In terms of economic analysis and economy-watching, the last three months have been truly awesome in every negative sense of that word. We have been faced with a set of circumstances that nobody would have believed possible. I never envisaged in my wildest dreams that I would end up commenting on a monthly decline of 36% in retail sales or an unemployment rate jumping from 4.8% to 28.2% over a two-month period. That is exactly what I find myself doing at the moment.
On the upside, such statistics are reflecting a virtual shut down of large swathes of the economy, and as the economy is gradually re-opened, many economic statistics will rebound quite quickly. On the downside however, my fear is that the crisis might leave a permanent legacy in the form of lost businesses that might never re-emerge.
With the acceleration of the roadmap for reopening the economy and the ongoing COVID-related employment supports, there is a fair chance that the damage will be kept to a minimum. However, it would be naïve not to accept that for the next 12 to 18 months the reality for businesses in the retail sector; the accommodation and food services sector; the airline industry and some other businesses will be challenging and sustained State support will be required at a significant cost the Exchequer.
This will necessitate running significant budget deficits over the next couple of years, but thanks to our decision over a decade ago not to default on debt and the growth recovery that has been experienced over the past 5 years, Ireland is in a good place to borrow. In addition, thanks to the ECB’s ongoing aggressive bond-buying programme, Ireland and indeed most other EU countries are able to borrow at historically low interest rates. We have to accept higher deficits over the next couple of years as this will be a necessary price to pay for helping businesses survive and re-building the economy. Fiscal austerity should not be part of the popular lexicon for at least the next 2 years.
SUMMARY OF IRISH ECONOMIC DATA
The impact of COVID-19 on the Irish economy is severe, and there is no point in glossing over that fact.
- The labour market impact has been dramatic. 1.28 million people are now on State employment supports. In the period up to June 2nd, 543,200 people were on COVID-19 Unemployment Payment support (-36,200 on week earlier); 57,800 employers had registered for the COVID-19 Wage Subsidy Scheme, representing 508,100 workers (+25,300 on week earlier); and 225,662 people were on the Live Register at the end of May. Of the 543,200 workers on COVID-19 Unemployment Payment support, 122,200 (22.5%) are in the Accommodation & Food Services Sector; 80,900 are in the Wholesale & Retail Trade (14.9%); and 60,800 are in Construction (11.2%). These three categories are by far the most significant. I would have few concerns about the construction sector as it is now reopening and the demand for construction output will be very strong over the coming years, not least residential housing. For the Accommodation & Food Services and the Wholesale & Retail Trade sectors, there are justifiable grounds for caution, as many businesses may struggle to survive in an environment of social distancing, other health protocols, and the lack of international visitors. Thankfully, the Taoiseach has stated that the COVID-19 labour market supports will be extended to the end of August. This is important for many businesses.
- In the year to April, the value of retail sales declined by 44.8% and the volume of sales declined by 43.3%.
- New car registrations in the first 5 months of the year were down by 34.6%.
- The Purchasing Managers Index (PMI) for manufacturing declined from 51.2 in February, to 45.1 in March and to 36 in April. It increased to 39.2 in May.
- The PMI for services declined from a two-year high of 59.9 in February to 32.5 in March, and to 13.9 in April. It rebounded to 23.4 in May.
- The PMI for construction fell from 50.6 in February to 28.9 in March, and to 4.5 in April. (For PMIs, a reading below 50 signifies a contraction in activity.)
- Consumer confidence declined from 77.3 in March to 42.6 in April, which is the largest monthly drop in consumer confidence in the survey’s 24-year history. It rebounded to 52.3 in May.
- Overseas travel to Ireland fell by 99.1% in April compared to April 2019 and was down by 44.4% in the first four months of the year.
- The impact of COVID-19 on the public finances can only be described as quite dramatic. The Exchequer returns for the first 5 months of the year show that the Exchequer recorded a deficit of €6.1 billion, compared to a deficit of €63 million in the same period in 2019. The deterioration of €6 million is primarily due to increases in voted expenditure in health and social protection. Tax revenues of €21.7 billion in the first 5 months of the year were just €8 million lower than last year. VAT receipts were 21.7% lower than last year; Income Tax was 4.8% higher in the first 5 months (boosted by strong performance in January and February), but in May was 7.8% down on May 2019; but Corporation Tax receipts were 91.8% or €1.65 billion ahead of last year.
One of the more surprising elements is the fact that Income Tax receipts are performing better than might be expected. Given the surge in unemployment, this is reassuring. It suggests that middle and higher-income workers, who pay the bulk of income tax, are not as adversely affected as lower income workers in the retail and hospitality sector.
- On the tax side, the negative impact of COVID-19 has been more than offset by buoyant corporation tax receipts. This is due to increased profitability and is attributed to a small number of companies.
- Merchandise exports in the first 3 months of the year were 12.7% higher than the first quarter of 2019. Exports of Chemicals & Pharmaceuticals increased by 14.6% and accounted for 64% of total merchandise exports. The strong Chemical and Pharmaceutical base in Ireland are very important for Ireland in the current circumstances, as is the strong performance of the social media companies and IT companies who provide a lot of employment in the economy.
In terms of pain, the most severe problems are being experienced by the hospitality sector, (restaurants, pubs, and hotels); non-grocery retail; the motor industry; most leisure facilities; and construction. In terms of getting back towards normal levels of activity, the construction sector will rebound relatively quickly, as the demand for construction output remains very strong. For the others, recovery is set to be more challenging.
Government is now accelerating the re-opening of the economy. For tourism-facing businesses the challenges are particularly intense because international travel is likely to be constrained until a vaccine is developed, and people feel safe to travel again. This is a considerable blow for Ireland because the country had a record 10.8 million overseas visitors last year.
It is vital that small businesses get as much Government support as possible during the period of lockdown and for at least the next year thereafter.
It is good to see the opening up of the economy being accelerated, but achieving a balance between preserving the health of the nation and the health of the economy is very challenging and obviously very risky.
Provided we do not experience a second wave of the virus coming into the Autumn and winter, the economic performance should gradually but steadily improve from here. A factor worth remembering is that personal savings are growing strongly at the moment, and once people have the opportunity to spend again and the confidence to do so, we could see a strong rebound in consumer activity and personal investment over the coming months.
Global policy makers continue to extend all possible fiscal and monetary policy support to get the global economy back on track.
Last week, the German government agreed on a fiscal stimulus package of €130 billion, coming on top of a previously-announced massive stimulus package. A significant cut in VAT is at its core. For the second half of the year, the standard rate of VAT will be reduced from 19% to 16%; and the lower rate will be cut from 7% to 5%. In addition, every child will receive a once-off payment of €300, and incentives for electric cars have been introduced.
To see the very fiscally conservative Germans behaving in this manner is very re-assuring. It just goes to show that Angela Merkel and most other leaders around the world fully accept the necessity of massive fiscal support at the moment. This is essential for global recovery.
There is also a lot continuing to happen on the monetary policy front.
On Thursday last, the European Central Bank (ECB) announced that it is increasing the PEPP (Pandemic Emergency Purchase Programme) from €750 billion to €1.35 trillion ; the PEPP will run until at least the end of June 2021; and it has committed to reinvest maturing principal repayments under the PEPP until at least the end of 2022.
This aggressive monetary policy action from the ECB reflects its view that the Euro Zone economy will contract by 8.7% this year, and that although a strong rebound is expected in 2021, its expects GDP to remain below its pre-COVID levels in 2022, Furthermore, it expects inflation to remain well below its 2% target until at least 2022. Historically low official interest rates are here to stay.
Most countries are now well advanced in the reopening process and this is being reflected in a rebound in economic data. March and April will represent the low point of the global economic cycle, and on the assumption that the virus does not reassert itself, we should see a reasonable global recovery over the next 18 months. The risk of a second wave of the virus is obviously the big fear.
The nature of the rebound possible was demonstrated by the increase of 2.5 million in US non-farm employment in May, following a collapse of 20.7 million in April. This was the largest monthly increase ever recorded. The markets had been expecting a decline of 7.5 million. This is dramatic stuff, but does not hide the fact that the US economy is still in a very poor place, and the protests will not help the recovery process. From a political perspective it promises to be a really interesting five months to the election on 3rd November. Trump is struggling in the polls, and his response will be interesting to observe. Already, relations with China are deteriorating at an alarming rate, and anything is now possible.
In the UK, Brexit has been playing second fiddle to COVID-19, but progress in the negotiations with the EU does not give much cause for optimism. The EU summit next weekend will tell a lot, but the odds of the UK exiting the transition mechanism at the end of this year remain too high for comfort.