OECD Economic Outlook, Volume 2020 Issue 1

Ireland

The economy is set to contract strongly in the first half of 2020 amid a strict lockdown. Supportive economic policies are cushioning workers and businesses from the full impact of the shock. However, depressed confidence and impaired household and business balance sheets will hold back the recovery as the economy further reopens. The second wave of virus assumed in the double‑hit scenario entails additional business closures and job losses, delaying the recovery and threatening to entrench long‑term unemployment and risk aversion by firms. If this were to occur, annual GDP would decline by 8¾ per cent in 2020 with virtually no recovery in 2021. If a further outbreak is avoided (the single-hit scenario), GDP would fall by 6¾ per cent in 2020 and then recover by 4¾ per cent in 2021.

The authorities should remain prepared to extend existing support measures if required. Policies that provide additional liquidity to viable small and medium enterprises may be needed. New investment in active labour market programmes for the unemployed should be coupled with a reorientation of services to reflect the characteristics of newly unemployed workers. A key tenet should be encouraging participation in adult learning, including by promoting distance learning opportunities.

The rapid spread of the virus caused a strict lockdown

Following the first confirmed COVID‑19 infection in Ireland in late February, the virus spread rapidly. The initial cases were mostly associated with travellers returning from northern Italy, but community transmission was rife by mid‑March. The number of new daily cases rose steadily until mid‑April, before subsequently easing. A high proportion of cases have been concentrated in Dublin and its bordering counties and most infections have been in individuals aged over 45. Managing the pandemic has been made easier by the relatively young age profile of the Irish population, though the health system was already experiencing significant strains at the onset of the crisis. This was most visible in very high occupancy rates in Irish hospitals and long waiting times for various types of elective surgery.

Ireland: Two scenarios of real GDP and firms shutdown

1. Sectors with the most significant shutdown are wholesale and retail trade, accommodation and food, real estate activities and arts, entertainment and recreation.

Source: OECD Economic Outlook 107 database; and Central Statistics Office.

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Ireland: Demand, output and prices (double-hit scenario)

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A strict lockdown was announced in late March, with the population urged to stay home unless buying food, attending medical appointments or engaging in physical exercise close by. At the same time, measures were taken to strengthen the health system. These included agreements with general practitioners to ensure cost is not a barrier to accessing services, the utilisation of private hospital capacity and the expansion of acute and community capacity.

Economic activity has slumped due to containment measures

The domestic and international containment measures have precipitated a deep economic slump. Household demand has fallen, with the volume of retail sales contracting by 43% in April over a year earlier. Bars and clothing, footwear and textiles experienced the largest declines in activity in April. Indicators of business confidence have plummeted in retail trade, but also in other services and manufacturing, largely reflecting shrinking export orders, as activity in Ireland’s major export partners has also contracted sharply. Many of the sectors most heavily impacted by domestic containment measures are characterised by a relatively high proportion of domestically-owned businesses. Such firms may be more likely to face cash‑flow constraints than their foreign‑owned counterparts.

Ireland: Demand, output and prices (single-hit scenario)

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The shock is being cushioned by a raft of new public support measures

Support measures were introduced to limit permanent worker layoffs. These included a temporary wage subsidy, which had been paid to over 495 thousand employees by the end of May. An enhanced COVID‑19 Pandemic Unemployment Payment was also established for workers who have lost their jobs due to the crisis. At the end of April, such payments were being made to over 590 thousand people, equivalent to one quarter of the total labour force. However, the number of recipients had declined to around 543 thousand by the start of June, with most of the individuals no longer receiving the payment moving into work. Policies to protect viable firms from becoming insolvent have also been implemented, including various loan schemes and deferrals of tax payments and business fees payable to local authorities.

The pattern of recovery is highly uncertain

Gross domestic product will contract massively in the second quarter of 2020, even with containment measures being gradually unwound from mid‑May. As the economy reopens, consumption possibilities will expand and some businesses will make investments that had been deferred. Nevertheless, ongoing caution and impaired household and business balance sheets will temper the speed of the recovery. In the double‑hit scenario, which assumes a second, albeit smaller, lockdown in the final quarter of the year, uncertainty will rise substantially and there will be a wave of job losses and business closures above those in the single-hit scenario. It is assumed that the government will extend some discretionary fiscal support into 2021 under the double-hit scenario. Real GDP is projected to fall by 8.7% and 6.8% in 2020 in the double-hit and single-hit scenarios respectively. In 2021, it is projected to fall by 0.2% in the double‑hit scenario and to grow by 4.8% under the single-hit scenario.

Although the Irish economy recovered strongly from the financial and sovereign debt crisis, legacies from that period remain which make it more vulnerable to downside risks. The impact of subsequent negative shocks could be exacerbated by high household debt and weak bank profitability, as well as still high general government debt. An increase in barriers to trade between the United Kingdom and the European Union following the transition period is also a downside risk as the United Kingdom remains a key trading partner. An upside risk is that a boom in the pharmaceutical and medical device manufacturing industries, which have a significant presence in Ireland, has relatively large spillovers to the domestic economy if value chains become more localised.

Public policy settings will require further adjustment

Policymakers should stand ready to extend existing support measures further if sanitary restrictions persist, or are reinstated in the second half of the year. Loan guarantees and public equity injections for viable but liquidity‑constrained firms should be undertaken as needed. To minimise the damaging effects of unemployment, active labour market programmes will need to be reoriented to the new cohort of jobseekers. Effective statistical profiling systems for segmenting recipients into different categories for engagement with programmes will be crucial. Lifelong learning pathways, including distance‑based learning, should be promoted more actively, given likely structural changes in labour demand and relatively low participation in training by young low‑skilled Irish adults. To enhance the preparedness of the health sector for further outbreaks, care that can be provided effectively in primary and community settings should continue to be shifted out of hospitals.