerns about the economic power of the big tech giants.

But in the short term whoever is planning a new programme for government can’t do so in a bubble, using forecasts produced by the Department of Finance before the general election and before we realised the extent of the coronoavirus threat.

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