Frightening scale of new recession

WHAT is frightening about the ‘scenario analysis’ undertaken by the Economic & Social Research Institute (ESRI), which estimated that the Irish economy would shrink by 7.1% in 2020 and that the unemployment rate could shoot up from 4.8% to 18% in the second quarter of this year, is that it may be a best case scenario. These dramatic forecasts have been triggered by the slump in economic activity caused by restrictions brought in by the government to try to slowdown the spread of the Covid-19 coronavirus.

They have led to a huge fall in exchequer revenues and a significant increase in spending the government must implement in order to support workers who have lost their jobs, assist businesses facing declines in revenue and provide the additional health expenditure needed to combat the virus.

The huge amounts of money that have to be spent on necessary public health measures in order to try to deal with what the ESRI described as ‘the greatest threat that the Irish economy has faced since the financial crisis’ of 12 years ago means a lot more money will have to be borrowed by the government and, instead of being in surplus, Budget 2020 will end up in quite a serious deficit situation plunging the economy suddenly into recession.

With 350,000 people set to lose their jobs due to all the sudden closures of businesses – surpassing the 15.1% rate at the height of the last downturn – the economic situation has to be worrying. And, to make matters potentially worse, the ESRI predictions are based on the government measures being in place for 12 weeks and that a recovery will begin to happen immediately afterwards.

If the crisis goes on longer than that – and the ESRI has qualified its predictions by saying they may prove benign – it will cost a lot more in terms of jobs and extra borrowings and they will be revising their figures if that becomes the case. Hopefully, it won’t come to that, but nobody can tell at this juncture.

Also, the assumption that the economy will bounce back quickly should not be taken as gospel. Economist Colm McCarthy last weekend warned that the recovery of the Irish economy post-Covid-19 is linked to external factors, especially to the swift recovery of the US economy, and the way President Donald Trump is handling the pandemic there does not inspire hope that this will happen.

McCarthy said that he would be more pessimistic about the economic outlook than the ESRI are at this point in time. Ireland’s last recovery was driven by foreign demand and he added that, if the US economy is badly affected, Ireland will be impacted as it is ‘more exposed to the US economy than any other country in the world.’