DAN O’BRIEN
What are we doing to our economy?
THE Spanish flu a century ago caused the deaths of millions of people. The coronavirus appears to be similarly lethal. Despite the huge loss of life from Spanish flu, it had limited impact on societies, politics or economic well-being at the time, and societies were not traumatised by it.
Most history books covering the period don’t even mention it. Most of those that do merely reference it in passing. Either most historians have made a giant collective error in their analysis of this period or they have accurately reflected the Spanish flu’s limited impact on the world, both at the time and afterwards.
A decade after that pandemic, the world plunged into the Great Depression. That shock had a greater impact on societies than the pandemic a few years earlier. Not only did it lead to mass impoverishment, hunger and deprivation, it had consequences much wider-ranging and longer-lasting than the earlier global pandemic. At the very least, it accelerated a shift away from democracy towards the political extremes in the 1930s. Few would deny the Great Depression was a major factor in causing World War II.
Many of the world’s leading organisations in the field of economics, such as the IMF and the OECD, believe many countries are facing a depression, and that is assuming these economies start rapid recoveries soon.
The collapse in economic activity within many countries is already steeper and deeper than during the Great Recession more than a decade ago. Some of this has been caused by individuals and organisations changing their behaviour in order to avoid the spread of infection. Some has been caused by government-imposed shutdowns.
There is a never a good time for a depression, but at a time when the world is already experiencing a ‘democratic recession’, this is a particularly fragile moment. It is one of many reasons to question the extent and duration of lockdowns.
Extending the duration of lockdowns will add to the depressionary momentum. The scale of the health emergency is widely understood. The scale of economic collapse needs to be better understood.
Although lockdown measures and behaviour changes only really took effect across Europe in March, the impact on economic activity in the first three months of the year was evident for the first time last week with the publication of GDP data for the first quarter of the year. It showed the biggest ever quarterly contraction in the European economy, bigger even than the worst moments of the Great Recession and euro crisis of a decade ago. And to emphasise, only one month of the three during the quarter was seriously affected by the pandemic and its consequences.
Now, only one month into the second quarter, it is already inevitable that contraction in the current quarter will be very much worse than that which was recorded in the first three months of the year.
Ireland is particularly tardy in reporting its GDP data, so our economy was not included in the wider European GDP numbers. Among the most timely indicators of what is happening in the Irish economy is daily credit and debit card activity, as well as how much money people are withdrawing from ATMs.
These figures, published by the Central Bank last week, show that seven weeks ago all was still normal. Then, in the second week in March, as the schools closed, followed soon afterwards by pubs and restaurants, daily cash withdrawals fell by a 10th within a week.
Then things really went off a cliff. From the middle of March, card spending and ATM activity plummeted. Restrictions on non-essential services, introduced on March 27, caused a further downturn.
By early April, consumer spending activity looks as if fell between 30-50pc on normal levels. Since the early days of April, both card spending and cash withdrawals have remained at extremely low, if stable, levels.
This massive and unprecedented drop in consumer activity has had a massive and unprecedented impact on employment. Before the crisis hit, there were 2.5 million people in the workforce. Of that group, just under 5pc was unemployed and around 20pc in the public sector. The rest — around two million people — were employed in the private sector. Since then, more than half of private sector workers have been put out of a job or are having their wages subsidised by the State. This will not be sustainable for more than a few months, for a variety of reasons.
Last Friday, the CSO published a survey of how badly businesses have fared. The findings were predictably grim. Almost a quarter of firms have ceased trading altogether. Most businesses which said they had ceased trading said they expected it to be temporary. But most companies did not respond to the survey. Companies that have ceased trading permanently are among the least likely to respond. Why bother? If you had lost your business, you might have priorities other than filling out forms for statisticians.
The survey also showed half of respondent companies said they were availing of government supports. That is as unsustainable as having less than half of the workforce generating enough wealth to pay for everyone else. With each passing day, more businesses will fail and will never reopen.
Barring a miraculous medical breakthrough in the coming weeks, the economy will continue to collapse. Friday night’s announcement of very gradual easing of movement restrictions in phases over the next 100 days will do little to slow the pace of collapse. Let’s conclude on Brexit. It is an infinitely lower priority than it was just weeks ago, but it hasn’t gone away, and it’s worth saying that the economic impact of the pandemic for Ireland has already been far worse than the worst possible nodeal Brexit rupture would have resulted in, or will result in.
The past week has raised further questions over whether the British government will leave Northern Ireland as a de facto part of the EU, as Boris Johnson agreed to do when he was left with a choice of a no-deal Brexit or putting a border in the Irish Sea.
If he backtracks on that commitment, the issue of a border on this island will rear its head again. Ireland will face a choice between checking goods (and goods only, not people) crossing from north to south or having other countries in the EU’s single market checking Irish goods arriving at their ports and airports.
There is no doubt but that the British are using this as leverage in negotiations. Everyone has played hardball in the Brexit debacle. But the issue is of profound long-term important for the strategic position of Ireland. Even in the midst of a pandemic, it remains something to watch closely.
‘Almost a quarter of firms have ceased trading’