Pandemic bailouts could create a zombie economy
Those of us working from home – columnists included – are sheltered from most risks
The effects of Covid are going to linger long after the lockdowns. Governments in Europe – Ireland included – have so far stepped in with short-term work schemes to prevent a full crash but at some stage supports will have to end or we’ll risk endlessly trying to prop up a growth sapping zombie economy.
Supports like the Employment Wage Subsidy Scheme have prevented an immediate unemployment shock, but if kept too long will stall any economic recovery.
“We estimate that about onefifth of the (eurozone) workers in short-time work schemes will eventually lose their job,” says Sandra Phlippen, chief economist of group economics of ABN AMRO.
“These workers, together with a substantial number of people who are marginally attached to the labour market, could actually cause unemployment to rise to more like 12pc to 13pc of the labour force,” she says.
The Covid-adjusted unemployment rate was 27pc in Ireland at its second-quarter peak and far higher for young people. The forecast for next year here is 10pc.
The same risk of extended supports also applies to businesses, especially in hospitality where many firms cannot generate any revenues or provide work for the most economically vulnerable.
There is a now a danger that keeping zombie firms on life support will hold back recovery by making it harder for viable new businesses to hire workers or access capital.
“Keeping firms in business without demand for their products and services is usually a bad idea. It prevents people and capital from flowing to the more productive areas of the economy and thus stalls recovery,” says ABN AMRO’s Phlippen.
However, it is by no means clear that what will replace collapsed businesses will be innovative Irish firms.
The pandemic’s economic winner so far has been big tech companies like Amazon and thanks to network effects, the winner tends to take all.
“This is a race that, if won by technology, will increase wage inequalities to a level where the social contract becomes problematic,” Ms Phlippen noted.
Policy makers don’t have a map to any of this. It is almost impossible to make the ‘correct’ decisions balancing health and economic risks as counterfactuals unfold in near real time. One week Sweden’s ‘let it rip’ approach is winning plaudits, the next, it is responsible for excess deaths and a not-so-great economic outcome.
Right now we are buying time for firms and workers with our Budget and racking up a deficit of €20.5bn next year on top of the €23bn expected for this year. That is a tourniquet to stop the economy bleeding out. Whatever stitches we need now will be different.
The big questions from the pandemic will last a lot longer, even if there is a vaccine.
Those who can work from home – newspaper columnists included - are sheltered from both health risks and much of the economic shock. Traditional frontline workers in health and the new key workers in retail, to name but two, are not.
Existing inequalities in society are being exacerbated by the pandemic, and even though Ireland does a very good job keeping a lid on economic and social strain with large tax transfers, the budget deficits and jobs losses could strain the social contract.
Doctors are only just beginning to understand the effect of “long Covid” on human bodies, the lingering effects on the economy may take years to understand.
A fifth of those in European short-time schemes may lose jobs