DELUSION OF THE V-SHAPED ECONOMIC REBOUND

The public will determine the direction of our recovery after the Covid-19 crisis, writes Colm McCarthy

AFEW countries, none in Europe, are close to suppressing the Covid-19 virus. South Korea, a country of 52 million people, has had just 273 deaths, compared to more than 40,000 in the United Kingdom, whose 67 million population is only a quarter larger.

Most countries have sought to ‘‘flatten the curve’’, minimising strains on the health system, without an explicit target of suppression. A few seem to have resigned themselves, by accident or design, to letting the disease develop almost uncontrolled.

Ireland’s experience looks better than the UK but not as good as several European countries, including Austria, Germany, Denmark, and Portugal.

Calls for an earlier exit from Covid lockdown are being promoted by Ibec and several sectoral lobby groups as a strategy to limit the economic damage. But the economic damage could be worse if the exit is mismanaged and the public come to fear a resurgence of infection.

How many Irish people would travel to Cheltenham next week if the festival meeting in March had been deferred?

In the fixture list published last November, the Cork hurling team were due to take on Clare this afternoon at Pairc Ui Chaoimh and a packed stadium would have been expected. How many people would turn up today if the game were to go ahead?

The authorities in Seoul, the Korean capital, slipped up through reopening bars and night clubs too early, sparked a fresh outbreak, shut them again and taught everyone a lesson — there are economic costs in an over-hasty exit.

There has been an extensive discussion on the economics websites about the plausibility of a V-shaped rebound, and particularly about the notion that early recovery is somehow in the gift of policymakers.

Most economists predict no early bounce-back and warn of substantial long-term effects. While there is widespread support for the instant response of governments, including extra unemployment pay and aids to businesses closed by government edict, there is no belief that economies will spring back

ALWAYS DARKEST BEFORE THE DAWN: Storm clouds are gathering on the horizon as the ecomomic recovery kicks in to life as they do when the Christmas shutdown expires on schedule.

This is the central delusion of the V-shaped analysis, that the supply shock can simply be switched off by governments since they flicked it on to begin with. There has been a demand shock too, and some of it will be permanent. The public will reduce demand for anything seen as risky.

There is extensive evidence that governments were slower than the public in becoming alarmed about the virus.

One example — the ‘‘super-spreader’’ football match at Anfield on March 11, attended by 52,000 people including 3,000 fans from Madrid. Matches had already been cancelled in Spain and Atletico travelled under protest. When they offered ticket refunds on their website, many people took them up.

Attendance at Cheltenham the same week was down a little on the previous year. Some pubs in Dublin closed a couple of days before the Government acted. Travel bookings declined before flights got cancelled.

This is a key point about the prospects of post-lockdown recovery: there can be no presumption that pre-Covid patterns of consumer behaviour will re-emerge, which implies that not every firm can be saved.

Some of the long-term casualties are already coming into view. The airline industry will be smaller, so there is no urgency about building a third terminal at Dublin airport.

City centre hotels and restaurants which rely on business customers will suffer. If social distancing raises office costs relative to remote working, office landlords will not see a full recovery in demand.

The economist Richard Baldwin expects that the deglobalisation narrative will not apply to services — the remote workers can be anywhere. All the Dublin-based tech firms have staff working from home, but some of the homes are in Spain and Italy. Both Facebook and

Twitter have announced their intention to adopt remote working permanently. Baldwin reckons the economy is more like a metal clip than a rubber band — if you pull on a rubber band, it resumes its former shape when you stop pulling, executing, if you wish, a V-shaped recovery. But that does not work for a metal clip, which stays out of shape once the temporary shock has gone away. Why is the economy more like a metal clip? Because there have been important changes, caused by the pandemic, to variables which are known to have permanent effects. There have been massive layoffs in labour markets around the world. Even for firms unaffected by adverse demand shifts, rehiring workers is far more costly than retaining the ones you already have, especially if they have gone back to Poland or other EU countries.

Both firms and governments are accumulating large debt mountains, which will constrain their options, especially for capital formation.

The argument that interest rates are low, so debt does not matter, must contend with the awkward fact that interest rates were low before Covid and have not fallen further.

Firms and individuals have made several years of investment in remote working in just a few months. Uncertainty about how they might manage has been dispelled — it works fine for a lot more businesses than was thought possible, and there is no going back. The invisible investment in organisational capital will have profound effects — firms have discovered a viable way to operate that might be less costly. There will be an acceleration, Baldwin argues, in robotics for office work and the use of artificial intelligence.

Consumers have learned, very quickly, that online shopping works fine, delivery is cheap and reliable, and bricksand-mortar retailing will take another hit.

Those searching for silver linings think they might have found one in remote working, which has been welcomed for its potential to reduce peakhour commuting. But the perfect commuting mode for as long as social distancing is required by governments or chosen by a nervous public, is the single-occupant private car.

Until a vaccine is found there could be serious problems for public transport, with uneconomic restrictions on capacity utilisation.

A better silver lining could be the willingness of governments to be more radical about policy solutions, in this instance, a long overdue resort to congestion charging for road use, penalising the peak-hour commuter, and providing another incentive to remote working.

Every component needed to move in this direction, including the technology in cars and GPS tracking, is already in place.

There is also an important anniversary in 2024 — it will be 60 years since the first practical congestion charging scheme was proposed in a report to the UK government.

‘Pre-Covid patterns of consumer behaviour may not re-emerge’

HOW has Ireland’s economy fared compared to others since the pandemic struck? Much like the effects of the virus on human health, it will be some time before a truly accurate picture emerges of the impact of the pandemic on the health of economies across the world. There are, however, some early indications.

Before looking at the recent data, it is worth considering what governments are doing to mitigate the effects on prosperity and two significant developments in Europe last week.

The first thing to say about the economic effects of the pandemic is that they are horrifying almost everywhere. The world will be poorer because of the virus, probably a lot poorer.

The massive and rapid response of most governments to mitigating the economic shock offers some hope. At this juncture, the measures being taken to support incomes and businesses across many developed countries with the wherewithal to finance them look broadly proportionate to the scale of the emergency. And, compared to the crash of 2008, policy makers have been quicker to act.

It may be that experience of the Great Recession, unpredicted as it was, has left a lasting impression on decision-makers regarding the fragility of economies. Before 2008, there was an over-confidence, particularly among central bankers, about the ability of policy-makers to keep economies ticking along at just the right pace. That over-conKeynesians. fidence was blown away in 2008.

The cost of delaying action was another lesson learnt, particularly in Europe. Divisions among eurozone governments on dealing with the consequences of the Great Recession led to the euro crisis in Europe in 2010-12.

Two decisions — one made in Berlin, the other in Frankfurt — over recent days have given cause for hope that divisions among European governments on economic management will cause less damage on this occasion.

Last Wednesday the German government announced a massive new stimulus package for its economy. German budgetary policy matters for everyone in Europe, for two reasons.

The first is that Germany is a major source of demand for everyone else. If its government is spending big, and its economy is moving, Germans will buy more from other countries. That will hasten recovery in those countries, including Ireland, which exports lots of goods and services to Germany.

But perhaps an even more important aspect of last Wednesday’s decision is the signal it sends on policy choices. Traditionally, German politicians and economists have been more associated with balancing the books in downturns than with boosting demand with borrowed money. In the jargon of economics, they are Ordoliberals, not Keynesians.

But in the coronavirus emergency, they’ve almost all become The German government has been among the most active in Europe in taking interventionist measures and borrowing massive sums to fund mitigation efforts.

This is important because in the last downturn, Germany didn’t stimulate its own economy. Berlin also demanded that other eurozone economies follow its example. Last week’s announcement in Berlin, coming just weeks after Germany conceded to making EU grants of considerable size available to harder-hit countries, suggests that this time could be different from the last time.

The second big European development last week was the decision of the European Central Bank to expand its pandemic money-printing program, increasing both the amounts involved and the time frame over which it is prepared to keep the printing presses going.

It cannot be stressed enough that the only reason many governments in the single currency area continue to be able to borrow massive amounts at low interest rates is because of the ECB’s actions.

Printing money certainly comes with risks, but it is the least risky option facing Europe now. That the ECB has made clear its willingness to go further than it had already agreed in mid-March gives governments a chance of borrowing their way through the worst of the crisis, and worrying about the consequences in the years to come.

What of Ireland’s economic performance?

Before the onset of the pandemic, the Irish economy was one of the fastest growing in the developed world. It was competitive and without some of the weaknesses it has had in the past, such as excessively high levels of private debt. Many of the country’s most important sectors — pharmaceuticals, technology, internationally traded financial services and food — were better placed than most to withstand the pandemic.

Last Friday, the State’s statisticians published GDP figures for the first quarter of the year. They showed that Ireland bucked the international trend and continued to grow in the first three months of the year.

That was largely because the sectors that were expected to be relatively unaffected by the corona crash proved to be so. According to last Friday’s data, accelerating growth in the pharmaceutical and tech sectors offset a lot of the damage caused at the end of the quarter when the effects of the pandemic started to be felt.

All that said, Ireland’s GDP numbers are notoriously volatile even in the best of times, so not too much should be read into the headline figures when compared with other countries.

Another more timely indicator puts Ireland mid-table among European countries. Retail sales in Ireland in April were down by more than a fifth compared with February. That is in line with the average in the EU.

What stands out from last week’s Eurostat retail figures is how unaffected the Nordic countries have been. In Denmark, Finland and Sweden, retail sales were down only slightly between February and April. In Norway they actually rose. These countries have always been watched closely around the world as models for others.

Despite their different approaches to lockdown, in Sweden in particular, they will be studied more closely than ever to see what they seem to be doing right.

There is one area — jobs — where Ireland might be doing worse than other countries, and I stress ‘might’ because there is considerable uncertainty around how countries are measuring unemployment in the crisis. Official Eurostat figures show almost no change to rates of unemployment across the continent in March and April. There is clearly a measurement problem happening.

Researchers at the Institute for Government, a London-based think tank, have dug into the jobs numbers in five English-speaking countries: Australia, Canada, Ireland, the UK and the US. They have tried to disentangle wage subsidy schemes, from new welfare payments, from pre-existing joblessness. They found that among the five countries during the pandemic, ‘unemployment has risen most sharply in Ireland’.

Again, this may be a counting error or it may be a short-lived spike, so care is needed. But if the analysis is correct, it could mean that the pandemic unemployment payment created an incentive for both employees and employers to use it. Last Friday’s tweaking of how the payment is dispensed in July and August should help remove any perverse incentives that may exist.

It would be nice to come to a strong conclusion on how Ireland has fared economically so far, relative to its peers. That, however, is simply not possible on the basis of the available evidence. Like so much else in the world now, uncertainty will prevail on the matter for some time yet.

‘Ireland might be doing worse than other countries over jobs’