Last Friday the Central Statistics Office (CSO) published the first estimate for growth in the Irish economy last year. There were no surprises and the picture presented is of an economy that experienced decent levels of growth last year. Gross Domestic Product (GDP) expanded by 5.5 per cent, with consumer spending expanding by 2.8 per cent and exports of goods and services expanding by 11.1 per cent. As most people are by now very aware, the GDP numbers are grossly exaggerated by Intellectual Property Products (IPP) and by aircraft leasing activities. When these items are adjusted for, a more realistic growth rate of 3 per cent in Modified Final Domestic Demand was recorded. For people who operate on the ground in the Irish economy, 3 per cent growth resonates much more accurately with the real story on the ground.
There is good news and bad news attaching to these data. The good news is that the year ended with considerable momentum, which would normally set a very solid springboard for the following year. However, the bad news is that given the global and domestic events of the past month, there is now little or no visibility on what the coming months hold in store for the global or domestic economies. The portents are not particularly good right now, which should also come as no surprise.
We have seen a pretty dramatic correction in equity markets over the past couple of weeks; there has been a total collapse in Government bond yields in a number of countries, but not all; we have seen the first emergency cut in US interest rates since the collapse in Lehman Brothers in 2008; the Bank of England followed with a half per cent emergency rate cut this week; and increasingly we are witnessing a significant restriction to many events and activities, much of it voluntary and some of it officially imposed. The latter is becoming increasingly important as various countries seek to contain the spread of the virus.
The world is indeed in a state of chassis now, and anybody who claims wisdom or foresight on how this is going to evolve over the coming months is a charlatan. We are in totally uncharted waters and the blind are certainly leading the blind.
It is astounding to see the level of criticism directed at our Government over both what they have done and what they haven’t done. Earlier in the week there was a clamour to cancel the Saint Patrick’s Day festivities; this has now happened, but some people are still not happy. We must realise that these are totally uncharted waters. At one level there is an ongoing requirement to ensure that the spread of the virus is contained insofar as is possible; but on the other hand, life has to go on, and businesses need to be given as much support as possible and jobs and livelihoods need to be protected. We cannot simply let economic activity collapse, but it is a thin line between success and total failure just now.
There is an intense air of unreality out there at the moment. Conferences and other events are increasingly falling victim to the virus, and we are now starting to see the first impact on schools and colleges. If schools are forced to shut down and younger children are sent home, then there will an onus on parents to stay home to mind them, which in turn will further pressurise businesses. Uncertainty is the byword.
For many businesses, cash flow will increasingly become a big issue. Fixed and other costs simply do not go away, but if revenues collapse, then there is a real businesses survival issue. Banks need to play a role in supporting businesses and households through the crisis, and they need to be given the necessary liquidity to do this. We are also going to have to see the EU fiscal rules relaxed to allow governments spend more money on health and to ease the financial burden on households and businesses. Desperate times require desperate measures.
The hope is that the virus will pass through the system relatively quickly and that the seemingly inevitable recession proves short and sharp, and that growth subsequently rebounds in a strong and sustained manner. Perhaps that is naïve optimism. There is a long road ahead.