This article is from our July 2020 edition of MarketWatch.
28th July, 2020
It is clear the Irish economy has already suffered a very deep economic contraction, evident in surging unemployment, falling retail sales, and activity in many sectors shut down during April and May. However, promisingly, the third phase of the governments reopening plan began on June 29th, removing most of the remaining restrictions.
The progress in reopening the economy is already evident in falling Pandemic Unemployment Payment claims. This rose to a peak above 600,000 at the end of April according to the Department of Employment Affairs and Social Protection, suggesting employment had fallen by an enormous 26%. Since then claimants have fallen back to 439,000 on June 29th, of which, 25,700 had closed their claim. This suggests employment may now be 18% off pre-pandemic levels.
The news that GDP rose by 1.2% in Q1 2020 (Central Statistics Office), standing out compared with most European countries that saw a contraction, bore out the thesis that the multinational sector concentrated in pharmaceuticals, medical technology, and technology services would be relatively less affected by Covid-19.
May’s exchequer returns were also exceptionally strong. The Department of Finance had expected a c.40% drop in tax revenues as disruptions hit the economy. Remarkably, the outturn was a small 1% rise on the year to €6.2bn. Of course, this reflected buoyant corporation tax receipts on profits in 2019, but the damage to income taxes and Value Added Tax (VAT) was also smaller than feared.
Of course, it hasn’t all been good news. The Banking & Payments Federation Ireland have revealed that 78,000 mortgage accounts, 9% of the total, received payment breaks, illustrating the financial stress many households now face. However, in the context of unemployment claimants this figure is something of a relief, illustrating the hit to employment has been biased towards younger, part-time workers and those less likely to own a home.
In some respects, Ireland’s response to support small medium enterprises has been slow. The €6.5bn of support announced in May is just 2% of GDP a far smaller level of support than announced in other EU countries. However, in larger countries the support is often targeted towards large corporates, and credit guarantees have not been put in place. Ultimately, the proof will be in the pudding, and political pressure for greater support will only grow if companies fail to reopen as business restrictions are lifted.
The news that Fianna Fáil, Fine Gael and the Green Party had formed a new government was a clear positive for investors valuing stability and continuity. A July stimulus package has been promised, which includes pre-announced measures such as the €2bn credit guarantee scheme, but also new supports for the hard-hit retail and tourism sectors.
Although an ‘economic recovery plan’ will be announced in October’s budget, it is not clear this will entail extra spending, over and above the already accommodative fiscal stance set out in April’s Stability Programme update. This envisaged public capital rising from €9bn in 2020 to more than €10bn in 2021, with the budget deficit expected to reach €23bn (7.4% of GDP) this year and €13.8bn next year, as published by the Department of Finance.
Of course, the housing market continues to attract attention, amidst warnings that prices could fall by more than 10%. MyHome asking prices fell by 1.5% in Q2 2020, down 2.9% on year on year, annual inflation entering negative territory for the first time since the last recession. Also, the Consumer Price Index (CPI) private rents index was down -0.7% in the year to May, again entering negative territory for the first time since 2012. In this context, we have decided not to revise our forecast for a 5% drop in house prices through 2020.
However, recent weeks have seen a surge in housing market activity as estate agents reopened from June 8th. New listings for sale on MyHome, which had been down circa 85% from normal levels through April and May, were down only 20% in the final weeks of June. Also, MyHome reported stronger activity from homebuyers searching for property on its website in recent weeks, indicative of latent demand. As long as confidence in the recovery continues to gain traction through the summer, it could be our forecast for a 5% drop in house prices proves too pessimistic.
WARNING: Forecasts are not a reliable indicator of future results.
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