Additional reporting: Daniel McConnell
Further evidence of the pain coursing through the economy has emerged, as the Central Bank warned that unemployment may reach 25% this summer, with output tanking at an unprecedented rate and the recovery delayed if the Government needs to extend the Covid-19 lockdown.
The jobs of up to 500,000 people are threatened temporarily by the pandemic but, such is the severity of the economic hit, the Central Bank said there was huge uncertainty about “the potential depth and persistence of the downturn currently under way” and warns about the potential for “more persistent scarring effects” should the fight against the virus need to be extended through the summer.
A 25% peak unemployment rate was not matched during the worst of the years of the banking and property crash of more than a decade ago, as the global Covid-19 crisis is set to deliver a double whammy by hitting household spending, as well as reducing demand for Irish exports.
In terms of the economic hit, the Central Bank assesses that, under a 12-week shutdown, unemployment would fall back to around 12.5% by the end of the year and that GDP would shrink by 8.3% in 2020. Under an alternative measure, output could slide by 25% in the quarter.
And it starkly warned that, under a number of scenarios the economic fallout could be much greater, 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,” said the Central Bank, suggesting that a further 12 weeks of restrictions could potentially mean that the fall in output would almost double.
It said the costs of the Government’s 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” and the overall fiscal costs of dealing with the pandemic could likely exceed €21bn.
Last year’s budget surplus will turn into a deficit of over 10% under a modified measure of Irish output, or a deficit of 6% of GDP.
The State’s debt has grown to 112% of economic output, up from 97% last year, equivalent to a debt load of 66% of GDP, up from 58% in 2019.
“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 the banks, the Central Bank said the crisis will affect their loan losses, but it said they have built up reserves and their resilience in recent years.
It said possible additional sources of finance to bridge the expected gap between government revenue and expenditure could include using the rainy day fund.
The unemployment rate will have topped 20% by the end of this week, as more construction workers sign on for the Covid-19 payments, said Goodbody chief economist Dermot O’Leary.
It comes as new CSO figures suggest that more than 513,000 people were receiving some sort of payment from the Government by the end of March — before the full effect of the closure of most building sites announced last weekend came into effect.
Mr O’Leary said the unemployment rate had risen to 17% by the end of March — up from 4.8% in February — and would likely rise to 20% this week as more construction workers join the claimant count.
The CSO said that a total of 513,350 people were on the official Live Register at the end of March, including 283,037 receiving the pandemic unemployment payment, and 25,104 covered by the Covid-19 income-subsidy scheme.
At a media briefing, Finance Minister Paschal Donohoe and his top officials said that government spending and borrowing will increase to meet the costs of the crisis.
The exchequer returns for March showed that the Government took in €1bn less in tax revenues in the month than it had anticipated amid the Covid-19 crisis.
VAT receipts in the month were half the level they were last year, which the department described as an unprecedented fall, and an indication of the difficulties businesses are currently facing.
Total tax receipts for the month of March amounted to €3.7bn.
Broker Davy said the public finances took a €2bn hit from the Covid-19 crisis in March by way of additional health spending, social welfare payments, and the fall in VAT receipts.
Mr Donohoe said that, while the Government was previously expecting a budget surplus in 2020, we are “now heading for a considerable deficit” because of the pandemic’s impact.