Covid shock is far from over, Central Bank warns
High unemployment and house price hit as pandemic ravages jobs
THE Central Bank of Ireland warned yesterday that the economic fallout from the coronavirus pandemic had further to play out and said that income losses and a move to tighter credit conditions could hit house prices.
The bank’s annual review of Ireland’s financial stability came as the State was embarking on a gradual removal of lockdown restrictions that have crashed the economy and resulted in more than a million workers becoming dependent, at least in part, on the Government for their income.
“Depending on the success of the containment measures, most current projections expect that the worst of the economic impact will be evident in the second quarter of 2020, with a gradual recovery to begin in the third quarter,” the Central Bank said.
“Even with this trajectory, the unemployment rate is still expected to average in the mid-teens for 2020 as a whole, with the domestic economy to contract by between 9pc and 15pc,” it warned.
The Government here is spending tens of billions of euro to shore up the economy and the European Central Bank (ECB) has expanded its measures to keep interest rates low as well as to ensure that financial markets do not panic with a massive expansion of its bond purchase programmes.
The Bank’s measure of financial stress in Ireland – an index ranging from 0 to 1 that measures risk conditions in financial markets – spiked sharply in March to levels not seen since the 2011 euro area debt crisis.
Although it has fallen back, it remains elevated – standing at levels last seen around the 2016 Brexit referendum.
The indicator bounced from a reading close to zero in the first two months of 2020, peaked at 0.42 in late March, and has since come back down to 0.14.
For the real economy, a higher reading in the index of 0.1 units is estimated to lead to a 3.5pc fall in house prices and to a reduction in private sector loans of almost 3pc over two years, the Central Bank said.
While a halving of the share of heavily indebted mortgage borrowers since 2013 means that there is not as much financial distress in the hous
Research shows 79,000 mortgages were on payment breaksat end of May
ing market, almost half of mortgage holders work in an industry that has been hit by Covid.
It also noted that “a significant share of households have limited liquid assets and income support payments may be insufficient to meet mortgage repayments in some cases”.
Research from the bank shows that 79,000 mortgages with a value of €11.7bn were on some form of payment break at the end of May.
Financial distress is also being felt among companies.
Some 200,000 Irish companies in business sectors that have been impacted by the pandemic and subsequent lockdowns are also on payment breaks. That accounts for €8bn in loans to businesses.
However, the corporate sector is more resilient than the financial sector, the CBI said.
“The banking system is expected to make losses, the scale of which will depend on the evolution of the virus and the scarring effects of this crisis,” the Central Bank said.
Central Bank governor Gabriel Makhlouf noted that banks were going into this crisis with much more substantial buffers than they had in 2007, although he said that a prolonged pandemic hit to the economy would eat into those reserves.
“The resilience that does exist is not infinite,” he said.