The Drac­ula sce­nario for the Ir­ish economy: a sec­ond out­break plus a no-deal Brexit

Cen­tral Bank’s re­port for­goes fore­casts in face of ex­treme un­cer­tainty

The Irish Times - - Business Today - Eoin Burke-Kennedy

When there’s ex­treme un­cer­tainty, the path­ways al­most po­lar op­po­sites, fore­cast­ing is out the win­dow.

Think of a no-deal Brexit with in­tro­duc­tion of trade tar­iffs or a sec­ond wave of Covid-19 and a sec­ond shut­down. These en­tirely plau­si­ble out­comes make fore­cast­ing treach­er­ous. That’s why we’re in­creas­ingly turn­ing to sce­nar­ios.

The Cen­tral Bank’s lat­est quar­terly anal­y­sis is a case in point. Given the scale of un­cer­tainty sur­round­ing the eco­nomic out­look, the bank sets out of two sce­nar­ios for the economy.

The “base­line” in­volves grad­ual re­open­ing of the State this year and a re­bound in eco­nomic ac­tiv­ity – the one we hope we’re on – sug­gests the economy con­tract­ing by 9 per cent this year, but ex­pand­ing by 5.7 per cent in 2021.

The more “se­vere” model would mean the economy con­tract­ing by nearly 14 per cent in 2020 with un­em­ploy­ment stay­ing el­e­vated for sev­eral years after that. This sce­nario as­sumes the lock­down pe­riod has a more dam­ag­ing im­pact on eco­nomic ac­tiv­ity and that there is a virus resur­gence at some point over the next year. In this sce­nario, it would take un­til 2023-24 be­fore the economy re­bounds fully from Covid-19.

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The se­vere sce­nario is, how­ever, not the worst case. That would be if no vac­cine ar­rives

Out­side its baili­wick

Sig­nif­i­cantly, the Cen­tral Bank does not spec­u­late on the prob­a­bil­ity of ei­ther out­come, sug­gest­ing it’s a pub­lic health mat­ter and there­fore out­side its baili­wick.

The se­vere sce­nario is, how­ever, not the worst case. That would be if no vac­cine ar­rives and the new world or­der in­volves con­stant so­cial dis­tanc­ing and dis­ease vig­i­lance. But the bank does not con­sider this in its re­port as the ram­i­fi­ca­tions are prob­a­bly too dif­fi­cult to gauge.

Un­der­ly­ing the Covid-19 sce­nar­ios are three pos­si­ble Brexit va­ri­eties: a trade deal be­tween the EU and the UK; no deal with an or­derly tran­si­tion to tar­iffs; and a dis­or­derly, no-deal out­come. The two Covid-19 sce­nar­ios pre­sented as­sume a trade deal is bro­kered.

With­out go­ing into all the var­i­ous pos­si­ble hits to growth, a break­down in the Brexit talks would sig­nif­i­cantly am­plify the Covid-19 shock.

The Drac­ula sce­nario would be if a sec­ond wave of the virus and a dis­or­derly no-deal Brexit hit at the same time.

Iron­i­cally, the Cen­tral Bank spec­u­lates that Covid-19 may fast-track some of the ex­pected busi­ness fail­ures un­der Brexit. In other words some of Brexit ef­fects that would have been ex­pected next year have been front-loaded into the economy as a re­sult of the shut­down.

The Cen­tral Bank also spec­u­lates in its re­port about the im­pact of the virus on the hous­ing cri­sis. It ex­pects 30,000 fewer homes to be built in the com­ing three years as a re­sult of the pan­demic even as the State is strug­gling to de­liver suf­fi­cient num­bers to meet de­mand.

“The un­cer­tainty around prices, fi­nanc­ing and de­mand in­creases the like­li­hood that some projects will be post­poned, re­duc­ing sup­ply over the pro­jec­tion hori­zon,” it said.

It could be that you get a short-run neg­a­tive ef­fect on price due to a fall-off in de­mand linked to fall­ing in­comes and un­em­ploy­ment – in other words prices fall­ing. But, in the longer term, with a lower level of sup­ply, prices could be bid up again, ac­cen­tu­at­ing the cur­rent af­ford­abil­ity is­sues.

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