COVID-19 Economic Series Part 1

Where are we with ‘unemployment’?

Economists have started to publish estimates on how COVID-19 will impact the economy. It is important at the outset to emphasise that these estimates are not based on traditional forecasting methods but instead rely on scenario-based analysis. The reason for this is simply that we are in unprecedented times, without parallel. How do we reliably model such a sudden downturn in an economy? There is no data from modern times with which to compare a once in a generation symmetric shock of this nature. The primary challenge for rigorous analysis is that first and foremost we have a public health crisis and the extent of the economic downturn will largely depend on the depth and magnitude of a crisis that has not yet fully played out. Where we are, as a society, regarding the rate of new infections is still unclear. There is huge uncertainly regarding how long the emergency period will last and how the reawakening of the economy will progress after the restrictions are lifted.

For the purposes of debate let us first go with a scenario that the impact of COVID-19 will be confined to a 12 week period and that economic activity (both domestic and international) will begin to recover in Q3 and Q4 of 2020. The ESRI has estimated that output in such a scenario will contract by 7.1% and that unemployment will hit 18% before falling to 11% by the end of the year. The Irish Central bank has estimated an 8.3% drop in GDP, with unemployment hitting a peak of 25% (the Central Bank also estimates that unemployment will remain above 10% by the end of the year). As an international perspective, the OECD has suggested that annual output will be reduced by 2% for every month spent in lock-down.

Several national media outlets in the last few days have compared current estimated levels of unemployment with levels that were reached in the aftermath of the 2008 financial crisis. This is misleading as the increase in social welfare support for the COVID-19 crisis is not due to a cyclical slowdown in the economy (remember Ireland was in a strong position as little as 6 weeks ago with unemployment at 4.7% and significant labour shortages reported by many sectors of the economy). Comparing unemployment levels now with what they were after the 2008 financial crisis is really like comparing apples with oranges.

In truth, at this point in time we simply cannot reliably know what the actual unemployment rate is. The CSO only today (April 9^th) published its March Unemployment figures which included a standard measure of 5.4% and a new COVID-19 adjusted figure of 16.5%. The current COVID-19 adjusted figure however is undoubtedly higher than 16.5% as the number of individuals receiving the COVID-19 emergency payment has increased by 224,000 in the last week (this would not have been included in the March calculations).

In a regional context, the only official statistics that have been released by the CSO are the March Live Register figures (Table A). The Live Register is not intended to measure unemployment as individuals on short time working weeks are also included. As such we will not have a clear picture on unemployment rates in the different regions across the country until the Labour Force Survey for Q1 is released in May.

Attempting to estimate regional unemployment from social welfare figures (i.e. number of people on the COVID-19 pandemic payment – Table B) in addition to the most recent labour force survey (Q4 2019) is complex as for example it would not take into account any individuals that have been hired in the essential services sector in recent weeks. Furthermore, the unemployment rate is calculated using labour force figures which include individuals who are in employment in addition to those that are actively seeking work. There can surely be no doubt that there are many individuals who now require a COVID-19 Emergency Pandemic Payment and are prevented from actively seeking work given that non-essential businesses remain closed. An unknown portion of these individuals are likely to return to their previous roles once the lockdown ends. We therefore cannot possibly determine a clear unemployment rate until after businesses have reopened and we can separate employees who are simply in limbo as a result of the lockdown from those who will be unemployed for the foreseeable future.

Table A: Live Register (by Region)                                                                

Table B: COVID-19 Emergency Pandemic Payments (number of individuals by region as of 6^th April)

Let’s set aside the term ‘unemployment’ momentarily and instead analyse figures from the perspective of those who now require social welfare support. This support figure currently stands at a rate close to 25% (across the regions it is likely that current rates vary between 23.5% and 27% influenced not only by the pre-crisis unemployment rate but also by the economic profile of the region). This rate will fall once current restrictions have been lifted but it is impossible to say for certain by how much.

Interestingly we are starting to see some European economies tentatively emerge from their respective lockdowns. Decisions being taken by our neighbours point to several options for the way forward for Ireland. Denmark this week announced that all creches and primary schools will reopen on April 15^th, while Austria has announced that non-essential stores of less that 400m² in addition to DIY stores will reopen on April 14^th. This will be followed by the reopening of shopping centres and hairdressers on the May 1^st. Denmark and Austria were two of the first countries to enter lockdown on the 11^th and 16^th March respectively.

These economies are following in the footsteps of the Chinese regions that have in the last month been emerging from the lockdown restrictions that were imposed on January 23^rd. Most businesses have now reopened but strict social distancing protocols will remain in place for an extended period. Over 30% of China’s tourist attractions have also reopened under strict conditions. For example, the Shanghai museum which regularly attracts 8,000 visitors a day now permits a maximum of 2,000 people per day. However, for every 2 steps forward there seems to be a distinct possibility of one step back unless careful management takes place. For example, cinemas that were allowed to reopen in some regions on the 23^rd March were ordered to close again on the 27^th March when mini spikes in new infection rates were recorded. This highlights the precautionary, incremental approach that will be required following lockdown. The challenge of growing business confidence in such a climate cannot be underestimated.

While it seems that China has largely addressed its initial supply side shock, the response to the attendant demand side shock is far from resolved. Domestic demand will be negatively influenced by uncertainty and loss of income while international demand has all but stagnated as other countries face their own pandemic situations. Factories may have reopened but many are without international orders. Likewise, the hospitality sector has attempted to re-engage but consumer caution is evident in low footfall. The Chinese Government is now at a point where it is focusing on stimulating the economy through measures aimed at boosting consumer consumption. We have clearly not yet reached this point in Ireland – defibrillator stimulus cannot be applied to an economy that is still in lockdown by rule of law. However even if we are not at such an advanced stage as some other countries in our fight against COVID-19 it is never too early to learn from the Phase 2 stimulus policies implemented by countries such as China, Denmark and Austria.

No recovery can gain real traction until the pandemic is brought under control internationally. The sentiment of “we are all in this together” is as true for the economy as it is for the public health crisis. Growth in the Chinese economy is likely to remain sluggish as long as the US remains in the grips of the pandemic. Ireland’s dependence on FDI means that economic performance will be closely aligned to that of its main international and European trading partners.

The most important thing for now is that we continue to remain consistent in our approach to fighting COVID-19. The debate regarding the relaxation of restrictions must obviously be based on the advice of the chief medical advisor. His decisions will be guided by the data showing a sustainable downward trajectory in COVID-19 cases. There is no doubt that the Irish economy will rebound but how far and how fast is unclear. The important thing to bear in mind is that the shape of the pandemic curve can only be influenced by how we as individuals act now in terms of following public health protocols.

Likewise, the trajectory of the economic recovery will be influenced by how the Government acts now in terms of devising an effective stimulus strategy that can be swiftly implemented after lockdown – more on this in the next blog.

[1] Registrations which have yet not being assigned to a DEASP local office of registration are included in the Live Register Totals. These registrations are not included in individual NUTS3/ NUTS2 totals in this table