In this week's blog, NERI Co-director Dr Tom McDonnell discusses Lockdown 3 and the EU Recovery and Resilience Fund (RRF).
Lockdown 3 grinds on with economic recovery tied to vaccine rollouts, virus containment policies and ongoing government supports. A cautious approach to opening up the economy is the correct approach. A prolonged lockdown 3 is preferable to a series of further tight lockdowns over the next four to seven months. However, such a cautious approach would need to be accompanied by continued policy support (e.g. continuance of EWSS, PUP, CRSS, alongside future debt forgiveness) or there will be lasting damage to the economy's productive capacity.
The Republic of Ireland economy escaped a GDP recession in 2020. This was on account of the idiosyncrasies of the Irish economy and the outsize success of a small number of multinational companies in medical equipment, pharmaceuticals and computer services. However, the Republic's domestically focused economy experienced a sharp deterioration in 2020. Modified domestic demand is now unlikely to be fully recovered until 2022 at the earliest.
The Republic's pandemic adjusted unemployment rate was 25% or 607,000 in January and there is only limited cause for short-term optimism. The virus lockdown and Brexit mean that growth will be negative in Q1 2021. Economic recovery will not begin in earnest until the easing of lockdowns over the course of late Spring and early Summer. More positively, pent-up demand and the extraordinarily high levels of household savings suggest that growth should start to pick up significant momentum in late 2021 and continue through 2022. Unemployment will still be well above pre-crisis levels by the middle of next year.
Despite the various containment policies, it is likely that all of the major OECD and EU economies will grow in 2021, albeit this growth should be understood relative to the sharp falls in output in 2020. The economic recovery across the OECD should gather steam in 2022. In the EU, this will be helped by continued support from the ECB and the spending of the EU's Recovery and Resilience Fund (RRF).
The recovery fund represents an important opportunity. It will mobilise hundreds of billions of euro and has two main objectives: counteracting the pandemic induced recession and catalysing a green and digital transformation of the economy. Ireland's allocation is a relatively modest €853 million for 2021/22. Even so, it represents an opportunity for radical reform in one or more policy areas. Crucially, the money is not for day-to-day spending - it is for investment and reform.
So, what should we do with the money? What about seed money for setting up a cost rental housing semi-state? Perhaps a retrofitting programme for the state's social housing stock? Should we spend some of the money on building up our renewable energy infrastructure or greening our public transport fleet, or perhaps we should upgrade the health service IT systems? A good option for the era of social distancing might be a mass tree planting or rewilding initiative. In addition, the focus on the green and digital transformations suggests that education and upskilling of workers should make-up a meaningful part of the spending. Most obviously, some of the fund could be used to support reskilling for workers in carbon heavy sectors. These are just ideas, and in reality, there will probably only be funds to support a small number of initiatives.
The government is looking for submissions. The deadline is the 22nd of February and submissions can be made here.