03 Jul 2020 | 09.53 am
Economy Will Take Five Years To Recover
Grim outlook in Central Bank Quarterly Bulletin
03 Jul 2020 | 09.53 am
The Central Bank of Ireland has outlined a grim outlook for employment and small business in the coming years in its third Quarterly Bulletin of 2020.
The report focuses on the impact of the Covid-19 pandemic and the potential impact of a disruptive Brexit.
The CBI notes that pandemic lockdown impact being greatest where employment has less ‘work from home’ potential and where sectors such as hospitality and tourism are particularly important. Elsewhere in the economy, other sectors such as high-tech manufacturing, computer services and the pharmaceutical and chemical sectors have been less affected.
“These uneven effects of the crisis will have implications for employment and wealth and the longer term trajectory of the Irish economy,” says the bulletin.
Two scenarios are outlined in the Quarterly Bulletin. In the ‘baseline’ scenario, the gradual reopening of the economy would allow for an initial rebound in economic activity over the near term. Containment measures would remain in place meaning that activity would be constrained in some sectors for a longer period.
The CBI report states: “Beyond the initial rebound, recovery is expected to be gradual, in line with a projected gradual recovery in employment and incomes and a slow unwinding of precautionary behaviour as the effects of the shock on consumers and businesses lingers.
“The unemployment rate is set to decline from its second quarter peak of about 25 per cent as the year progresses and is projected be around half that level by the end of this year, before averaging just over 9 per cent next year and 7 per cent in 2022. The baseline scenario sees output recovering to its pre-crisis level by 2022.”
In the ‘severe’ scenario, the strict lockdown period is assumed to have a more damaging impact on economic activity and is not successful in effectively containing the virus. Stringent containment measures would remain in place, or would be re-instated, albeit not as severe as before. In this scenario, there is a subdued economic recovery with a larger permanent loss of output.
In this severe scheanio, unemployment remains higher for longer in this scenario and would average just below 17 per cent in 2020, while consumer spending is projected to fall by around 14 per cent and GDP by over 13 per cent this year.”
Both of these scenarios assume that a Free Trade Agreement between the EU and the UK, with no tariffs and quotas on goods, takes effect in January 2021. In the event of a hard Brexit, growth in the Irish economy will be weaker than outlined in the above scenarios.
In line with the phased re-opening of the economy, consumer spending is projected to rebound in the second half of the year, but not recover the decline in the second quarter. As a result, consumer spending is expected to decline by 10 per cent for the year as a whole. The CBI’s view is that contact-intensive sectors, which also tend to be labour-intensive sectors, may be slowest to recover.
A Signed Article by economists Thomas Conefrey, Niall McInerney, Gerard O’Reilly and Graeme Walsh, explores alternative long-term recovery paths for the economy from Covid-19 and assesses the impact of fiscal and monetary policy.
The baseline scenario would see a strong but incomplete rebound in activity in 2021 and 2022, followed by more gradual pace of recovery thereafter. In the severe scenario, output in Ireland would remain significantly below the level that could have been achieved in the absence of the pandemic.
The unemployment rate would fall initially but remain persistently higher than its level prior to the pandemic outbreak until the middle of the decade. “This recovery path is consistent with the emergence of hysteresis effects which result in the economy becoming entrenched in a protracted period of low growth,” says the Article.
“Our preliminary assessment of the combined effects of domestic and international policy supports indicates that the interventions will help to meaningfully reduce the scale of the output loss in Ireland from the pandemic.”
Services Sector PMI data from AIB tracking trends for June 2020 shows that employment continued to fall sharply, though expectations with regards to activity over the year ahead turned positive.
The headline figure from the survey is the Ireland Services Business Activity Index. This is a diffusion index calculated from a question that asks for changes in the volume of business activity compared with one month previously. 50.0 is the no change reading.
The Business Activity Index rose to 39.7 in June, from 23.4 in May and up further from April’s record low of 13.9. The index continued to signal falling activity and three of the four sub-sectors monitored by the survey continued to record declining business activity in June.
The transport, tourism & leisure sector again registered the steepest rate of contraction, followed by financial services and business services. Activity in the technology, media & telecoms sector rose for the first time since February, albeit only marginally.
AIB says the overall reduction in services activity in June mainly reflected a sustained slump in incoming new work, with demand remaining subdued while many lockdown restrictions still in place. The data signalled that international new business weighed on demand, falling at a faster rate than total new work. Only the TMT sector registered growth of new business in June, and at a marginal pace.
The PMI report states: “With both new and outstanding business declining further in June, and great uncertainty surrounding the severity and length of the hit to demand from the lockdown, service providers continued to shed staff. One-quarter of respondents reported lower workforces, compared with 37% in May and 41% in April.”
Prices charged for services rendered fell for the fourth consecutive month, as firms reported special offers to stimulate sales as the economy began to reopen. The rate of discounting was weaker than in April and May.
The Composite Future Output Index remained below its long-run average since the series was first compiled in 2012.