Covid’s long economic tail
A second global lockdown could result in a double-dip recession, causing panic in financial markets
AMID a surge in coronavirus infections that have turned Ireland from best in class to worst, vaccine euphoria has now given way to the realisation that it is going to be a long slog.
While the European Union has ordered more than a billion shots, most of them won’t be available until the second half of 2021 and the slow pace of rollout, both here and in the rest of the bloc, means that it will take all year to vaccinate the entire eurozone population.
The best-case scenario for Ireland’s economy is that once the most vulnerable have been vaccinated, we will be able to start rolling back some restrictions from Spring onwards and this will give consumers the confidence to start spending the billions they have saved over the past year.
If we can manage to reopen tourism and entertainment safely then we could have a meaningful recovery that will help bring hundreds of thousands of people back into paid work in the summer.
That could, in the best case, result in virtuous cycle of employment and investment and allow the Government to shift from crisis management into repair mode and start working out how best to support firms whose balance sheets have been holed.
But at the moment, we are still mired in a health crisis.
We simply don’t know how many of the infections we are seeing are down to delayed Christmas reporting and whether there will be the kind of lockdown adherence that will save our hospitals from being overwhelmed.
With the spread of the more infectious UK Covid strain there is a greater risk to individuals and to the HSE.
This means we are getting only a partial picture of the risks – as was the case last March when official data on infections was heavily skewed.
If there is a second global lockdown prompted by the kind of surge in infections we have seen here that would cause a double-dip recession and unsettle financial markets.
With stock markets hitting all-time highs again, it is easy to forget that from February 19 to March 23 last year, the US S&P equity index fell by 33pc and that it has taken some $20trn in support to avert a liquidity shock that would have led to a debt and financial crisis.
While the world’s central banks still have firepower at their disposal, governments do not have as much room and it is unlikely that budget policies would be as generous as they were last year.
It is also a confidence game. The first time round, you were taking a huge risk betting against say Italy when the European Central Bank stepped in to close market spreads. A year later, the risk-reward balance may well be looking very different.
For all those shops, restaurants, pubs and hotels across Ireland that have closed, reopened and closed again, the question now is how much more can they endure?
Another extended period of crisis could be the last straw for many of those businesses and for hundreds of thousands of jobs.
Even a smooth vaccination programme will have to meet demanding targets as ‘herd immunity’ is estimated to require a 70pc acceptance rate. The longer the vaccination programme takes, there is a bigger risk of mutations like the British one, and the chance of vaccine-resistant variants emerging.
Covid has proved far more tenacious and long-lasting than expected and all those projections of a V-shaped recovery have long since been consigned to the dustbin.
If there is one lesson to be learned, it is that we have all been way too optimistic over the path of the disease, speed of reopening and the economic costs.
It will likely take all of this year for the eurozone to vaccinate against Covid