Global economic recovery may take five years – World Bank chief economist

The global economic recovery from the crisis originated by the coronavirus pandemic may take as much as five years, the World Bank’s chief economist Carmen Reinhart said on Thursday.

“There will probably be a quick rebound as all the restriction measures linked to lockdowns are lifted, but a full recovery will take as much as five years,” Reinhart said in a remote intervention during a conference held in Madrid.

Reinhart said the pandemic-caused recession will last longer in some countries than in others and will exacerbate inequalities as the poorest will be harder hit by the crisis in rich countries and the poorest countries will be harder hit than richer countries.

For the first time in twenty years, global poverty rates will rise following the crisis, she added.

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We’re closer now than we have ever been to a major breakdown in how the internet works

So is this the big one? After years of courts cases and appeals and treaties and Austrian campaigners, are we finally on the brink of digital war between the EU and the US?

Everyone agrees that the Irish data protection commissioner’s preliminary order to Facebook to stop transferring EU citizen data to the US brings us a much bigger step closer to it. More importantly, we can now see an imminent situation where you can’t legally use your cloud provider or video conference services.

We’re not there yet. As I write, you can still upload images to US services and host your small business with an American cloud provider.

But make no mistake we’re closer to a major, fundamental breakdown in how the internet works – and who’s allowed to send what to who – than we’ve ever been.

And by ‘internet’, I mean some of the normal services used every day, like social media or online shopping.

For those who haven’t been following why this has come about, here’s a quick recap of where we are.

Since the US was caught tapping into services like Facebook, Gmail and other services we all use in the 2013 Edward Snowden scandal, EU courts have increasingly warned the US is no longer a trustworthy country for data privacy.

The US refuses to change its surveillance laws, citing “proportionate” security concerns.

So the EU responded this summer, with its highest court – under which we’re all bound – striking down the main transatlantic agreement underpinning legal data transfers. Furthermore, it told national data regulators they had to start taking action to tighten up on transatlantic data transfers.

So it’s in that context that Helen Dixon has just informed Facebook it can no longer send personal data across the Atlantic as it has been doing with what are called standard contractual clauses.

Most of the industry relies on these clauses, too.

For Ireland, the stakes are pretty high. As well as being the seminal regulatory presence involved in all of this, quite a few of the companies at stake have large, important industrial bases here.

So now we’re coming to a genuine crunch. Either the US changes its surveillance laws – and somehow convinces we Europeans that it’s serious about it this time – or EU law will stop large chunks of personal data being directly transferred there.

And it will do it through European regulators such as Helen Dixon.

We’re talking about Amazon, Google, Facebook, Microsoft and lots more. Think of almost any digital or online service you use and it’s probably intertwined.

“Yes, but we’ve heard all of this before,” you might respond. “We always manage to come up with some new treaty or legal way around it.”

We did try to come up with a “good faith” arrangement which the US called “Privacy Shield”. But that was a failure as the Americans didn’t take it seriously. That’s the one the European Court of Justice just struck down.

Unfortunately, we may now have come to the end of our ability to fudge the core issue. Will we accept occasional US surveillance of our communications? If not, will the US formally agree to stop doing that?

Right now, it looks overwhelmingly like the answer to both questions is no. So this time it may be for real – we may be facing a serious disruption sooner rather than later. It may soon be illegal for large numbers of organisations to send data transfers to the US.

Is it possible that it is merely some technical challenge that can be sorted by clever engineers in the tech companies? Might it be dealt with using European data centres or the determination to somehow contain the “processing” of EU citizens’ data in European servers?

But there’s no early suggestion from the likes of Facebook, Google and Microsoft this is easily done, let alone the tens of thousands of other European online companies (or millions of European customers of US online companies).

It’s possible, though, some flavour of this is what we’ll eventually see offered as a solution to the problem. If legal precedent is anything to go by, it can take years to properly parse a claimed technical setup when it comes to regulators, injunctions, local cases and European appeals.

Whatever the proposed fix, the issue is likely to inflame cross-Atlantic tensions with just two months left until the US presidential election, already one of the most divisive in recent history.

But there seems no escape. We’ve danced around the core issue for years, hoping it would somehow be smoothed away with diplomacy or clever treaties. But that has now failed. The US and the EU do not agree on what a reasonable level of internet surveillance is.

And we have now run out of ways to square what seems to be an impossible legal circle.

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Revenue extends Pay & File deadline to 10 December

Revenue has further extended the deadline for self-assessed income tax returns made online.

The Pay and File deadline for submissions made via Revenue Online Service is now 10 December, as opposed to the previous date of 12 November.

Revenue said Capital Acquisitions Tax returns relating to gifts or inheritances received in the year to the end of August could also now be made up to the 10 December.

The move has been broadly welcomed by the accountancy industry.

“We broadly support this move by Revenue,” said Marian Ryan, consumer tax manager at Taxback.com. 

“Any assistance at all that the can be provided to business owners throughout Ireland to allow them time to get back on their feet must be welcomed.”

Accountancy firm ACCA Ireland also welcomed the extension. 

“The impact of Covid-19 has forced practitioners throughout Ireland to adjust their workload in recent months ensuring that their clients have been able to avail of Covid-19 supports including the wage subsidy scheme, grants and loan schemes,” it said.

“The additional administration associated with this work is creating challenges for practitioners to meet the traditional tax and file deadline, therefore this is welcome news for the industry and businesses throughout Ireland.”

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Covid-19 and Brexit hitting different parts of the economy – ESRI

The Economic and Social Research Institute (ESRI) has found there is limited overlap between the parts of the economy most exposed to Brexit and the parts most exposed to the impact of Covid-19.  

In a working paper, the ESRI said that if a no-trade deal Brexit were to occur, more companies overall would be faced with a serious risk.

But this would not be due to the interaction of companies between sectors exposed to Brexit and sectors exposed to Covid. 

The paper suggested the hospitality and construction sectors are expected to have “almost no impact from Brexit” but are very exposed to Covid. 

It said that insurance and the financial services sectors will be the most exposed to Brexit, but are only in the mid-range of impacts from Covid.  

The ESRI research found that no sector was found to be in a category of severely exposed to both the Brexit and Covid-19 shocks. 

“However, some sectors did fall into the category of being severely exposed to one shock and moderately exposed to the other, a combination that does leave them at some risk if the two shocks are combined,” the think tank cautioned. 

Looking at supply chain linkages to examine how sector risks could transmit to suppliers and purchasers more widely, the research also found limited exposure of sectors most impacted by Covid-19 being further hit by Brexit. 

“Overall, these findings suggest that adding the Brexit shock to that of Covid-19 brings a wider range of sectors exposed to economic risk but that they do not layer further substantial risks onto those sectors that have already taken the largest Covid-19 hit,” Martina Lawless, author of the report and a Research Professor at the ESRI, said.

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Bank of Japan sees economic gloom lifting slightly

The Bank of Japan kept monetary policy steady today and slightly upgraded its view on the economy, suggesting that no immediate expansion of stimulus was needed to combat the coronavirus pandemic. 

Markets are focusing on what Bank of Japan Governor Haruhiko Kuroda will say at his post-meeting briefing on how the central bank could work with new Prime Minister Yoshihide Suga to support the economy with its dwindling policy tool-kit. 

As widely expected, the bank maintained its -0.1% short-term interest rate target and a pledge to cap 10-year government bond yields around zero. 

It also made no major tweaks to its asset-buying and lending programmes for easing corporate funding strains. 

“Japan’s economy remains in a severe state but has started to pick up as business activity gradually resumes,” the Bank of Japan said in a statement announcing its policy decision. 

That was slightly more upbeat than its view at the previous rate review in July, when it said the economy was an “extremely severe state.” 

Suga became Japan’s first new prime minister in nearly eight years yesterday, pledging to contain Covid-19 and push reforms after retaining about half of predecessor Shinzo Abe’s lineup in his cabinet. 

Analysts expect no major change to the relationship between the Bank of Japan and an administration led by Suga who, as Abe’s right-hand man, spearheaded the departing premier’s strategy to revive the economy with bold monetary and fiscal measures. 

Japan suffered its biggest economic slump on record in the second quarter as Covid-19 hit demand, reinforcing expectations inflation will remain well below the Bank of Japan’s 2% target for years. 

The Bank of Japan eased policy twice this year, mainly by ramping up asset buying and creating a lending scheme to channel money to ailing small firms to cushion the blow from the crisis.

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Government says income tax won’t change in Budget

The Minister for Finance has confirmed that the Government does not plan to make any changes to income tax, USC or PRSI in October’s Budget. 

Paschal Donohoe said it is the view of the Government that it needs to hold the personal tax code steady and use it to respond back to the challenges facing the economy. 

“There may well be decisions that we need to make in the future in relation to social insurance in Ireland,” he told journalists during an online press conference today. 

“But if I look at where we are moving into 2021 there is a heightened air of economic uncertainty and this Government wants to give confidence to those who are earning income or who have a high level of deposits within our economy for this year and for next year,” Minister Donohoe said. 

“After Budget 2021, future budgets that we make will be guided by the commitments we have in these areas in the Programme for Government,” he added. 

Mr Donohoe said the opening position before the Government makes any additional policy decisions for 2021 is that the Exchequer will have a deficit ranging between 4.5% and 5.5% of national income or in borrowing terms of €15-€19 billion. 

He said the budget would be framed against the central planning assumption of the continued presence of Covid-19 in Ireland across most of next year and that there will be a no trade deal Brexit. 

The main priority of Budget 2021 will therefore be management of the Covid crisis and Brexit. 

But the Government also wants to target any further measures on issues prioritised in the Programme for Government, particularly housing, health and climate change. 

A recovery fund will also be put in place to allow the State respond to issues that emerge during 2021, but no decision on its scale has been made.

Minister for Public Expenditure and Reform Michael McGrath said spending this year looks set to be up 23% above the level envisaged at start of the year due to Covid-19 related measures, such as the Pandemic Unemployment Payment, extra health spending and the wage subsidy schemes. 

He said he is currently trying to untangle with officials how much of that spending might be necessary again next year for issues such as schools, additional places in third level, changes to public transport and demand on the health service. 

He added that there are certain expenditure measures that have been committed to, such as public sector pay and demographics, as well as pressure in demand led schemes. 

Capital expenditure though will increase next year to €9.2 billion, he said, adding that a review of the National Development Plan is taking place. 

In relation to the carbon tax, Mr Donohoe said he does intend to repeat the change in carbon tax made in last year’s Budget and use the revenue from it to reinvest in ways that will make a difference to climate change and to mitigate the impact of carbon tax on vulnerable people. 

In terms of borrowing on international markets, Mr Donohoe said there would be a borrowing strategy for next year in place by the time the Budget is delivered.  

In the first half of next year a medium-term borrowing strategy would then be published outlining how the deficit will be reduced over time, he said.

Minister McGrath said no decisions have been made yet on core social welfare rates. 

He also said significant resources would be allocated to deal with the fall out from a no-trade deal Brexit.

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Ibec calls for €6bn support for businesses in Budget

Employers’ group Ibec has called on the Government to provide an additional €6 billion in supports for businesses in the upcoming Budget.

In a pre-Budget submission, Ibec said the economy “is not yet ready to carry itself” and that the Irish business model faces its most significant challenge in over half a century.

Ibec said the Government could and should run a deficit of €30 billion this year but it should also do “whatever it takes to combat the economic crisis while it lasts”.

That means running another substantial deficit of €15 billion next year. 

It recommends the new wage subsidy scheme should be reduced gradually beyond its current limits and only be removed from companies when revenues return to 90% of normal.

It also wants the 9% VAT rate reinstated for the hospitality sector and personal services industry.

Ibec is calling for an arbitration system and Government support to solve disputes over commercial leases and wants Revenue to write down tax debts.

It also believes back to-work schemes should be open-ended until unemployment is brought down to 6%.

Ibec Director of Policy and Public Affairs Fergal O’Brien said: “The scale of the challenge facing us from both Covid-19 and Brexit means that the economy will need ongoing support in 2021.

“The significant, but temporary, income supports currently in place are providing life support to many sectors and jobs across the economy.

“The Government has provided €20 billion in direct support to the economy in 2020. As those supports are withdrawn, in the first half of 2021, it is important that they are not all withdrawn at once,” he cautioned.

“The economy is not yet ready to carry itself. A new stage of policy measures will be needed to rehabilitate the economy, strengthen our competitiveness, and ensure recovery,” he added.

Among the other proposals put forward by Ibec in its budgetary submission is an improvement to the Capital Gains Tax entrepreneurs’ relief.

The measure, introduced in 2016, gives a CGT rate of 10% on gains from the disposal of qualifying business assets, with a lifetime limit of €1m.

It was reduced from an initial rate of 33%.

Ibec called for the lifetime limit to be increased to €15m and expanded to “passive investors” in areas with high growth potential. 

It also proposed exploring a dispute resolution mechanism regarding commercial leases, along the lines of a Swedish model recently introduced, which would involve some state burden sharing in order to provide short term protection from eviction. 

It recommends the ability of businesses to write down Covid-19 tax debts under the Revenue tax warehousing scheme in circumstances where the debt threatens business viability. 

“If SMEs are left with significant balance sheet damage, this would represent a significant blow to the growth potential of the most labour intensive sectors of the economy,” the report concludes.

The business group also proposes introducing a number of budget measures to assist firms that stand to be negatively impacted by Brexit. 

Among the measures it proposes under this heading is the extension or re-introduction of the Employer Wage Subsidy Scheme for Brexit affected companies in the event of no trade deal being reached. 

“The scheme should be put on a scenario contingent footing and be reintroduced on a temporary basis where firms are struggling due to immediate loss of income due to Brexit,” it said.

Ibec said a no-deal outcome is now the most likely scenario in December which, it says, will fundamentally reframe the economic outlook for Ireland, especially the regions most reliant on Brexit-exposed sectors.

“Whilst some parts of the country may begin to recover from Covid-19 in 2021, others would be sent in a second recessionary spiral,” the report concludes. 

It said the measures it proposes can be paid for through the existing €4 billion in Brexit contingency funding set aside for the years 2020 to 2025, additional tariff revenue from UK imports, and funding from the EU Brexit adjustment fund.

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UK inflation falls but by less than expected in August

The UK’s restaurant subsidy scheme to support the hospitality sector through the Covid-19 pandemic helped to push the country’s inflation rate down to its lowest rate in almost five years, official data showed today. 

UK consumer prices rose by 0.2% in annual terms in August.

This was the smallest increase since December 2015 and a sharp slowdown from July’s 1% increase, the Office for National Statistics (ONS) said. 

A Reuters poll of economists had pointed to a reading of 0%. 

Last month discounts for more than 100 million meals were claimed through the government’s “Eat Out to Help Out” programme, which offered diners a state-funded price reduction of up to £10.

Prices in restaurants and cafes were down 2.6% compared with August last year, the first time they had been negative since records began in 1989, the ONS said. 

Falling air fares and a smaller-than-usual rise in clothes prices also helped to push annual inflation down. 

The ONS said eight items in its inflation basket were still unavailable to its price collectors.

It said they reflected the things that remain off limits to people in Britain such as tickets to the theatre and soccer matches, entrance to horse racing events and catering for more than 50 people. 

In April, during the most stringent period of the lockdown, 90 items had been unavailable.

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Payment breaks source of temporary relief at time of extraordinary financial stress – Central Bank

The Central Bank has published an analysis of payment breaks taken by mortgage holders and firms which shows the overwhelming majority of borrowers had no problem servicing their loans prior to the Covid-19 pandemic.  

The analysis of payment breaks on mortgages is based on data at the end of May from the five main banks. 

At that stage, there were 67,000 payment breaks covering €9.5 billion in loan balances which represented 9.7% of private dwelling homes (PDH). 

According to the Central Bank’s own internal estimates, just over half of these breaks remained in place at the end of last month. 

Mortgage accounts which already had a history of forbearance before Covid were twice as likely to have a payment break, the Central Bank found. 

Borrowers working in sectors worst affected by the fallout from the pandemic were also more likely to avail of payment breaks, it added. 

An analysis of the geographical spread of the payment breaks shows a higher than average take up in the Dublin commuter belt but also in Kerry, Donegal and Wexford.

The Central Bank’s analysis suggests this may be explained by a higher percentage of borrowers in these locations working in food service and accommodation. 

A proportion of borrowers who originally took out their mortgages in the boom years took breaks, compared to those who borrowed in the early part of the last decade.

53% of all payment breaks are on mortgages taken out between 2004 and 2008. Just 7% of breaks were on mortgages taken out in 2012 and 2013, the Central Bank figures show. 

In a separate study, the Central Bank examined the types of companies that availed of payment breaks. 

It found that more small and medium sized firms (SMEs) than large corporates availed of the breaks and the sector in which the company traded was the best predictor of what firms took the break.  

The study also found that the “overwhelming majority of borrowers” showed “no explicit signs of vulnerability prior to the shock”. 

It found that just over 20% of the balances for SME loans were subject to a break while just 6.5% of large corporate loans were.

The highest incidence of loan breaks was amongst SMEs in the accommodation and food sector with 59% taking a break. 48% of SMEs in the Arts, Entertainment and Recreation sector participated and 19.4% of manufacturing companies also took part. 

The Central Bank concluded that the payment breaks gave companies valuable relief at a time of “severe deterioration in trading conditions due to the pandemic”.  

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State’s chief economist warns on state of the economy

A presentation by the Department of Finance’s chief economist describes the fall in the economy in the second three months of this year as ‘the largest economic contraction on record.’

It also warns that budgetary policy will have to walk a ‘fine line’ between support and ‘fiscal sustainability.’ 

Chief Economist John McCarthy’s presentation to the Tax Strategy Group outlines how Modified Domestic Demand, a measure which strips out the multinational sector, fell by 16% in the second quarter of this year. 

He notes that GDP only fell by 6% highlighting a ‘two speed’ economy, with multinationals continuing to export. 

Mr McCarthy also draws attention to the ‘excess’ savings by households running to €5-€6 billion. 

He notes that unemployment peaked in April at 28% which was twice the highest level recorded during the financial crisis. 

However, a pick up in the economy is currently underway after an initial ‘bounce-back’ during the summer. 

The number of people on the Live Register, the PUP and the wage subsidy scheme remains high though with 800,000 in receipt of support up to last week. 

The multinational sector is described as having done most of the ‘heavy lifting’ in the economy this year helping to mitigate the negative impact from domestic demand.

For next year, the question mark over the future EU-UK trade relationship is noted as are the potential threats of tariffs and disruption to supply chains. 

On the public finances, the paper notes that our national debt is amongst the highest in the developed world.

Debt is expected to rise further next year and the exposure of the tax base to corporation tax is highlighted.

It notes that whatever debt we take on now will have to be refinanced in the future at a higher cost and that the ECB is expected to end its support in June next year. 

The economy, it concludes, is in a ‘finely balanced position’ with the shock of Covid-19 having had a disproportionate impact on labour intensive sectors.

It says budgetary policy will have to walk a fine line between support and what it describes as ‘fiscal sustainability.’

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