“A sudden and severe negative shock that has affected all parts of the economy” — that’s how the Central Bank sees the Covid-19 crisis in its latest quarterly bulletin. 

The CBI adds that the shock, “fundamentally different in nature and scope from anything previously witnessed”, makes it impossible  to produce a conventional forecast.

The bulletin states: “The pandemic outbreak of coronavirus disease, and the measures required to contain its spread, have brought economies worldwide to a near standstill, triggering a very sudden and sharp contraction in economic activity. The scale and extent of the global health crisis, which has aggravated rapidly, poses unprecedented challenges to governments and policymakers to mitigate the societal and economic impact. 

“In terms of its impact on the economy, Covid-19 has triggered an extremely severe economic shock that is fundamentally different in nature and scope from types of shocks previously witnessed.  “This has resulted in the widespread shutdown of businesses, mainly in the market services sectors of the economy, with labour-intensive sectors, such as retail trade, food and beverage activities and accommodation, tourism and travel particularly affected.

“By end-March, the numbers on the Live Register had risen to over 500,000, with further job losses possible.  As a result, this disruption has in turn given rise to a severe negative shock to domestic demand.”

In Association with

One person whose income is not affected by the private sector lockdown is Central Bank governor Gabriel Makhlouf (pictured). During the greatest economic crisis Ireland has ever faced, the recent appointee is running the Central Bank remotely from Greece. Makhlouf's annual salary is €287,000.

25% Unemployment

With its usual econometric models useless in such circumstances, the bulletin’s authors say that their conclusions are based on “heavy use of judgement and a range of analytical tools”.

Their primary conclusion from the process is that if all measures remain in place for three months, Gross Domestic Product could contract by 8.3% for 2020, while overall output could fall by as much as 11%.

“In this scenario, the unemployment rate would rise to around 25% in the second quarter. On the assumption that both domestic and global economic activity begins to recover during the second half of the year, the unemployment rate could then begin to move gradually lower, though it may still remain relatively high and in double figures by year end.”

Director of economics and statistics Mark Cassidy commented: “The near-term outlook for the economy is very unfavourable, and beyond that the path ahead for economy depends on the path of the virus, both domestically and globally.

“The starting point for the recovery will depend on the depth and duration of the downturn, which is as yet unknown, though the hope is that forceful containment measures can shorten the period during which economic activity has come to a stop. 

“When it emerges, the pace of recovery is likely to depend on factors such as the extent to which households and firms have been scarred by the downturn, the degree to which precautionary behaviour unwinds, the recovery in employment and incomes and possibly also, the degree of stimulus in place to provide some impetus to recovery.”

“We are projecting that the general government balance will move from an estimated surplus of 0.7% of GNI in 2019 to a deficit of 10.2% of GNI this year (or from 0.4% of GDP to -6% of GDP). In terms of general government debt, we project an increase in the ratio from an estimated 97% of GNI in 2019 to 112% of GNI, or from 58 to 66% of GDP,” Cassidy added.

Exchequer Returns

Exchequer returns for March showed a €2bn hit from Covid-19 on the public finances due to extra health spending and social welfare payments and a fall in VAT receipts.

Broker and wealth manager Davy said the 50% reduction in VAT reflects the decision to allow companies to defer tax payments rather than illustrating a decline in retail spending.

“The Exchequer returns tell us very little about how Covid-19 has affected the economy. Income and corporate taxes were ahead of budget targets, reflecting activity prior to the outbreak,” said a Davy statement.

“Compared with 2019, VAT receipts were down by €1bn, or 50%, in March but relate to retail spending in January and February. The enormous fall in VAT revenues reflects the Revenue Commissioners’ decision to allow companies to defer tax payments rather than saying anything about the behaviour of consumer spending. Despite the €1bn shortfall in March, tax revenues in Q1 2020 were still up 1% on 2019."

Gross current expenditure was  €111m over budget in the first two months of 2020 but is now €1.1bn ahead of targets, up 12% on 2019 versus the 7% growth planned in the Budget. Health (€205m) and Social Protection (€353m) were the two departments that drew down extra resources.

Overall, the central government balance was €3.5bn in Q1 2020 compared with the €1.5bn expected. The exchequer deficit was €2.5bn, which is €2bn worse than expected.