As the COVID-19 situation progresses, central banks and governments across the world are seeking to support their unwell citizens, pressured healthcare systems and challenged economies through expansion and fiscal policies. On the latter, with a triple shock of supply, demand and financial markets impacted by the global pandemic, the intervention is wide-ranging and for the most part rapid. Central banks, in particular the Fed in the US and the European Central Bank, have implemented extensive asset purchase programmes which implicitly cover public expenditure growth and guarantee favourable financing conditions.
Oil prices fell into negative territory in the past month, for the first time ever, as population lockdowns across the world led to a sharp decline in demand and storage capacity issues. Demand contraction may worsen further as India, the third biggest crude oil consumer in the world, placed its more than 1.3 billion inhabitants in lockdown. This severe contraction in demand is expected to amount to more than 10 million barrels a day, further intensifying oversupply levels and keeping prices subdued. From a business perspective however, provided countries can reactivate their economies quickly enough, many sectors stand to benefit from some of the lowest oil prices in 20 years.
With the unfolding events, the damage to the Irish economy is expected to be significant and lasting. The Department of Finance recently launched its Stability Programme Update which outlines its projections on the impact the COVID-19 crisis may have on the Irish economy. The government expects core domestic demand, which has been a key driver of growth in recent years, to decline by 15% in 2020, while GDP is expected to fall by 10.5%. The pandemic has also transformed the labour market, from one of full-employment at end-2019 to one in which unemployment is likely to reach its highest level on record in the second quarter, before easing back thereafter.
It must be noted however that the exact trajectory and impact of the COVID-19 crisis is subject to a high degree of uncertainty, and as such these forecasts are based on one of many possible scenarios. In this case the scenario assumes that the shock to the global and Irish economies is a transient one: assuming that containment measures are effective in reducing the infection rate, economic activity would bottom-out in the second quarter, with a gradual recovery – domestically and internationally – beginning later this year and gaining momentum into next year. On this basis the government expects domestic demand to bounce back with growth of 8% in 2021, while GDP could rise by 6% with output returning to pre-pandemic levels by 2022. As always, these projections will continue to be revised throughout the year as new information becomes available.
SECTOR WINNERS AND LOSERS
With the United States leading the list of cases and Europe having been seriously affected, the virus is continuing its spread towards other emerging countries. Non-food retail, entertainment and hospitality are among the worst affected sectors, while other sectors have been affected to varying degrees.
The crisis has been hugely damaging for airlines, as their activity has been reduced to minimum levels, leading to sharp declines in revenues. This sector has been one of the hardest hit on the stock markets and we are likely to see further redundancy measures in among larger airlines, as well as the disappearance of some of the smaller companies in an industry that is likely to tend towards consolidation. European airlines have been more adversely affected than their US counterparts, as they take out oil derivatives over a significant part of their annual fuel demand, meaning that they are tied to pre-agreed prices which are now well above market levels.
Tourism and retail are two sectors that have suffered considerably from the impact of COVID-19 restrictions on movement and consumption. Widespread closures have hit revenues, leaving such businesses unable to pay major costs such as wages and rents. A renegotiation of rents, with the aim of deferring or reducing them, has been the solution in many cases however the extent of this and the potential for recovery remains to be seen. The Irish government has provided assistance to such businesses in the form of business loans schemes, grants, rates payment deferral and a wage subsidy scheme which allows employees to be retained on the company’s payroll in order to minimise job losses. Tourism and retail are interrelated, with 10.8 million tourists visiting Ireland last year spending more than €5.1 billion in Irish businesses. In relation to the retail sector, the government also introduced schemes to assist with the move to a take-away and delivery or online retail model. These include the COVID-19 Retail Online Scheme, which will be administered by Enterprise Ireland, as well as immediate changes in planning restrictions to allow restaurants to operate under a take-away model.
Another of the worst-hit segments is the automobile sector, which has been seriously affected by the shutdown of production plants located in China and a reduction in purchases. Many European companies are suppliers of components for manufacture and China is also one of the biggest buyers of western vehicles that are exported. Chinese buyers also make up one of the most important market niches of leading luxury retailers. The temporary cancellation of flights from China and elsewhere means that these brands are starting to feel the effects of reduced footfall.
Nonetheless, some sectors, including pharmaceuticals, biotechnology, and those that supply medical equipment and supplies such as PPE and disease containment materials, have stepped up their activity in recent weeks with materials being developed as quickly as possible. While activity in the office sector is largely on hold, with demand for office space from large multinationals likely to be further slowed as the US experiences the full impact of COVID-19. Nevertheless, some US technology companies such as Zoom have performed extremely well and may be looking to expand further within Europe, with Dublin potentially benefitting in the near term.
Increased activity has also been seen in the food and distribution sectors, which have been overwhelmed and have had to rapidly upgrade capacity to account for increased demand. This, along with an increase in online shopping and pressure on supply chains, has led to increased demand for industrial and logistics space. This has been evidenced by recent deals with both Amazon and Dunnes Stores signing for large amounts of warehousing space in Dublin in recent weeks.
In summary, while the impact of COVID-19 on business activity has been significant, the impact will vary from sector to sector. In response to this unprecedented and rapidly evolving situation, it will be crucial to implement effective measures that stimulate and enable companies to continue to remain operational. This will involve a proactive and coordinated approach among all stakeholders, along with appropriate government support, particularly in the sectors and regions most affected by the pandemic.
The plans or ‘Roadmap’ laid out by the government last Friday was the first step in this process, providing businesses with some clarity on when they can expect to reopen. The government also announced a range of additional supports for businesses including a €2 billion Pandemic Stabilisation and Recovery Fund, SME Credit Guarantee Scheme and measures to reduce tax and rates liabilities. Nevertheless, this will be a slow phased process which will be kept under constant review so the announced timelines may change. Even with the additional supports, some sectors will struggle to remain operational under new social distancing guidelines.