Resilient Irish economy still needs more help
■ Some business sectors simply in a very dark place
Almost five months have elapsed since the World Health Organization declared the novel coronavirus, Covid-19, a global pandemic. The intervening period has been simply extraordinary, with devastating consequences for the physical health of nations, economic activity, public finances, politics, global inequality, and of course mental health.
While there is still no end in sight to the pandemic, it is clear that the legacy will be long-lasting and will take some years to work through. As we look forward, I think most individuals and businesses are currently facing the future with a mixture of fear and hope. The fear mainly derives from the fact that the virus is surging again all over the world.
We appear to be facing into the reality of ongoing waves of the virus, requiring ongoing localised lockdowns of the type that are now being witnessed in Manchester, Leicester, large swathes of the US, and many other places around the world. The new cases reported in Ireland in recent days are a particular cause of concern.
The hope derives from a desire that a safe and effective vaccine will be developed.
From an economic perspective, the impact everywhere has been devastating, and unfortunately, economic forecasting and modelling is about as useful at the moment as sunbeds on an Irish staycation.
While the great financial crash back in 2008 was a global event, there was certainly a sense in this country that we were on our own, and based on some of the treatment we received, we certainly were. Thankfully, the Troika eventually stepped in and provided us with the funding required to run the country for a three-year period, and eventually enabled us to sort out the mess, thereby laying the foundations for almost a decade of recovery.
This time around, there is a much greater sense that we are all in this together. Witness over the past week the quarterly decline of over 12% in eurozone GDP in the second quarter. In the US, the economy contracted at an annualised rate of almost 33%. These numbers are truly biblical in nature, and unfortunately, the path to recovery is far from clear .
The reaction of policymaking authorities around the world has been very strong and very concerted to date. But it is worth reflecting on the fact that the economic slumps occurred despite massive fiscal and monetary stimulus packages everywhere, and one can only imagine the devastation in the absence of such stimulus.
Much more will inevitably be needed over the next couple of years. I think it is safe to say that Covid-19 has fundamentally altered the way we look at policymaking and its role in economy and society. Here in Ireland, I think it is now time to seriously analyse and debate the concept of a universal basic income.
In some ways, Ireland has a certain level of resilience to the global economic devastation, due to the significance of the chemical and pharmaceutical sector, which is particularly good for Cork, and the strong presence of big tech. The blockbuster earnings reported by companies such as Apple, Amazon, Facebook, and Google over the past week demonstrate how well those companies are doing, and of course, they do employ a lot of people around the country, directly and indirectly.
It was interesting to observe last week the evidence that the animal spirits of the Irish consumer are still alive. Naturally, consumer spending fell sharply during the months of lockdown in the economy, but it has picked up strongly as the economy has re-opened. The volume of retail sales in June was 3.5% higher than June 2019, and was 3.1% higher than pre-Covid-19 levels in February.
Overall, we have seen a strong recovery in retail spending in May and June, but of course, this is spending on goods only and does not capture spending on services. For many service providers, business conditions are still very challenging, particularly where overseas visitors are an important source of revenue.
The impact of Covid-19 on tourism and travel has been truly dramatic. Data published by the CSO last week show there were just 57,100 arrivals into Ireland in June, which is 97% down on June 2019; and there were 73,900 departures, which is 96.4% lower than June 2019. In the first six months of the year, there were 3.18 million arrivals, which is almost 66% lower than last year; and 3.17 million departures, which is 66.6% lower than last year. For a country where tourism is so important and in particular counties that have a heavy dependence on this sector, the consequences are staggering. Inevitably, many businesses will become extinct and many jobs will be lost. Regional economic development will have to take on a whole new meaning.
Many pubs are still closed and those that are open, are operating well below capacity and are subject to expensive restrictions. Likewise, for restaurants, who are also finding the going very challenging. However, occupancy data from the Irish Hotels Federation are truly frightening. The average national hotel occupancy rate stood at just 42% in the peak tourism season of July, when it would be expected to be over 90%. Some sectors in the economy are quite simply in a very dark place at the moment and there is not a lot of light emerging.
On July 23, the Government published details of the COVID-19 economic recovery plan.
The plan was basically a clarification of pre-announced measures, with some additions. Its purpose is ostensibly to save jobs, to create new jobs, and to get as many people as possible back to work. It contained over 50 measures, and some of those should certainly help achieve some of the employment objectives, but certainly not all of them. It seems clear to me that many of the measures were politically motivated, rather than motivated by real business concerns and realities.
One can only wonder at the strange and unexpected decision to cut the standard Vat rate from 23% to 21%, while ignoring the Vat rate applied to a sector that is in real trouble, the hospitality sector. Targeted interventions tend to be much more effective at achieving specific objectives and helping those in real trouble.
Likewise, even as an avid cyclist, I am somewhat aghast at the enhancement of the cycle-to-work scheme, but we can guess where that came from. Likewise, in relation to housing, the real issue is the lack of supplyside rather than the lack of demand. The enhancement of the help-to-buy scheme will surely just boost demand and house prices, which in my view would not be the optimal outcome.
The plan is short-term in nature and is intended to address immediate challenges. A longer-term perspective will be presented in October, when the Government is due to publish the National Economic Plan, along with Budget 2021. When this plan is coupled with the measures introduced at the beginning of the crisis, the total stimulus to date is worth around €20bn, equivalent to around 8.3% of GDP. More stimulatory measures will be required in the budget in October and the exchequer could run a deficit of around €30bn. This is a phenomenal deterioration in the public finances, but there is no choice.
However, we need to ensure that even scarcer resources are now allocated in the most effective way possible. This will obviously be a tall order for the current very strange government party alliance.
Dark clouds over Manchester City Centre as seen from the Castlefield area. Lockdown restrictions have been tightened in several areas in the north of England following a surge in new Covid-19 cases. The rise in the number of cases globally is a huge concern for business.