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The Known Unknown – The Economic fallout of COVID

Published on 4 July 2020 at 09:54

“The known knowns and unknown knowns” come from former U.S secretary of defence Donald Rumsfeld who coined the repetitive phrasing. We are currently in a scenario there are foreseeable and unforeseeable circumstances.

The full scale of COVID-19 on the Irish economy is unknown, this we know. During the month of April, sectors of the economy shut down, and the real economy went to sleep. There are whispers of the worst recession in our history repeated by politicians and mass media alike. During these times, we must understand the tools our leaders will be using. Tools used in the wrong way are just as bad as doing nothing. Think of an economy as something that can only be managed and not controlled.

Confidence and stability sunk during the pandemic restrictions. As we begin to emerge from economic and social restrictions, the government is very eager to make sure businesses and consumers alike can participate. That confidence must be restored as quickly as possible. But it is crucial to understand that during the harshest of the COVID restrictions, we witnessed a supply-side shock. Global supply chains were interrupted, and even domestic supply chains fell to the shock.

On March 24th, all non-essential businesses closed, and travelled restrictions were enforced. When the economy was put to sleep, economic activity was lessened, while many people relied on massive Government payment programmes. April saw 815,000 people on the live register receiving the pandemic unemployment payment.  Last year at the same time, there were 193,000 people unemployed. Along with the COVID-19 unemployment payment, there was the wage subsidy scheme, which saw an additional 425,000 workers on this payment. Those on the Wage subsidy do not show up on unemployment figures. In total, however, over 1.2 million workers received a COVID-19 related payment. Currently as of 1/07/2020 there are 438,933 still receiving the pandemic unemployment payment. We know we have lost out on economic growth and productivity.

There is promising data. When looking at PMI (Manufacturing), Consumer confidence, retail sales, and domestic demand, the much talked about V-shaped recovery is seen.

 The V is where an economy experiences a deep but fast recovery to a shock. Preferable to the L and U shape, which are named after the letters because they resemble the graph line in each scenario.

The PMI (Purchasing managers index) in April fell from 45.1 to 36.0. The third weakest in our recording of manufacturing and on par with February-March 2009. Such a poor rating showed signs of contraction. The PMI is recorded from surveys of private sector companies in response to how they are performing. By measuring outputs, manufacturing, and real tangible goods in the real economy. This was a result of the restrictions as they were supply-side shocks.

In June, our economy began to reopen, and the PMI index jumped from 39.2 to 51.0. A record-breaking jump. This increase was the first growth spurt since February, and exports are now at their strongest since April 2019. Retail sales fell to 66.7% in April but have jumped to 86.4% in May when some retailers reopened. Retail benefitted from grocery and online sales (€629M & €70.9M was spent respectively), and when June & July’s data is released it will show more growth. Currently, Retail sales like PMI are preforming a V-shaped recovery.

Consumer confidence collapsed in April as the news bared constant bad news. At the start of April, confidence was rated at 42.6, the lowest since 2008. Towards lessening of restrictions, confidence grew to 61.6 (June), bearing in mind that before any news in February (the first Irish diagnoses of COVID), the rating was 85.2. There is substantial growth in consumer confidence, but like all other indexes, it will take a while as restrictions are adversely affecting the real economy.

On the side of domestic demand, forecasts see the economy contracting 7.2%, which is down 1.3%. Yes, forecasts are changing as more information is gathered, and we begin to see a V-shaped recovery in sectors. 2021 in Ireland is forecast for 5.7% growth. The OCED gives Ireland a 3.2% growth prediction for 2021.

 All these indexes show promising data that would lead us to believe a V-shaped recovery is on the way. The ISEQ fell 1,580.33 points during the lockdown but has recovered to 6,361.39, which shows increased confidence from investors in the Irish market.


But this from data we know, the real concern is the data that we know we do not know. Such as individual debt burdens of SME’s which represent most businesses and employment in Ireland. For example, franchisees will be vulnerable as those previously or currently not earning enough will not be able to pay staff, bills, and loans and look at closing less productive outlets. On the other hand, we must consider restarting operational costs, PPE costs, managed footfall, which is lost footfall in many ways as restrictions on the number of people in stores are limited.

Even with restart grants, we must consider those with highly in debt do not become zombie business. These are businesses with high debt & low debt repayments, and little productivity and growth. As liquidity begins to flow again and a July stimulus promises massive help for the private sector, which desperately needs all the help it can get.

Short term SMEs in this scenario will keep the economy stable by providing employment, which benefits purchasing, and so on, thanks to increased cash flow from the Government. Long term, they stifle economic growth, innovation, and face closure as if they have high debt to growth, and productivity takes a hit as costs do not disappear. Indigenous SMEs should be the laser focus for this stimulus.

The travel bans on U.S citizens to Europe by the European Union will adversely affect the Republic of Ireland. Not for tourism but all-out American connections with investments and businesses has the chance of doing severe damage to our economy.

The ERSI has three possible scenarios for this year. This illustrates the complexities of trying to plan for our current simulation. Never have we faced a double shock in the economy. We are looking at a financial blow that impacts the flow of credit; such a shock, however, has a ‘playbook’ of tools. The crisis of freezing the real economy, households, and brick & mortar business limit income and purchasing. Both these shocks feed off each other. But the outcome of this shock, further restrictions, reopening and closures, debt burdens are all unknown, this we know.

The unforeseeable, which is the unknown. We do not know beyond our indexes and data of our economy how the real economy of goods and services will flow. The real wealth of an economy is passed and grows through the exchange of money for products and services—innovation in goods, services, and processes drive economic growth. And we do not know how these fundamental economic truths will be as we don’t know about a vaccine, we don’t know about global supply chains and all the government can do is manage the economy as it is in a constant state of flux.

An economy can only be managed by the tools we have, and we know they must be used right. We cannot control and economy and using the wrong tools at our disposal can be just as bad as doing nothing. This, we know. Proper management will be need and we must remember that the right decisions can be the hardest to make when looking at the unknown.





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