One Year Since The Pandemic

• It is now just over a year since COVID-19 was declared a global pandemic. The impact on global economic activity has been dramatic, and the policy response via fiscal and monetary policy has been very strong and very co-ordinated. 
• There is now a strong basis for a rebound in global economic activity. The OECD has just upgraded its global growth forecast for 2020 in a very significant way, and is now anticipating global growth of 5.6 per cent, which is more than 1 per cent higher than its December forecast. The upward revision is due to a combination of the vaccine rollout, the US fiscal stimulus package, and considerable pent-up demand in the global economy.
• The ‘Biden package’ is expected to add 3 percentage points to US growth this year. This is a very significant fiscal stimulus coming on top of the two other fiscal packages implemented over the past year. 
• It is estimated by the Economist magazine that personal savings in the 21 richest economies in the world increased by $6 trillion (€5 trillion) in the first 9 months of 2020, which implies ‘excess’ savings of $3 trillion (€2.5 trillion).  This is equivalent to 10 per cent of annual consumer expenditure in those countries. 
• The obvious risks to the growth outlook revolve around the rollout of the vaccine programme, and variants of the virus.
• Equity markets fell sharply once the global pandemic was declared, but they quickly bottomed out in the third week of March. They have subsequently made very strong gains over the past year. Markets have become somewhat nervous and volatile in recent times about prospects for global inflation. Bond yields have increased, albeit from exceptionally low levels, but nevertheless this is indicative of market nervousness about growth, inflation, and future monetary policy. 
• Fears about inflation arise from the significant fiscal and monetary stimulus in the system, particularly the $1.9 trillion (€1.6 trillion) fiscal package about to be implemented by President Biden; the considerable consumer and corporate investment pent up demand in the system; and the fact that oil prices are rising strongly. Oil prices are currently touching €70 per barrel, which is equivalent to an increase of almost 130 per cent on levels attained at the end of March 2020. 
• Markets are very concerned about the potential for inflation in the US in particular, and the prospect that the Federal Reserve might be forced to increase interest rates at some stage to rein in spiralling prices. The Chairman of the Federal Reserve, Jay Powell, has sought to dampen nerves by arguing that the uptick in inflation will be ‘neither large, nor sustained’. The Secretary of the Treasury, Janet Yellen, has always sought to downplay concerns. However, some fear that the stance of US fiscal policy in response to COVID-19 is now becoming too aggressive, but President Biden appears intent on doing whatever it takes to address the inequality issues that gave rise to ‘Trumpism’ and extreme populist politics. Meanwhile, all of the major central banks have given some type of commitment to keep bond yields down. This is important, because higher government bond yields in an environment where most governments are borrowing heavily, would not be good news from a debt sustainability perspective. 
• COVID-19 has resulted in a very unusual fiscal and monetary situation engineered to deal with a health crisis that does not have modern precedent. Policy makers are in a tricky situation, but justifiably appear more intent on ensuring that economic recovery is sustained, rather than fighting a war against a foe (inflation) that has been conspicuous by its absence for the past couple of decades. 
• In Ireland, the economic impact of the global pandemic and the restrictions put in place to deal with it, have been quite dramatic. The public finances have deteriorated significantly; the complexion of the labour market has been turned around in dramatic fashion in just 12 months; and sectors such as tourism and hospitality, the non-essential retail sector, arts and entertainment, personal services, and the airline industry have been seriously damaged. On the other hand, the multi-national sector, the public sector, the grocery retail sector, professional services, and financial services, have all held up well.
• The impact of COVID-19 on the Irish economy and Irish society over the past year has been very different for different parts of the economy and society. A real dual economy has become very apparent. This is demonstrated in exports, the labour market, industrial output, and tax revenues. 
• Workers in the sectors most exposed to restrictions have seen their incomes decimated, and the State has been forced to step in with considerable financial support for these sectors and the workers most adversely affected. On the other hand, workers in sectors not subject to restrictions have maintained earnings, but have lacked the wherewithal to spend. As a consequence, household savings increased by €15 billion in the year to January 2021 to reach €126.4 billion, which is the highest level ever seen. Considerable business investment has also been put on hold in an environment of considerable uncertainty. Non-financial corporate deposits increased by €11.9 billion in the year to January.
• Prospects for recovery in the Irish economy look good, with high levels of savings at the household and corporate level likely to lead to a strong rebound in consumer expenditure and business investment respectively, once the pandemic is brought under control and confidence is restored. The potential for significant pent-up demand to drive the recovery is strong. However, everything is contingent on a successful delivery of the vaccine programme. 
• COVID-19 will leave a significant legacy for Ireland. This will include a potentially dangerously high level of Government debt; many indigenous businesses that may not re-open, or which may struggle for some time; increased inequality; an inadequate supply of housing; and a damaged tourism product. 

As we pass the first anniversary of the imposition of Ireland’s first national lockdown, it is still difficult to comprehend what has happened at a global and national level over the past year and the consequences for all facets of life. The economic and social impact has been dramatic and the legacy will remain with us for a long time to come.

On 29^th February 2020 the first case of COVID-19 was discovered in Ireland. On 11^th March, the World Health Organisation declared COVID-19 a global pandemic, and the closure of Irish schools was announced the following day. Pubs were shut on 15^th March, and then on 27^th March, the Taoiseach announced the introduction of a wide range of strict restrictions, thereby signalling the beginning of a regime of restrictions that has prevailed to varying degrees ever since.

The initial response in March included the closure of all non-essential retail outlets to the public; limiting cafes and restaurants to deliveries and take-away only; the cancellation of all sporting events; the closure of theatres, clubs, gyms, leisure centres, and hairdressing salons; and restricting people to travelling within 2 kilometres of their own home. People aged over 70 were forced to ‘cocoon’, which involved those people not leaving their house; not having any visitors to the home, unless for vital care; not attending any gatherings; and not to go out for any reason. Where possible, workers in sectors that were not shut down, were asked to work from home where possible.

This first stage of rigid restrictions lasted until May, but from May onwards, we started to see a very gradual and modest easing of restrictions, but they still remained very stringent, with significant impact on the social, business and general economic life of the country.

However, following the gradual and limited easing of restrictions during the summer months, and the subsequent increase in case numbers, the country has been subsequently subjected to increasingly stringent restrictions. In September, Dublin and Donegal were moved to Level 3 restrictions; the whole country moved to Level 3 on 6^th October; and then on 19^th October the whole country moved to Level 5.

On 1^st December there was an easing of restrictions to Level 3, but at the end of December the country moved back to Level 5 until 31^st January initially; but this was subsequently extended to 5^th April. At that stage it will be reviewed, but we are unlikely to see a significant easing of restrictions for some time after that. The only meaningful change in policy since the beginning of January was the decision that schools would be gradually re-opened from 1^st March.

With the extension of Level 5 restrictions, the Government had no choice other than to extend the various support schemes, at considerable cost to the Exchequer.

The Pandemic Unemployment Payment; the Employment Wage Subsidy Scheme; the COVID-19 Enhanced Illness Benefit; the Covid Restrictions Support Scheme; the Suspension of redundancy provisions; and the Commercial rates waiver have all been extended to 30^th June 2021. This represents a very significant drain on the public finances, but there is little choice.

The global response of policy makers to the pandemic has been quite dramatic on both the fiscal and monetary policy front.

The EU relaxed the fiscal rules and the state aid rules early in the crisis, and thereby gave permission to member countries to provide as much fiscal support as necessary to households and businesses, and it accepted the need for large budget deficits and escalating debt levels. The fiscal stimulus response from the EU itself has been relatively modest and is estimated at about half that of the US in GDP terms. The latest instalment is the €750 billion recovery fund agreed in December, which will consist of grants and loans. The overall EU response to the crisis has been disappointing.

The US response has been dramatic. Once the current €1.9 trillion Biden package is implemented, the total fiscal stimulus will total around $5.1 trillion (around 24 per cent of GDP). President Biden is planning a further significant investment stimulus package over the coming months.

On the monetary policy front, central banks reacted aggressively and quickly to the crisis. Official interest rates were quickly taken to zero or near-zero in the major economies. The scope for interest rate cuts was limited, as rates were already at very low levels coming into the crisis. Bond buying or Quantitative Easing (QE) programmes were ramped up in all of the major economies. This was primarily intended to drive Government borrowing costs down in order to facilitate the significant borrowing that most countries have had to engage in. At its March 2021 policy meeting, the European Central Bank (ECB) pledged to speed up its €1.9 trillion Pandemic Emergency Purchase Programme over the coming months in order to keep bond yields low.

The overall global response to the crisis was and continues to be strong and co-ordinated. Monetary policy and fiscal policy are working hand in glove, which is really important in the face of such an unprecedented crisis.

Once the global pandemic was declared, equity markets experienced sharp declines. Table 1 shows the decline in markets from the beginning of February 2020 to the lowest levels achieved the following month; and the subsequent rebound from the March 2020 lows to 15^th March 2021.

The initial reaction in the markets was a sense of panic, but markets quickly bottomed out and have subsequently performed very strongly. The strong performance over the past year reflects more than anything else a market belief that both governments and central banks would stand ready to do whatever it takes to support economic activity through co-ordinated fiscal and monetary policy.

Markets have become more nervous and volatile again in recent weeks, as there are fears that the fiscal and monetary stimulus in the system, and the resurgence of pent-up demand, will result in a strong upsurge in inflation and force the hands of central banks.

Table 1: COVID-19 AND EQUITY MARKETS

GDP IN 2020

COVID-19 has had a dramatic impact on the overall economy and the public finances. However, the impact has been very different in different sectors, with some subject to stringent restrictions, and others able to operate as close to normality as possible.

Gross domestic product (GDP) expanded by 3.4 per cent in 2020. This makes Ireland the only country in the EU to experience positive growth. However, in an Irish context GDP needs to be treated with extreme caution. The impact of multi-national activities in areas such as IP transactions and profit repatriations, on GDP is very distortionary and does not give a true picture of the health of the real economy. Modified domestic demand seeks to strip out these distortions, and this showed a contraction of 5.4 per cent; with consumer spending on goods and services down by 9 per cent. The latter is a more adequate description of life on the ground in the real economy.

On the output side of the economy, output from Distribution, Transport, Hotels and Restaurants declined by 16.7 per cent; Construction was down by 12.7 per cent; and Arts, Entertainment and Other Services declined by 54.4 per cent. On the other hand, output from industry increased by 15.2 per cent, reflecting the strong performance of multi-national companies. Industrial output from the ‘modern’ component of the industrial base increased by 7.3 per cent, but output from ‘traditional’ industry declined by 5.2 per cent.

The GDP data show clearly that Ireland in 2020 was very much a story of two very different economies. The FDI part of the economy continued to perform very strongly. Exports of Chemicals and Pharmaceuticals expanded by 13.8 per cent, and accounted for almost 66 per cent of total merchandise exports. This sector along with other parts of the multinational sector provided a very solid base for economic growth, employment, and the public finances. Those components of the economy most exposed to Government restrictions had a dreadful year, and this has continued into the first quarter of 2021.

For workers in the FDI sector, the public sector, professional services, and financial services, 2020 was a relatively good year financially. Jobs and earnings were largely maintained. However, for workers in accommodation and food services, non-essential retail, personal services, arts and entertainment, the airline industry, or any tourism related activity, 2020 was a very difficult year.

An analysis of the labour market provides a clear indication of the sectors and the workers most adversely affected by COVID-19. The overall impact on the Irish labour market has been dramatic, but the sectoral breakdown tells the real story.

The unemployment data show that at the end of February, the non-COVID adjusted level of unemployment stood at 140,800, which is 15,600 higher than a year earlier, and the unemployment rate stood at 5.8 per cent of the labour force. However, if all recipients of the Pandemic Unemployment Payment (PUP) were classified as unemployed, the unemployment rate is estimated at 24.8 per cent of the labour force.

The latest CSO Quarterly Labour Force Survey (QFS) shows that in the final quarter of 2020, there were 2,306,200 people in employment. This is 55,000 or 2.3 per cent lower than the final quarter of 2019. However, the COVID-19 adjusted measure of employment showed a total of 1,970,609 at work at the end of December 2020. This is 390,591 down on the final quarter of 2019. The COVID-adjusted employment total at the end of January 2021 declined further to 1,826,567.

In the week to 9th March 2021, 464,860 people were on the COVID-19 Pandemic Unemployment Payment (PUP) scheme. This is 133,140 down on the highest level on 5^th May 2020, but it has increased significantly since the national Level 5 restrictions were introduced at the beginning of this year.

Table 2: Sectoral Breakdown of Pandemic Unemployment Payment (9^th March 2021)

Source: Department of Employment & Social Affairs, 9^th March 2021.

The Accommodation & Food Services sector (109,754) accounts for 23.6% of the total; wholesale and retail sector (74,153) accounts for 16%; the construction sector (58,864) accounts for 12.7%; and administration and support services sector (40,759) accounts for 8.8% of the total. This demonstrates clearly the sectors that have been disproportionately affected by Government restrictions.

In addition to those on PUP, there was a further 186,702 people on the Live Register at the end of February. In total, there was 651,562 people either on the Live Register or the Pandemic Unemployment Payment. This is equivalent to 28 per cent of total employment in the economy in 2019.

Prior to the COVID-19 crisis in February 2020, the unemployment rate stood at 5 per cent of the labour force, and there was concern around the implications for the economy of a labour market close to full employment. The situation has changed dramatically in the past year, but for the sectors not affected by COVID in any significant way, staff costs, and staff recruitment and retention will become challenging issues as the economy gets back to business over the coming months.

COVID-16 has had a dramatic impact on the public finances.  An Exchequer deficit of €12.3 billion was recorded in 2020, which is a deterioration of €13 billion on the previous year. Exchequer spending was up strongly, while tax revenues were somewhat, but not dramatically softer.

For the full year 2020, the General Government Deficit is projected at around €19 billion, equivalent to around 5.5 per cent of GDP. At the beginning of 2020, the Department of Finance had been projecting a General Government surplus of around €2.5 billion.

On the revenue side, taxation held up very well in 2020 in difficult circumstances. Overall tax revenues were down by just 3.6 per cent. The corporation tax take was very strong, with the overall tax take from the corporate sector increasing by 8.7 per cent. VAT declined by a significant 17.8 per cent, reflecting the very negative impact on overall consumer spending. Income tax held up remarkably well, with a decline of just 1 per cent.

Given the sharp increase in unemployment as a result of COVID, the income tax take is proving very resilient. This reflects the very progressive nature of the Irish income tax system. Lower paid workers in sectors such as accommodation and retail were worst affected by the crisis, but they make a small contribution to the overall income tax take. On the other hand, workers in sectors such as the FDI sector, the public sector, financial services, and professional services, who pay the bulk of income tax, maintained their earnings during the crisis.

Table 3: Tax Revenues 2020

Source: Department of Finance, Fiscal Monitor, Jan 5^th 2021.

The real and most painful impact of COVID-19 on the public finances was seen on the expenditure side. Total net voted expenditure increased by 25.3 per cent or €13.7 billion on the previous year. Within expenditure, net voted current expenditure was 24.4 per cent or €11.4 billion higher than in 2019; and net voted capital expenditure was 31.2 per cent or €2.3 billion ahead of 2019.

Net voted current spending on social protection was 60.8 per cent ahead of 2019 at €17.1 billion; and total expenditure on health increased by 20.1 per cent to reach €20.4 billion.

Not surprisingly, given the ongoing significant restrictions that are in place, the damage to the public finances has continued into 2021. In the first 2 months of the year, total tax receipts were 9 per cent lower than the first 2 months of 2020. Gross voted expenditure was 20.5 per cent higher than in 2020, with health expenditure up by 2.8 per cent at €2.79 billion, and social protection expenditure up by 51.3 per cent at €5.32 billion.

The latest analysis from the Department of Finance shows that the public debt to income ratio has increased significantly as a result of the Government response to COVID-19.  At the end of 2020, the public debt to GDP ratio stood at 62.6 per cent, up from 57.4 per cent at the end of 2019. It is expected to reach 66.6 per cent at the end of 2021. The more meaningful debt to modified gross national income (GNI*) ratio, which is the modified and more realistic measure of economic activity, stood at 107.8 per cent at the end of 2020, up from 95.6 per cent at the end of 2019. This is projected to reach 114.7 per cent at end of 2021.

In monetary terms, the public debt amounted to an estimated €218.6 billion at the end of 2020, up from €204.2 billion at the end of 2019. This is equivalent to €44,000 for every person resident in the State. This is amongst the highest in the developed world and is expected to increase to €47,700 by the end of 2021, with public debt projected to reach €239 billion.

Ireland’s merchandise export performance remained strong during the pandemic. However, the chemical and pharmaceutical sector had a disproportionate impact, growing by 13.8 per cent, and accounting almost 66 per cent of total exports.

Table 4: Merchandise Exports (2020)

The tourism and hospitality sector has been disproportionately affected by the crisis. This sector is comprised of more than 20,000 SMES; it employs around 260,000 people; and it has a very significant regional and rural footprint. The sector has been severely damaged, and prospects for recovery over the coming years look very challenging.

Global tourism has been one of the most significant casualties of COVID-19 since March 2020. Due to a combination of stringent restrictions on travel and a reluctance to travel, global tourist numbers have fallen dramatically. Ireland has not been immune to these global trends. In 2020, just 4.46 million persons arrived in Ireland from overseas, which is 77.9 per cent down on 2019. 69 per cent of this total arrived in the first quarter of the year.

The road to recovery for the tourism and hospitality sector will be long and difficult. For the small open island economy air connectivity is vital, and unfortunately air connectivity has been badly damaged over the past year. The reality is that airlines have curtailed or abandoned services, at least temporarily, on many routes. In 2020, Dublin Airport lost services to over 100 airports, and Irish air connectivity has fallen by more than two thirds.

It will prove very challenging to restore capacity, and this could seriously undermine attempts to rebuild Ireland’s international visitor market, and by implication the tourism product.

THE HOUSING MARKET

When the country went into the first lockdown in March, there was a general expectation that house prices would decline during 2020 as people lost their jobs either on a permanent or a temporary basis, and as economic activity in large swathes of the economy ground to a virtual standstill. In the event, house prices have help up remarkably well.

• In the year to January 2021, national average residential property prices increased by 2.6 per cent. Between March 2020 and January 2021, average prices increased by 2.7 per cent.
• In the year to January 2021, average residential property prices in Dublin increased by 1.1 per cent per cent. Between March 2020 and July 2020, prices in Dublin declined by 1 per cent, but then recovered. Between March 2020 and January 2021, average prices in Dublin increased by 0.9 per cent.
• In the year to January 2021, average residential property prices Outside of Dublin increased by 4 per cent. Between March 2020 and January 2021, average prices increased by 4.3 per cent.

The rental market was affected somewhat more significantly. CSO data show that average private rents declined by 3.6 per cent between February and June 2020. However, they then stabilised and increased by 1 per cent between June 2020 and February 2021. In the year to February 2021, average rents were 2.5 per cent lower than a year earlier.

The construction sector was subject to significant restrictions for much of 2020, but still managed to deliver 20,676 new dwellings. The sector has been subject to Level 5 restrictions since the beginning of 2021, with very few activities permitted. This will further undermine housing supply in 2021 and exacerbate the housing problem. The good news is that there is considerable supply in the pipeline once restrictions are eased or lifted. Given that Ireland has a natural demand for around 35,000 houses per annum, the current supply is inadequate and will not be sufficient to satisfy demand. COVID-19 has had a significant impact on housing supply and it remains an issue of considerable political significance, and will continue to be so for years to come.

Planning permissions were strong last year despite COVID restrictions. 44,538 permissions were granted in 2020, which is 13.5 per cent higher than 2019. This suggest the construction sector stands ready to ramp up supply once it is allowed do so.