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Quarterly Economic Commentary, Summer 2020

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Quarterly Economic Commentary, Summer 2020

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On Thursday, 28 May 2020, Connor O'Toole hosted a webinar which presented the findings from the report 'Quarterly Economic Commentary, Summer 2020'. The report assesses the future prospects for the Irish economy under three different scenarios: Baseline (“New normal with ongoing physical distancing”, Severe (“Second wave requiring strict lockdown”) and Benign (“Successful disease suppression”).

The webinar featured a presentation by Conr O'Toole and was followed by a Q&A session with co-author Kieran McQuinn.

To view the report, visit our website here: https://www.esri.ie/publications/quarterly-economic-commentary-summer-2020

To watch a video of the webinar, visit our Youtube here:
https://www.youtube.com/watchv=FQl91wpY_bQ&feature=emb_title

On Thursday, 28 May 2020, Connor O'Toole hosted a webinar which presented the findings from the report 'Quarterly Economic Commentary, Summer 2020'. The report assesses the future prospects for the Irish economy under three different scenarios: Baseline (“New normal with ongoing physical distancing”, Severe (“Second wave requiring strict lockdown”) and Benign (“Successful disease suppression”).

The webinar featured a presentation by Conr O'Toole and was followed by a Q&A session with co-author Kieran McQuinn.

To view the report, visit our website here: https://www.esri.ie/publications/quarterly-economic-commentary-summer-2020

To watch a video of the webinar, visit our Youtube here:
https://www.youtube.com/watchv=FQl91wpY_bQ&feature=emb_title

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Quarterly Economic Commentary, Summer 2020

  1. 1. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Quarterly Economic Commentary – Summer 2020 DATE AUTHORS Kieran McQuinn, Conor O’ Toole, Matthew Allen- Coghlan, Cathal Coffey.
  2. 2. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Scenario Overview • Given the current uncertainty we conduct a scenario analysis with three scenarios: 1. Baseline: New Normal • Government Roadmap. • ‘Recovery period’ through Q3 and Q4 2. Benign: “Pandemic Suppression” • Effective suppression of disease through testing, tracing, targeted quarantine etc. • Normal Economic Activity in Q4 3. Severe: “Second Wave” • Second viral wave emerges • Strict lockdown measures implemented in Q4
  3. 3. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Summary 2019 Baseline 2020 Severe 2020 Benign 2020 Output (Real Annual Growth %) Private Consumer Expenditure 3 -13 -20 -12 Public Net Current Expenditure 6 11 15 11 Investment 94 -28 -39 -18 Exports 11 -8 -10 -7 Imports 36 -12 -13 -10 Gross Domestic Product (GDP) 6 -12 -17 -9 Gross National Product (GNP) 3 -14 -19 -10 Labour Market Employment Levels (ILO basis (‘000)) 2,322 2,026 1,976 2,081 Unemployment Levels (ILO basis (‘000)) 121 427 477 371 Unemployment Rate (as % of Labour Force) 5 17 19 15 Public Finances General Government Balance (€bn) 1 -28 General Government Balance (% of GDP) 0 -9
  4. 4. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Consumption Private Consumption • Baseline: -13.3% Benign: -12.0% Severe: -19.7% • Overall retail sales expenditure is down 13 per cent in March relative to January/February • Dramatic fall in certain spending categories and moderate rise in others • Expenditure in bars and on clothing is down over 50 per cent • Expenditure on motor trade items and in department stores is down over 25 per cent. • Expenditure on food and beverages is up by between 13 and 16 per cent for specialised and non- specialised stores • In order to estimate annual growth for 2020 we use Coffey et al. (2020) • Utilise microdata from Household Budget Survey 2015/2016 • Map changes across the year using a combination of existing data, international literature and judgement • Decline in consumption will be dampened by extensive income supports introduced this year
  5. 5. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie CHANGE IN RETAIL SALES – MARCH AS A PERCENT OF JAN/FEB AVERAGE -53% -50% -32% -29% -25% -17% -13% -8% 0% 6% 9% 12% 13% 16% -60% -50% -40% -30% -20% -10% 0% 10% 20% Bars Textiles, clothing and footwear Motor trades (45) Books, newspapers and stationery Department stores Retail sale of furniture and lighting All retail businesses Automotive fuel Other retail sales Electrical goods Pharmaceutical, medical and cosmetic articles Hardware, paints and glass Non-specialised stores with food, beverages or tobacco predominating Food, beverages and tobacco in specialised stores Source: Central Statistics Office, Retail Sales Volumes Data, Seasonally Adjusted.
  6. 6. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie COUNTERFACTUAL CONSUMPTION FIGURES BY SCENARIO (% CHANGE FROM 2019) New Normal Second Wave Pandemic Suppression Food -1 -4 -2 Drink and Tobacco -18 -22 -14 Clothing and Footwear -25 -41 -25 Housing -2 -4 -2 Fuel and Light 0 0 0 Non-Durables 5 7 4 Durables -16 -38 -16 Transport -34 -48 -30 Miscellaneous -16 -22 -14 Total -13 -20 -12 Total (excluding housing and light) -17 -25 -15 Source: Coffey et al. 2020
  7. 7. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Box 1: The Effects of Government Policy on Personal Savings 2019 2020 % Market Income 110.9 92.6 -16.5 Other Income 23.8 23.9 0.4 Taxes -45.6 -37.2 -18.5 Welfare Payments 27 32.2 19 Disposable income 116.1 111.5 -3.9 Adjustments 1.8 1.7 -5.6 Consumption 105.5 92.4 -12.4 Personal savings 12.2 22 79.7 Savings Rate 10.5 19.7 PERSONAL INCOME, CONSUMPTION AND SAVINGS, € BILLION • Market Income will fall by nearly 17 per cent in 2020 • However, disposable income will fall by less than 4 per cent • Consumption expected to fall by over 12 per cent • Net result is a large increase in savings in 2020 • Personal Savings to increase by over €10 billion • Savings rate of nearly 20 per cent • Future disposition of this household saving could have a significant impact on the nature of the economic recovery • Increase in consumption in 2021 could act as a significant stimulus to the economic recovery • Continuing uncertainty in 2021 could postpone such a consumer boom to 2022 or beyond
  8. 8. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Investment Investment • Baseline: -27.6% Benign: -18.4% Severe: -39% • CSO Business Impact Survey shows 25 per cent of businesses in Ireland have ceased trading • Large increase in uncertainty coupled with a significant decline in sentiment (Figure on the right) • Supply chain disruptions likely to limit the ability of companies to make capital expenditures • Different components of investment likely to be impacted in different ways by the current situation • Historical data shows a strong contemporaneous relationship between investment in Machinery and Equipment and business sentiment • This implies investment in Machinery and Equipment will fall significantly in Q2 • Building and Construction may be less impacted by fall in sentiment in the near term due to capital committed • However, due to physical restrictions, building and construction likely to be significantly curtailed 0 20 40 60 80 100 120 ECONOMIC SENTIMENT INDEX Source: Economic Commission
  9. 9. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Trade Exports • Baseline: -8.2% Benign: -6.7% Severe: -9.7% • Impact on trade may be spread out over a longer time period than on other components of GDP • Recovery of exports dependent on recovery of Ireland’s main trading partners • Q1 Q-on-Q GDP growth: EU -3.5%, UK -2.0%, US -4.8% Imports • Baseline: -12.0% Benign: -9.9% Severe: -13.2% • Related to decline in consumption and investment • COSMO: 1 % decline in consumption in a year reduces imports by 0.6% • Some sectors to be more impacted than others • Machinery & Equipment and consumer durables likely to be significantly impacted
  10. 10. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Box 2: Export Scenarios Following The Coronavirus Outbreak -10 -5 0 5 10 15 20 25 30 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 M1-3 Medical Devices Office Machinery Rest Pharma Manufacturing Export Growth • Modelled based on NiGEM • 20 per cent reduction in world demand for Irish exports in the first two quarters of the year • Global demand rebounds over second half of 2020 • Incorporate these impacts into COSMO • Baseline Scenario: Reduced spending internationally, increase in business uncertainty, reduction in hours of work, temporary lockdown of economies • Benign scenario: Figure on the right shows export growth has held up reasonably well. May indicate that due to the composition of Irish exports, exports may suffer less negative effects than other countries • Severe: longer-term strict lockdown with only limited success in containing the spread of the virus, thus dampening activity around the world for a longer period and leading to permanent losses SECTORAL CONTRIBUTIONS TO IRISH MANUFACTURING EXPORT GROWTH (PERCENTAGE POINTS)
  11. 11. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Labour Market Unemployment • Baseline: -17.4% Benign: -15.2% Severe: -19.4% • Covid-19 adjusted unemployment rate increased to over 28% in April • This equates to nearly 700k people receiving unemployment benefits • Sectors most impacted as per Beirne et al. (2020): • Wholesale and retail trade • Accommodation and food service activities • Construction • Live Register – April 2020 • 816k on Live Register or availing of Covid unemployment payment • 1.2m on Live Register, availing of Covid unemployment payment or wage subsidy scheme • Up 728k (142%) in comparison to March • 400k increase in the number of people on the wage subsidy scheme compared to March
  12. 12. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Unemployment rate: Irish economy 1973q1 – 2020q2 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 1973Q2 1974Q2 1975Q2 1976Q2 1977Q2 1978Q2 1979Q2 1980Q2 1981Q2 1982Q2 1983Q2 1984Q2 1985Q2 1986Q2 1987Q2 1988Q2 1989Q2 1990Q2 1991Q2 1992Q2 1993Q2 1994Q2 1995Q2 1996Q2 1997Q2 1998Q2 1999Q2 2000Q2 2001Q2 2002Q2 2003Q2 2004Q2 2005Q2 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2012Q2 2013Q2 2014Q2 2015Q2 2016Q2 2017Q2 2018Q2 2019Q2 2020Q2 21 quarters 12 quarters
  13. 13. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Box 3: Job Loss Distribution (1) (2) (3) PUP claims at 10/5/2020 Aged 18-66 in work, 2019q4 Col. 1/Col 2 (%) Total 589,638 2,275,420 25.9% Age: 18/19 26959 45908 58.7% 20-24 93,309 197,259 47.3% 25-34 135223 498211 27.1% 35-44 141,610 634,202 22.3% 45-54 111759 528128 21.2% 55-59 43,591 204,893 21.3% 60-66 37187 166820 22.3% Sex: Men 335,989 1,216,696 27.6% Women 253649 1058723 24.0% Region of residence (NUTS3): Border 51,586 174,834 29.5% West 55192 210292 26.2% Mid-West 54,823 207,092 26.5% South-East 52211 186379 28.0% South-West 82,964 325,412 25.5% Dublin 171874 706926 24.3% Mid-East 85,828 335,452 25.6% Midlands 33292 129034 25.8% • Look at pandemic unemployment claims relative to employment in Q4 2019 • Claims amongst younger workers represent a far greater share than for other age categories • Claims by men for the payment represent a higher share of employment (27.6%) than for women (24.0%) • Claims are highest in the Border region (29.5%) and lowest in Dublin (24.3%) • Live register figures from the CSO show that claims for non pandemic related welfare payments of Jobseekers Benefit and Jobseekers Allowance have risen by 13,333 and 19,293 respectively between February and April • An estimated 65,000 people above the age of 66 employed in the final quarter of 2019. These workers are not entitled to make a claim for the PUP, jobseekers allowance or – in most cases – jobseekers benefit
  14. 14. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Public Finances - Baseline • GGB (% of GDP) 2019: 0.4% GGB (% of GDP) 2020: -9.0% Debt to GDP 2019: 58.6% Debt to GDP 2020: 65.6% • Significant decline in revenue forecast in SPU (€14.9bn decrease relative to 2019) • Taxes on production and imports (VAT, excise duty) -19.5% • Current taxes on income, wealth (PAYE, corporation tax) -14.4% • Social contributions (PRSI) -12.1% • Significant increase in public expenditure forecast (€9.6bn increase relative to 2019) • Social payments (Unemployment benefit) +13.5% • Subsidies (Wage subsidy scheme) +120% • Intermediate consumption (Health related expenses) + 18.8% • SPU suggests 7.4 per cent deficit of €23bn • We assume pandemic payments stop at end of June and unemployed move to standard unemployment payments • Revenue to decline by €18.1 billion, Expenditure to increase by €10.7bn • Forecast a deficit of €27.5bn
  15. 15. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Box 4: How much are Government taxation receipts likely to fall due to the Covid-19 slow-down? 19% 21% 23% 25% 27% 29% 31% 33% 1984 1988 1992 1996 2000 2004 2008 2012 2016 • Previous work by Deli et al. (2017) examined the sensitivity of taxation revenue to underlying economic activity • A 10 per cent reduction in output levels results in total taxation receipts declining by 11 per cent • Use these parameters to nowcast the level of taxation receipts for the present year, by using our nowcast/forecast of economic activity for 2020 • Given our forecast that output is set to contract by over 12 per cent in 2020, that would indicate that taxation receipts will decline from €59.3 bn in 2019 to just over €51 bn in 2020. • In total, we expect that under our baseline scenario, total taxation receipts will fall by 16 per cent in 2020. EXCHEQUER RECEIPTS AS A % OF GDP
  16. 16. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie BOX 5: What are the short-run implications for the spreads on Irish bond yields of the Covid-19 downturn? 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 2016q1 2017q1 2018q1 2019q1 2020Q1 ACTUAL AND SIMULATED SPREADS (%) IRISH BOND YIELDS: 2016Q1 – 2020Q2 • Sovereign yields: financial market’s view of the sovereign’s ability to meet repayment obligations on its debt • Cronin, Dunne and McQuinn (2019) model yield spread on government debt, households disposable income and banking exposure • Using this model forecast spreads in Q2 2020 • Impact of the shock is to cause the spread to increase back up to 2018 levels • Monetary policy actions by the ECB will be crucial in offsetting these deteriorating conditions and keeping Irish yields low
  17. 17. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Assessment • Fiscal stimulus needed to kickstart the economy in the second half of the year/2021 • Environmental and sustainability projects • Social and affordable housing • No overheating in the domestic economy! • Allen-Coghlan and McQuinn (2020) suggest housing supply could be significantly impacted due to Covid-19 • Supports for large enterprises/SMEs should aim at expanding grants / cash injections • Clear and specific guidance from European institutions • Concerning the fiscal strategies available to member state countries essential • Proposed €500bn recovery fund a move in the right direction but more is needed • Possibility of increase in mortgage arrears • If income supports are tapered off and payment breaks expire • Financial stability concerns could arise?

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