Unemployment is likely to peak at 25% by early summer, as the economy tanks at an unprecedented rate, but the outlook could get a lot worse if the Government needs to extend the Covid-19 lockdown, the Central Bank has warned.
The bank’s latest quarterly report focuses on the up to 500,000 jobs, including construction workers, threatened temporarily by the pandemic.
Such is the severity of the economic hit that the Central Bank said there is huge uncertainty about “the potential depth and persistence of the downturn currently underway”, in particular if the lockdown is required to extend through the summer months.
"An extraordinary number of individuals have been laid off” and the economy faces “more persistent scarring effects” should the lockdown be prolonged, it said.
A 25% peak unemployment rate was not matched even during the worst of the years of the banking and property crash of over a decade ago, as the global Covid-19 crisis delivers a double whammy by hitting household spending as well a depressing demand for Irish exports.
In terms of the economic hit, the Central Bank assesses that under a 12-week shutdown that unemployment falls back to around 12.5% by the end of the year.
GDP nonetheless posts a drop of 8.3% in 2020, while output under an alternative measure could slide by 25% in the quarter, it said.
And the Central Bank starkly warned that under under a number of scenarios the economic fallout will be much higher – if the pandemic is not controlled relatively quickly.
“If the measures were to remain in place for a longer period in 2020, the output losses would be larger than calculated,” it said, suggesting that a further 12 weeks of restrictions could potentially mean that the fall in output almost doubles.
It said the costs of the Government measures to protect the economy and additional spending on health was around €8.2bn, while “the final cost will, of course, depend on factors such as the length of the crisis and the uptake of various schemes”.
Last year’s budget surplus turns into a deficit of over 10% under the modified measure of Irish output, or a deficit of 6% of GDP.
The State’s debt accelerates to 112% of economic output from 97% last year, equivalent to a debt load of 66% of GDP, up from 58% in 2019.
The overall fiscal costs of dealing with the pandemic runs out at €21.8bn – as the exchequer suffers from a loss of tax revenue and from additional expenditure.
“The near-term outlook for the economy is very unfavourable and, beyond that, the path ahead for the economy depends on the path of the virus, both domestically and globally,” the Central Bank said.
On financing the costs, it said the NTMA had “large positive cash balance" although there are a number of debt issues which are due to mature this year.
“Possible additional sources of finance to bridge the expected gap between Government revenue and expenditure this year include", using the the Rainy Day Fund, it said.
On the banks, the Central Bank said the crisis will affect their loan losses but they have built up reserves and their resilience in recent years.