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.’

Article Source: Click Here

Inflation may be higher than official measure – Makhlouf

The Governor of the Central Bank has said price inflation experienced by households may be higher than what is officially measured.

Gabriel Makhlouf also said that Covid-19 has highlighted the impact of globalised supply chains, digitalisation and the “interplay between fiscal and monetary policy”.

The Central Bank Governor made his comments during an online speech hosted by the Institute for International and European Affairs.

Governor Makhlouf said the composition of the goods baskets, which make up inflation statistics, are not updated during a calendar year.

Covid-19 has had significant impacts on the cost and quantities of goods and services purchased by consumers, he said, referencing the stockpiling early in the pandemic of food and sanitisers and the decline in the purchase of services, such as dining.

He said the Central Bank last looked at the methods used in measuring inflation back in 2003 and that it intended to re-examine them in the light of Covid.

The Governor also encouraged people to become involved in the European Central Bank’s review of monetary policy and price stability.

Mr Makhlouf also said the pandemic has seen a dramatic increase in the use of payment cards.

He noted the impact of technology in enabling many people to continue to work from home.

He said that while “digitalisation” will have implications for the labour market, but added that it was unclear why productivity has remained “so lacklustre” given the impact of digitalisation.

Banks here will need to start thinking about restructuring loans if borrowers need assistance beyond six-month repayment payment breaks due to expire in the coming weeks, Mr Makhlouf also said today.

“There are bound to be more people in a distressed debt situation, we need to avoid that almost becoming a systemic problem,” the Central Bank boss said.

“That’s why we would be encouraging borrowers to engage with their lenders if they think they are going to have a long-term problem,” he added.

Mr Makhlouf added that it would be wise for firms to plan on the basis that the UK will not strike a trade deal with the European Union as the strained talks of the last week has highlighted that “a lot of us don’t know what’s going on” and what may or may not ultimately be agreed.

Article Source: Click Here

Imperative to avoid second lockdown ‘if possible’ – Varadkar

Tánaiste Leo Varadkar has said Ireland may be close to the level “at which we can live with the virus”.

He said the overriding imperative right now is to keep the virus suppressed to avoid “if possible” a second lockdown.

The Tánaiste made his remarks at the Dublin Economics Workshop this afternoon.

He said he did not believe the impact of the coronavirus on the economy could be summed up in “a single hit hypothesis” like a V-shape or K-shaped recovery as he thinks there will be “multiple hits” and it was more akin to an ongoing war.

The Fine Gael leader added that people should not assume that it will be another 100 years before the next pandemic hits, and that he believes things will never be the same again.

He said one of the most important objectives for Government was to maintain social solidarity, particularly with people in industries like entertainment, conferencing and aviation which have been worse hit by the pandemic.

Mr Varadkar said the forthcoming Budget will need to focus on those industries.

The Tánaiste also said he would like to see a permanent wage subsidy scheme created as part of a strengthened social security system.

This would be more like social security systems in Europe and would also include better sick pay entitlements.

He said this would need to be paid for with higher rates of PRSI. Mr Varadkar told the online audience that this was “hinted at” in the Programme for Government so he was “not going off message.”

Mr Varadkar also said he was looking forward to implementing a “living wage” during the lifetime of this Government.

On insurance costs, the Tánaiste admitted that “…the last government did not succeed on insurance.”

He said he was now chair of a Cabinet committee set up to deal with insurance costs which he hoped will “make a real difference” and “bite the bullet” on passing some new legislation to deal with the issue.

The conference also heard from ECB Chief Economist Philip Lane and National Competiveness Council Chair Professor Frances Ruane.

Philip Lane described the rebound in eurozone economies this summer as “a mechanical rebound” and that the recovery is far from complete.

He described a “massive degree of nervousness” among households over spending, which is reflected in much higher than normal savings rates.

Prof Ruane pointed to five longstanding issues where Ireland’s costs have been out of kilter for a long time.

They are insurance costs, credit, legal costs, housing costs and childcare costs, she said.

Article Source: Click Here

New laws to screen investment from ‘unfriendly’ governments

The Government will introduce new laws to screen foreign direct investment (FDI) coming to Ireland, Enterprise, Trade and Employment Minister Leo Varadkar has confirmed.

The legislation will be brought in to give effect to a European Union regulation and is seen as an important tool to tackle concerns that strategically important assets – including research – could find its way into the hands of investors from countries such as China.

“Once enacted, the Investment Screening Bill will empower the minister for Enterprise, Trade and Employment to respond to threats to Ireland’s security and public order posed by particular types of foreign investment, and to prevent or mitigate such threats,” noted the department yesterday.

“Under the proposed legislation, the minister will be able to assess, investigate, authorise, condition, prohibit or unwind foreign investments from outside the EU, based on a range of security and public order criteria,” it added.

Ireland was the target for €3.1bn of foreign direct investment from China between 2000 and 2019.

That compared to €50.3bn that was pumped into the UK by China in the period, and €22.7bn into Germany.

EU regulation 2019/452 notes that in determining whether a foreign direct investment may affect security or public order, member states can consider the effects on critical infrastructure, technologies, and “inputs which are essential for security or maintenance of public order, the disruption, failure, loss or destruction of which would have a significant impact in a member state”.

“It should also be possible for member states and the Commission to take into account the context and circumstances of the foreign direct investment.

“In particular whether a foreign investor is controlled directly or indirectly, for example, through significant funding, including subsidies, by the government of a third country or is pursuing State-led outward projects or programmes,” the EU regulation says.

Mr Varadkar said FDI is very welcome, but it must be screened.

“While we welcome investment, it is important to be on our guard against forces that threaten our security and strategic assets falling into the hands of unfriendly foreign governments,” he said.

Article Source : Click Here

Fears weak sterling will fuel online sales as shoppers urged to buy local

Retailers are fearful that weak sterling will help fuel a surge in online shopping at UK websites in the run-up to Christmas – exacerbating the disastrous impact the pandemic has had on their businesses.

The value of sterling plunged this week as talks between London and Brussels on a trade deal faltered, making it more attractive for shoppers to splurge on goods from UK-based websites.

The currency swing has also prompted fresh concerns that consumers here could flock to Northern Ireland to do their shopping in the coming months as volatility persists.

The Government is being urged to roll out a major advertising campaign to encourage people to shop local, both physically and online.

“A lot of companies are still in survival mode,” said Arnold Dillon, director of Retail Ireland, which is part of business lobby group Ibec.

“An additional Brexit shock is something that could be incredibly disruptive and potentially push more firms out of business.

“With the exchange rate, we’ve been in this sort of ­territory before.

“There would be a risk with potentially significant volatility in exchange rates over coming months.

“What we would really want to desperately avoid is a situation where we see a return to very significant cross-border shopping.”

Shoppers flocked to Northern Ireland in 2009 when the euro neared parity with sterling. At its peak, 4.1pc of grocery sales to shoppers here were accounted for by retailers in Northern Ireland – about 10 times the figure that would be normally seen.

But it’s the impact of any surge in online shopping from sites such as Amazon in the coming months that could spell huge trouble for Irish retailers.

For many small retailers especially, Christmas can be a make-or-break time, helping them to turn a corner to profitability for the year.

But the pandemic coupled with the sterling plunge could play havoc with their businesses. Consumers here are likely to face paying tariffs on goods bought from the UK from January, which could see many use the coming months to capitalise on the strength of the euro and make purchases before any tariffs are imposed.

The UK’s Brexit transition period ends in December, and it looks increasingly likely that a trade deal with the EU won’t be agreed.

Duncan Graham, the managing director of Retail Excellence Ireland, a lobby group that represents more than 2,000 retailers, said he reckoned many retailers here had done about five years’ work in boosting their online presence in the past five months.

But he warned that shoppers needed to be encouraged to shop local and pointed out that 75pc of online purchases made by consumers in Ireland were made outside the country.

“About 75pc of online purchases go out of the State,” he said. “Buying local is really important between now and Christmas.”

City centres in particular have been hit hard, with many businesses that relied on footfall from office workers and shoppers left reeling as home working becomes the new normal.

“What we have seen since lockdown is a real passion for local community and passion for doing the right thing by buying Irish,” according to Mr Graham.

“It’s all very well and good shopping local in the middle of the summer, but it’s a bit more difficult when it’s cold and miserable in December and you’ve got your laptop in front of you,” he added.

“The message here is to think about what you’re doing and keep it in the country.”

Article Source: Click Here

UK economy grows by 6.6% in July, extending recovery from Covid crash

The UK economy grew for a third month in a row in July as pubs, restaurants and other sectors reopened after the coronavirus lockdown, but it remained around 12% smaller than its pre-pandemic level. 

After crashing by a record 20% in the second quarter, output expanded by 6.6% in July, slower than June’s monthly rate, the Office for National Statistics said. 

Economists polled by Reuters had expected growth of 6.7%. 

British finance minister Rishi Sunak welcomed the figures but added that people were rightly worried about the coming months. 

The economy has recovered about half of its lost output but is still 11.7% smaller than its level in February, before the pandemic hit Britain. 

Thomas Pugh, an economist with Capital Economics, said the data suggested British GDP would show record-breaking growth in the third quarter after its unprecedented collapse in the three months from April to June. 

“However, July was probably the last of the big step-ups in activity and a full recovery probably won’t be achieved until early 2022,” he said. 

In response, the Bank of England was likely to ramp up its bond-buying stimulus programme by a third, or £250 billion, Pugh said. 

Britain’s economy suffered the sharpest second-quarter fall of any Group of Seven nation in the April-June period. 

Hopes for a swift rebound have faded as businesses struggle to cope with social distancing rules and many people remain reluctant to travel on public transport or go to crowded places. 

Tensions between London and Brussels over a post-Brexit trade deal are also mounting. 

Unemployment is also expected to rise sharply because Sunak has ruled out extending his coronavirus job retention scheme which is due to expire at the end of October. 

Parliament’s Treasury Committee today urged Sunak to “carefully consider” a targeted extension of the scheme and other support measures.

The pound fell slightly against the dollar as today’s data showed output in Britain’s dominant services sector was a bit weaker than expected, growing by 6.1% in July compared to expectations for growth of 7.0%. 

This included a 141% jump in accommodation and food as lockdown measures eased, but that sector’s output was still 60% lower than its February level. 

Growth in the much smaller manufacturing and construction sectors exceeded forecasts. 

Complicating the outlook, Brexit risks have resurfaced. 

The European Union told Britain yestertday it should scrap a plan to breach their divorce treaty, but Prime Minister Boris Johnson’s government refused and pressed ahead with a draft law that could sink four years of talks. 

We are far from out of the woods yet,” Tom Stevenson, Investment Director, Personal Investing, at Fidelity International said, pointing to rising Covid-19 infections, new rules on social gatherings and the end of the furlough scheme. 

“Deteriorating relations with the EU make a no-deal Brexit in January more likely, adding to the UK’s economic challenges and to downward pressure on the pound,” he added.

Article Source: Click Here

UK agrees first major post-Brexit trade deal with Japan

Britain today said it had secured its first major post-Brexit trade agreement – a free trade deal with Japan – the day after bitter wranglings with the European Union. 

The Department for International Trade said the deal will increase trade with Japan by some £15.2 billion. 

The UK-Japan Comprehensive Economic Partnership Agreement was agreed in principle by International Trade Secretary Liz Truss and Japan Foreign Minister Motegi Toshimitsu during a video call today. 

It builds on the broad EU-Japan deal that came into effect last year, but which will no longer apply to Britain from December 31. 

Britain left the EU in January but agreed a standstill transition until the end of the year – and is racing to strike both replica and new trade agreements before that date. 

“This is a historic moment for the UK and Japan as our first major post-Brexit trade deal,” Liz Truss said. 

“The agreement we have negotiated – in record time and in challenging circumstances – goes far beyond the existing EU deal, as it secures new wins for British businesses in our great manufacturing, food and drink, and tech industries,” she said. 

The deal was an “important step” towards joining the Trans-Pacific Partnership, she added.

The UK is locked in increasingly fractious talks with the EU over its future trading relationship.

Brussels yesterday threatened legal action over contentious Brexit legislation that would violate the binding divorce treaty agreed last year.

Article Source: Click Here

‘Too much stimulus cash is now saved in banks’ – Ibec

The Government has pumped too much cash to households during the Covid-19 crisis and should find a way to “extract” money that has ended up in savings accounts, according to the head of employers’ group Ibec.

Ibec chief executive Danny McCoy told an event organised by the Dublin Economics Workshop that the best way to pull Ireland out of recession is to mobilise some of the record €120bn of household savings and direct it into projects for civic good including infrastructure.

Mr McCoy said the Temporary Wage Subsidy Scheme and Pandemic Unemployment Payment paid many people to work from home or just stay at home.

He said the payments, while essential to maintain stability, have multiplied what already was a strong build-up of savings even before the pandemic. Those funds in savings are doing little good, he said, given the virtually non-existent interest rates on offer.

He said the Government was building a €30bn deficit so as to finance households at a moment when the nation really needs stronger investment in public infrastructure and services.

“We’ve managed to put too much money into the household sector – and the households have other demands,” he said. “They are items that need to be provided by the public sector, in terms of public infrastructure: housing, childcare, transportation. These are the kind of ‘public good’ types of features we need, ironically, to get the pendulum swinging back from households towards financing what people want.

“The problem with Covid is that the pendulum actually pushed the money – rightly, given the shock, to keep people staying at home – and exacerbated that problem even further,” he said. “The money has ended up very firmly in the household sector as the Government racks up debts.”

He asked: “How is the Government going to extract that money back from the households, to deliver that which the households profess to need and want? There must be smarter ways of mobilising households as part of the solution. If people don’t want to be faced with taxes and we’re not willing to confront them with taxes, can we think of more innovative schemes?”

Mr McCoy suggested that Ireland needed targeted public bonds to promote “not mere saving, but savings with a purpose”.

He suggested the public could be encouraged to buy interest-bearing bonds and raise funds for raising university standards, building public housing and transportation links, and achieving energy efficiency and climate action goals.

Article Source: Click Here

Covid-19 impact on labour market ‘staggering’ – McGrath

The Minister for Public Expenditure and Reform has said government spending this year will be in the region of €86 billion, some €16 billion more than was planned in last year’s Budget.

Michael McGrath said the current estimates process in the run up to the Budget is a “complex one”.

He also said it was far from clear how much of that additional €16 billion will be needed again next year.

The Minister was speaking at the annual Dublin Economic Workshop, which is being held online this year.

Mr McGrath said a priority will be in ensuring the health service has all the resources it needs and that his department is close to finalising with the HSE “…the most comprehensive and costly winter plan in the history of the State.”

On Brexit, the Minister said there is a still a chance a deal will be done but there is also a distinct chance of a “no-trade deal Brexit”.

He said the economic plan which will follow the Budget next month will contain a recovery fund to support the economy in an “agile and responsive” way.

Minister McGrath also said the impact of Covid-19 on the labour market has been “staggering” and that younger and lower paid workers have suffered a “hugely disproportionate hit”.

The Minister also said international travel will be addressed when the Government unveils the next stage of its Covid-19 response next week.

He said the plan will give “clarity and certainty” to the industry and that the ECDC (European Centre for Disease Prevention and Control) template in the context of international travel will form part of the plan.

On the budget deficit, the Minister said he hopes the public finances would keep to the lower end of the €25-€30 billion range.

Article source: Click Here

Consumer prices see biggest fall since 2010 in August – CSO

New figures from the Central Statistics Office show that consumer prices on average were 1% lower in August compared with the same month last year. 

This marked the sharpest annual fall since 2010, when the economy was hit hard by the global financial crisis.

Consumer prices have dropped on an annual basis for five months in a row since the economy first went into lockdown due to Covid-19. 

They were 0.1% lower on a monthly basis in August as the full reopening of the economy was kept on hold. 

The CSO said one of the main reasons for the decrease was a 4.4% fall in transport costs due to a reduction in air fares and lower prices for diesel and petrol. These decreases were partially offset by a rise in the cost of cars and higher prices for services in respect of personal transport equipment.

Communication costs fell by 8.4% while August also saw a reduction in the price of home heating oil, lower rents and a fall in the cost of electricity and gas. This reduction was partially offset by higher mortgage interest repayments, the CSO added.

August also saw lower prices for a wide range of foods including vegetables, sugar, jam, honey, chocolate and confectionery and mineral waters, soft drinks as well as fruit and vegetable juices. A 3.2% drop in the prices of clothing and footwear was also reported.

As Covid-19 restrictions reduce, the CSO said the continued unprecedented changes in household consumption patterns have also been reduced during August compared to recent months. 

It was estimated that households, on average, were unable to consume 2.7% of the goods and services in the Consumer Price Index basket of goods and services in August. 

These mainly consisted of the following items included in the CPI – package holidays, nightclubs and theatres.

Article Source: Click Here