The Darkest Hour
The wave of negative data has started to come through on the drastic impact that the measures to contain the spread of the coronavirus are having on economic activity. Labour statistics, such as the rise of 10 million in jobless claims in a fortnight in the US, are giving the clearest indication of the immediate and severe effects of the shutdown on large parts of the world economy.
Here, Ireland saw an increase of 330,000 in jobless numbers to over 500,000 in March. It is estimated that the Irish unemployment rate may have risen from below 5% in February to 17% last month. Meanwhile, PMIs for the services sectors have fallen to the troughs seen in the 2008-09 recession in the space of just one month.
Some jaw-dropping forecasts are being published of close to double digit declines in GDP in 2020 for many advanced economies, including Ireland. This is largely due to a collapse in output levels in the second quarter as a result of the lockdowns to contain the coronavirus. The OECD has estimated that the containment measures could see falls of between 20% and 30% in GDP in the second quarter of the year in most economies.
Obviously, the decline in GDP for the year as a whole is critically dependent on how long lockdowns remain in place. The OECD gave a useful rule of thumb that annual GDP growth is likely to decline by up to 2 percentage points for each month that strict containment measures continue.
Quite interestingly, of the almost 50 countries analysed by the OECD, Ireland had the smallest projected decline in GDP in the second quarter at 15%. This reflects the composition of Irish output and exports, which is dominated by large multi-national companies operating in sectors such as pharmaceuticals, medical devices, ICT and financial services. These are less negatively impacted than other sectors by downturns in the global economy.
Nonetheless, the domestic economy in Ireland is experiencing a severe contraction, as labour market data show. Other noteworthy data published last week in Ireland were the Exchequer Returns for March, which showed a big rise in government spending and a decline in tax revenues. As elsewhere, Ireland is heading for a blow-out budget deficit this year.
In a strong opinion piece in the Financial Times, the widely respected, former President of the ECB, Mario Draghi, argued that it is the duty of the state to deploy its balance sheet to protect citizens and the economy against shocks that the private sector is not responsible for and cannot absorb, such as the coronavirus pandemic. This means greatly increasing public debt.
The challenge for public policy is to act with sufficient speed and strength to prevent the coronavirus recession morphing into a prolonged depression. Mr. Draghiargues the alternative to the state offsetting much of the hit to private demand would be much more damaging to the economy and eventually the public finances. He noted that with interest rates being kept very low, higher public debt levels will not add to servicing costs.
Despite all the bad data on economies published last week, stock markets were relatively calm. Meanwhile, debt markets had no problems absorbing high levels of fresh supply from governments and corporates, reflecting the fact that central banks will underpin the market.
It may also be the case that at this stage, financial markets have priced in a very steep declinein outputin this quarter. The key questions now are, how long the shutdowns will lastfor and how strong will the rebound in activity be when it arrives. In this regard, there are some signs in a number of European countries that the coronavirus outbreak may be reaching a peak. If the number of cases falls back appreciably, then lockdown measures could start to be eased later in the month.
Oliver Mangan
Chief Economist, AIB