Covid-19 has triggered a severe negative shock to the Irish economy – Central Bank of Ireland

• Covid-19 economic shock is fundamentally different in nature and scope from anything previously witnessed.
• Given the uncertainty of the situation, it is not possible to produce a conventional forecast.
• Both in Ireland and globally, Covid-19 has given rise to a sudden and severe negative shock that has affected all parts of the economy.

The Central Bank of Ireland has today published its second Quarterly Bulletin of 2020, which focuses entirely on the impact of the Covid-19 pandemic.

In terms of its impact on the economy, Covid-19 has triggered a severe economic shock that is fundamentally different in nature and scope from types of shocks previously witnessed. For the Irish economy, 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.

Given the extent of the unknowns, it is not possible to produce a conventional forecast of the outlook. Instead, making heavy use of judgement and drawing on a range of analytical tools, this Bulletin provides an assessment and estimate of the potential impact of the crisis under certain assumptions. On the basis of the initial impacts that have been observed, and also, primarily, the assumption that containment measures and restrictions remain in place for a three-month period before being rolled back, GDP could decline by 8.3 per cent in 2020.

In this scenario, given the fall in employment which has occurred to date and is in prospect, and if all those receiving Covid-19 related payments are counted as unemployed, the unemployment rate would rise to around 25 per cent 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.

The Central Bank has taken action to contain the economic effects of the pandemic and to protect consumers, households and businesses.  Our actions, working at home and with our European colleagues, span the full spectrum of our mandate. As part of the Eurosystem, significant financial firepower has been provided in the new Pandemic Emergency Purchase Programme of €750 billion until the end of the year. This is on top of the €120 billion announced earlier. Together this amounts to 7.3% of euro area GDP.

The Central Bank has taken further action releasing the Countercyclical Capital Buffer from 1% to 0% which will further support households and businesses. Similarly, the Single Supervisory Mechanism, of which the Central Bank is part, has announced that banks can temporarily use some of the supervisory capital buffers that they have built up in recent years. The Central Bank has also been working with financial services providers to help provide breathing space for customers who find themselves in financial difficulty, through no fault of their own.

Mark Cassidy, Director of Economics and Statistics, said:

“It is important to stress that due to the nature of this pandemic and the ongoing uncertainty it is not possible to produce a conventional forecast on the outlook for the Irish economy. However, 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.”