Wednesday, April 22, 2020

Grim Irish economic challenges from Covid-19 pandemic

Expedition 50 Commander Shane Kimbrough of NASA shared this nighttime image of Dublin on March 17, 2017, writing, "Happy #StPatricksDay - Spectacular #Dublin, Ireland captured by @thom_astro from @Space_Station. Enjoy the #StPatricksFest Parade down there!" Image Credit: ESA/NASA

Paschal Donohoe, finance minister, yesterday revealed the scale of the economic devastation in Ireland wrought by the coronavirus pandemic.

Near full employment in December 2019 will change to a peak unemployment rate of 22% in the current quarter while 220,000 jobs will be lost by December 2020 or 9.3% of the workforce. In 2021 the Department of Finance forecasts that 115,000 jobs will be added resulting in the unemployment rate dropping to below 10%.

Combined budget deficits in 2020 and 2021 may amount to €40bn, raising the public debt to at least €240bn, or over 120% of adjusted Gross National Income (after adjusting for some multinational distortions).

This is the black hole scenario before additional spending on housing, health and climate change are accounted for.

It's good that interest rates are at rock bottom because even when there was near full employment the Government could only achieve budget surpluses of a combined €1.7bn in 2018 and 2019, even after windfall corporation tax receipts of €20bn in 2015-2019 resulting from companies such as Apple allocating IP (intellectual property) to Ireland — it was as simple as posting a few accounting entries.

Without the benefit of multinational tax dodging the Irish would be staring into a bigger black hole.

As the recent Irish General Election coincided with the coronavirus outbreak and Ireland's parliament has yet to vote in a new government, there has been a lot of starry-eyed media columnists and others fantasising about a changed Irish society and a new social contract for the citizenry.

The European Central Bank would absorb the costs of the crisis for the 19 Euro Area members and typically the dreamers presented a menu without prices.

Now that Paschal Donohoe has outlined the grim challenges, let's hope that the debate will return to realities, rather than fairy tales.

There should be reform of both the housing system and the health service at least.

But do not forget that the job's challenge is the immediate priority after Covid-19.

The jobs challenge

Almost 500,000 jobs were created after the nadir of the Great Recession in the first quarter of 2012 to last December and 440,000 thousand jobs were full time.

It was a remarkable performance for the Irish economy after 357,000 jobs were lost during the period Q22008 to Q12012.

Eurostat data for 2018 on small to medium-size firms (SMEs) showed that 91.9% of Irish enterprises had 0 to 9 employees (Micro); 6.7% had 10 to 49 jobs (Small); 1.2% had 50-249 employees (Medium) and 0.2% of enterprises had 250+ jobs (Large).

SMEs accounted for 70.1% of Irish jobs while Micro firms accounted for about 29% of employment.

Micro firms are the most vulnerable during the pandemic emergency and its aftermath.

The chart above showing impressive gains for example in 'Accommodation and food service activities' would have many micro firms dependent on domestic and overseas tourism. However, tourism is likely to take time to recover.

Conventional retail in all employment categories is trying to survive amidst online competition.


Aspects of globalisation have been criticised during the pandemic, in particular, reliance on Asia for medical supplies. Reliance on American production of pharmaceuticals in Ireland has also been highlighted.

Ireland is cited 64 times in a 2019 paper published by the National Bureau of Economic Research. The authors write that almost 90% of the factories that make active pharmaceutical ingredients for the US market are located outside of the United States. About 60% of the factories that manufacture the final products are outside the US.

Beata Javorcik, chief economist at the European Bank for Reconstruction and Development in the Financial Times noted that "almost three-quarters of blood thinners imported by Italy come from China. The same is true for 60% of antibiotics imported by Japan and 40% imported by Germany, Italy and France. Political tensions increase as leaders stress where the virus originated, especially those who have not done enough to prepare their countries for a robust response. This will add another layer of uncertainty over trade policies."

CNBC reported that India is the global leader in generic drug production, while China is the world’s largest supplier of active pharmaceutical ingredients (API). India imports nearly 70% of its APIs from China and also depends on them for a variety of other key ingredients in drug production.

"We are living through a profoundly new period that forces us to ask ourselves questions we haven't asked ourselves [about things] like supply and production chains," Emmanuel Macron, president of France, said in March. "We are going to change our habits, but everything can't stop ... we must take the time to organise ourselves, and see what is adaptable."

"It will change the nature of globalisation, with which we have lived for the past 40 years . . . We had the impression there were no more borders. It was all about faster and faster circulation and accumulation,” Macron said in an interview with the Financial Times last week, “There were real successes. It got rid of totalitarians, there was the fall of the Berlin Wall 30 years ago and with ups and downs it brought hundreds of millions of people out of poverty. But particularly in recent years, it increased inequalities in developed countries. And it was clear that this kind of globalisation was reaching the end of its cycle, it was undermining democracy.”

Peter Altmaier, Germany's economy minister, also said last month that he wanted to support pharmaceuticals companies that are dependent for key reagents on imports from Asia to rebuild their production sites in Europe, Der Spiegel magazine reported. He also said that nationalisation could be one option for supporting strategically important companies brought into difficulties by the coronavirus epidemic, which is causing demand to collapse and severing global supply chains.

“Minimising one-sided dependencies in order to win back national sovereignty in sensitive areas is the right idea,” he told the magazine. “I can well imagine a common European project for medicine production.”


Ireland's April 21, 2020, Stability Programme Update 2020 for the European Commission