Re­silient Ir­ish econ­omy still needs more help

■ Some busi­ness sec­tors sim­ply in a very dark place

Irish Examiner - - Business - Jim Power

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.

In­ter­est­ing

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.

Re­stric­tions

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.

Pic­ture: PA

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.

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