In our latest blog, NERI Co-director Dr Tom McDonnell looks at ways of unlocking the economy and preparing for our new future.
Predictions that the global economy is entering its worst recession since the great depression are being realised. The first quarter data is dire and the second quarter data will be catastrophic. Every advanced economy and every major economy is almost certainly now in recession.
Over 30 million jobless claims have been filed in the United States in the last six weeks while Germany has over 10 million workers on reduced hours. The US economy declined 4.8% year-on-year in the first quarter (down 1% compared to the previous quarter), while the Euro area declined 3.3% year-on-year and 3.8% quarter-on-quarter in the same period. France and Italy are already technically in recessions.
Ireland has over 1 million working age people on some form of income support and has seen a collapse in consumer spending. The volume of retail sales is down 11.1% in April compared to the same month of last year. Cash withdrawals have fallen almost 60% since the beginning of March while card spending is down almost 30%.
It is one thing to lockdown an economy but quite another to reverse the process. The longer we wait the more businesses that will fail and the more productive capacity that may be lost. Against this, if we move too early we risk a second wave of the virus and a return to lockdown. That would be devastating for business and consumer confidence, to say nothing of the grievous human costs.
Traditional economic modelling offers little guidance and lack of testing makes it impossible to project an accurate diffusion path for the virus.
So what should countries do? In my view it is probably best to take a cautious stepwise approach with clear signalling given to businesses and to households about contingent timescales. Progress through the steps should be dependent on the progress of the virus, with clarity for each sector and sub-sector as to where we need to be in order for activity to resume. Ideally, we will not need to take any backwards steps.
If businesses and workers can project when they will be able to return, then they will finally be able to plan for the future. The new income supports will have to remain in place for much if not all of this 'support' period. Additional supports will be required to ensure firms have access to liquidity and are able to emerge from the crisis without carrying too much new debt.
Crucially, the later stages of the unlocking should involve a transition from support policies to stimulus policies - notwithstanding the monumental public deficits we will see in 2020 and 2021. Precautionary saving is likely to remain elevated until such time as a vaccine is widely available. As such, the design of the stimulus should focus on public investment, as opposed to crude measures to boost consumption e.g. tax cuts. In the Republic of Ireland, the obvious focus should be on public housing and on green projects such as renewable energy infrastructure. Northern Ireland should also focus on green investments. A second focus for the stimulus should be on investment in skills. The labour market of 2022 will likely need a different composition of skills to the 2019 labour market. Now is the time to prepare for that future.