Guest post by Stephen Byrne, Central Bank of Ireland
Today the Bank published its third Quarterly Bulletin of the year. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in early April as well as our latest macroeconomic forecasts out to 2022.
Given the scale of uncertainty surrounding the economic impact of Covid-19, two different scenarios for the economic outlook are outlined in the Bulletin (see featured image above).
In the “baseline” scenario, the economy reopens in line with the Government’s phased plan, allowing for a rebound in economic activity in the second half of the year. Some containment measures would remain in place meaning that activity would be constrained in some sectors for a longer period. Beyond the initial rebound, recovery is expected to be gradual, in line with a slow unwinding of precautionary behaviour as the effects of the shock on consumers and businesses lingers. The unemployment rate is set to decline from its second quarter peak of about 25 per cent as the year progresses and is projected be around half that level by the end of this year, before averaging just over 9 per cent next year and 7 per cent in 2022.
The baseline scenario sees output recovering to its pre-crisis level by 2022. However, the level of activity will be significantly below where it would have been had the economy grown in line with expectations before the outbreak of the pandemic.
In the “severe” scenario, the strict lockdown period is assumed to have a more damaging impact on economic activity and is not successful in effectively containing the virus. Stringent containment measures would remain in place, or would be re-instated, albeit not as severe as before, based on an assumption that there would be a resurgence of the virus at some point over the next year. In this scenario, there is a subdued economic recovery with a larger permanent loss of output. Unemployment remains higher for longer in this scenario and would average just below 17 per cent in 2020, while consumer spending is projected to fall by around 14 per cent and GDP by over 13 per cent this year. In this scenario, the projected recovery in growth in 2021 and 2022 would not offset the loss of output this year, leaving the level of GDP in 2022 about 5 per cent below its pre-crisis level.
Both of these scenarios assume that a Free trade agreement in goods between the UK and the EU, with no tariffs and quotas on goods, takes effect in January 2021. If such an agreement is not reached, then the EU and the UK would move to trading on WTO terms from January 2021. Box D of the Bulletin discusses the implications of such an outcome.
Finally, an accompanying signed article explores alternative long-term recovery paths for the economy and assesses the impact of fiscal and monetary policy supports. The Article considers how hysteresis – or scarring – effects could influence the pace and nature of the recovery. The paper shows that, as a highly open economy, Ireland benefits from the positive effects of monetary and fiscal policy measures implemented abroad. The assessment of the combined effects of domestic and international policy supports indicates that the actions will help to meaningfully reduce the scale of the output loss in Ireland from the pandemic.
Happy new year to all. In case some of you missed it, the Department of Finance published two working papers (by Gavin Murphy, Martina Nacheva and Luke Daly) just prior to Christmas looking at the ever topical issue of Ireland’s output gap. Both papers can be accessed at this link. The first paper takes a detailed look and review of the main methods used to estimate the cyclical position of an economy. The authors highlight the diversity of modelling approaches used across institutions both within Ireland and abroad. The second paper outlines in detail the methodology used by the Department to produce estimates of the output gap for Ireland. To date, the Department has used the European Commission’s harmonised approach (i.e. common to all EU Member States), which has at times resulted in counterintuitive estimates of Ireland’s cyclical position. This research seeks to develop more plausible estimates taking better account of the nature of Ireland’s small open economy. Such work will enable the Department to better evaluate the appropriate fiscal stance and the sustainability of public finances over the medium term. For those with an interest in macroeconomic modelling and forecasting as well as fiscal policy related issues, the papers offer an invaluable source of information into what can be a complex area.
Jim O’Leary has an op-ed about the Local Property Tax in today’s Irish Times, based on his recent report, How (Not) To Do Public Policy: Water Charges and Local Property Tax, published by the Whitaker Institute at NUI Galway. The report was launched at a conference last month at NUI Galway featuring senior policymakers, public servants, academics and other experts who evaluated the strengths and weaknesses of the policy-making process in Ireland with a view to suggesting how the quality of policy-making might be improved. Highlights from that conference, including videos of Jim’s presentation and Robert Watt’s keynote speech as well as audio of the panel sessions can be found here on the Whitaker Institute website.