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.

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UK must honour agreement to get free trade deal – Varadkar

Tánaiste and Minister for Enterprise, Trade and Employment Leo Varadkar says he does not believe a free trade agreement can be reached if the UK does not honour the UK EU Withdrawal Agreement.

Mr Varadkar said he hopes that proposed new Brexit-related Westminster legislation is simply “sabre rattling”, adding that  the strategy and behaviour of the British government a year ago was one of brinkmanship and threatening to crash out of the EU and he hopes that this is just another installment of this.

Speaking on RTÉ’s Morning Ireland, Mr Varadkar said that it was “extraordinary” to hear comments by the Northern Secretary Brandon Lewis yesterday, particularly as they were made by a cabinet minister in a respected liberal democracy.

Mr Varadkar said that Britain is not a rogue state and these comments set off alarm bells in Dublin.

The Tánaiste added that he believes the statements have backfired and governments around the world  are now “scratching their heads” and wondering if they should ever enter into treaties or contracts with the British government, if this is their attitude.

He pointed out that the Withdrawal Agreement was ratified by the House of Commons and the House of Lords.

Mr Varadkar said he believes the UK does want a deal but there are sticking points around the fisheries and state aid.

He said that he has faith in EU Chief Brexit Negotiator Michael Barnier to “make the right call”.

Minister for Foreign Affairs Simon Coveney yesterday described Northern Ireland Secretary Mr Lewis’ admission that the new Brexit-related legislation would break international law as “gravely concerning”.

Mr Coveney described the UK’s positioning as “hugely problematic and illegal”, but called for calm.

Mr Lewis told MPs in the House of Commons yesterday that the UK government planned a new bill, to be published today, that would override elements of Prime Minister Boris Johnson’s Brexit deal with Brussels.

Downing Street had insisted changes in the Internal Market Bill were simply “limited clarifications” to protect the Northern Ireland peace process if they failed to secure a free trade deal with the EU.

But Mr Lewis provoked a furious reaction when he confirmed to MPs that the legislation would breach international law in a “very specific and limited way”.

The former Conservative Party MP Dominic Grieve has said it is shocking that the UK government plans to go ahead with implementing a domestic bill that it has admitted breaches international law.

Speaking to RTÉ’s Morning Ireland, Mr Grieve, who is a former Attorney General of England and Wales, said that “to suggest it’s proper to decide to trim and alter an international obligation that was only entered into eleven months ago is completely unacceptable”.

Mr Grieve said that to suggest the UK government did not understand the implications of the withdrawal agreement when they signed up to it “is ridiculous”.

He said that it is impossible to see how the current Attorney General Suella Braverman and the Lord Chancellor Robert Buckland can remain in office without destroying their reputations, as they must be seen to uphold the rule of law.

The Government is set to announce additional measures today to help businesses prepare for Brexit.

The announcement will be made by the Taoiseach Micheál Martin, Tánaiste Mr Varadkar, and the ministers for Foreign Affairs and Transport.

It comes as businesses have been urged to intensify preparations for 1 January, amid warnings that new rules could prevent Irish firms from trading smoothly with Britain.

There is also the likelihood of significant delays in moving goods.

Mr Varadkar said a €9,000 grant will be made available to any business to take on somebody or redeploy someone and put them in charge of their customs procedures.

This is not a drill, Mr Varadkar said, “it is not good stuff” but the impact to businesses can be minimised.

Mr Varadkar said he knows that businesses are being pulled in many different directions as a result of Covid-19 but it is important to be as prepared as possible. 

He said that businesses can prepare for some certainties including customs procedures and checks, and all of this will be laid out today.

He acknowledged that businesses cannot prepare for the possibility of tariffs or quotas but that the Government will continue to work with European partners on securing a free trade agreement so this can be avoided.

The Tanaiste said he did not believe that British proposals would give rise to a border between North and South but “it would create difficulties for sure”.

Meanwhile, the latest round of talks on a post-Brexit trade deal continue in London between the EU’s chief negotiator Michel Barnier and the UK’s David Frost.

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Euro zone GDP revised up, but still a record drop

The euro zone economy declined by slightly less than initially estimated in the second quarter, but the drop was still the sharpest ever as consumer spending caved in due to Covid-19 restrictions. 

Gross domestic product (GDP) fell by 11.8% from the previous quarter and by 14.7% year-on-year, data from the European statistics agency Eurostat showed today. 

That compared with initial estimates of respectively 12.1% and 15% reported at the end of July. 

The contraction in the April-June period, during with Covid-19 restrictions were in place across the continent, was the steepest in a data series that began in 1995. 

In the first three months of this year, the contraction was already 3.7% quarter-on-quarter and 3.2% year-on-year. 

The sharpest second-quarter declines from the previous quarter were in Spain, Greece, Portugal and France. 

Household spending had the greatest negative influence, cutting 6.6 percentage points from growth, followed by gross fixed capital formation at -3.8 points. 

Net trade, government spending and inventory changes also had a negative impact. 

Eurostat also said that euro zone employment fell by 2.9% in the second quarter, also the sharpest decline since records began in 1995, after a 0.3% drop in the first three months of 2020. 

The impact was moderated by government support schemes, but the decline in hours worked, at 12.8%, was more pronounced.

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Central Bank finds weaknesses in some credit unions

Weaknesses have been identified in a number of credit unions as part of a supervisory analysis conducted by the Central Bank.

The difficulties, found as part of the fourth Credit Union Supervisory Commentary Report, were found in a number of risk categories, including governance and credit underwriting.

“We acknowledge that some credit unions have made progress towards addressing prudential concerns,” said Registrar for Credit Unions, Patrick Casey.

“However, it is a concern that we continue to identify weaknesses in core areas including credit underwriting – clearly there is still more work to be done.”

“At a time when so much attention centres on lending capacity, it is essential that credit unions address the fundamental weaknesses identified in these areas.”

The analysis provides an overview of the risk issues that were identified during the process and aims to inform all credit unions on the nature and type of risks identified during Central Bank supervisory activities last year.

Some of the 550 individual problems were recurring, including in fundamental risk areas such as credit underwriting.

The report also details what is expected from credit unions by the supervisor and the bank said it expects all credit unions to consider and act on the findings.

“Given existing commercial challenges facing credit unions and additional challenges presented by COVID-19 and Brexit, it is critical that credit unions maintain strong core prudential foundations,” said Mr Casey.

“Strong governance, risk management and operational capabilities enable credit unions to provide core services to members, while they seek to undertake prudent business model change.”

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UK seeks ‘more realism’ from EU ahead of Brexit talks

The UK has demanded “more realism” from the European Union ahead of crucial post-Brexit trade talks, which get under way in London.

However, the mood was soured by reports that the British government was looking to rewrite the Withdrawal Agreement that the two sides have already signed.

British Prime Minister Boris Johnson’s chief negotiator David Frost, said “we must make progress this week” if an agreement is to be reached by the end of a post-Brexit transition period in December.

For that, “we need to see more realism from the EU about our status as an independent country”, he said ahead of the talks with the EU’s chief negotiator Michel Barnier.

“If they can’t do that in the very limited time we have left, then we will be trading on terms like those the EU has with Australia, and we are ramping up our preparations for the end of the year.”

Talks have been deadlocked for months over issues such as the extent of EU access to UK fishing waters, state aid and fair competition rules.

Both sides say a deal must be agreed by a mid-October EU summit.

But there was concern in Brussels after The Financial Times reported Mr Johnson planned to legislate to override parts of the Withdrawal Agreement struck before Britain left the EU in January.

“Everything that has been signed must be respected,” Mr Barnier warned, saying he would discuss it with Mr Frost.

Taoiseach Micheál Martin said the UK’s trade talks with the European Union would be rendered “null and void” if the Withdrawal Agreement it signed up to is not implemented in full. 

“The Withdrawal Agreement is an international treaty and we expect the UK government to implement and to adhere to what was agreed. We trust them to do so or they would render the talks process null and void”, Mr Martin told the Irish Examiner in an interview. 

The FT said legislation to be put before the UK parliament this week would undermine agreements relating to Northern Ireland customs and state aid.

Under the protocol, Northern Ireland will follow some of the EU’s rules to ensure the border remains open.

Mr Johnson agreed to the Withdrawal Agreement last year, but he now believes there is an “unforeseen” risk that it will leave Northern Ireland isolated from the rest of the UK, the Daily Telegraph reported. 

“I trust the British government to implement the Withdrawal Agreement, an obligation under international law and prerequisite for any future partnership,” European Commission President Ursula von der Leyen said.

Mr Johnson’s spokesman said the UK government was “fully committed to implementing the Withdrawal Agreement and the Northern Ireland protocol, and we have already taken many practical steps to do”.

But he said it was taking “limited and reasonable steps to clarify specific elements” of the protocol in UK law, to “remove any ambiguity”.

“This would be a very unwise way to proceed,” Minister for Foreign Affairs Simon Coveney said in response to the FT report.

Sinn Féin leader Mary Lou McDonald said the UK would show “total disregard for the lives and concern of the people of Ireland” if it backtracked on the Brexit deal.

Belgian MEP Philippe Lamberts said that without an explicit commitment from the UK that they “intend to abide by their signature” and honour the Withdrawal Agreement in full, there is no point in negotiating another treaty on the future relationship with the UK. 

Mr Lamberts, who is a member of the European Union’s Brexit Steering Committee, said conditions within the agreement that give “special treatment to Northern Ireland” are something UK Brexiteers hate but “that was the price of the deal”. 

Speaking on RTÉ’s Morning Ireland, he said the agreement was negotiated for more than a year under two British prime ministers, including a renegotiation with Mr Johnson, and has been “sealed and signed” by him and ratified by both the UK and the EU Parliament. 

Mr Lamberts said the UK cannot “unilaterally clarify” something that has been agreed between two parties. 

Jitters have been felt on the currency market, where the pound slid against the dollar and euro on fears that the UK-EU talks would fail and severely disrupt trade ties.

Some analysts, however, suggested the row over Northern Ireland was a move by London to raise the pressure in the trade talks.

Tánaiste Leo Varadkar said the increased rhetoric from London and Brussels was inevitable “sabre-rattling” and “posturing” as the deadline approached.

Mr Johnson has said that failing to reach agreement would still be a “good outcome” for Britain, dubbing it an “Australia-style” deal.

However, Australia trades with the EU under World Trade Organization rules and tariffs, which would cause significant disruption to cross-channel trade.

Britain formally left the 27-member EU on 31 January but remains bound by EU rules until the end of December while it tries to thrash out new terms of its relationship.

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Economy in recession over impact of Covid-19 restrictions

New figures from the Central Statistics Office show that the economy contracted by 6.1% during the second quarter of 2020 due to the impact of the Covid-19 restrictions – the biggest quarterly drop ever recorded.

This means the economy is now in recession after an initial estimate that it expanded in the first quarter was revised downwards.

A recession is defined as a fall in GDP for two quarters in a row.

Today’s figures show that Gross Domestic Product (GDP), a measure of the total output of an economy, shrank by 6.1% in the three month period.

When the profits of multinationals were stripped out, as measured by Gross National Product (GNP), the economy contacted by 7.4%, the CSO added.

The CSO said the impact of the Covid-19 restrictions varied across the sectors of the economy in the three month period from April to June.

Industry and government spending were the only sectors which continued to make a positive contribution to economic growth in the three month period.

But sectors focused on the domestic market experienced significantly lower levels of economic activity in the quarter, with construction contracting by 38.3% and the distribution, transport, hotels and restaurants sector contracting by 30.3%.

Activity in the Agriculture, Forestry and Fishing sectors slumped by 60.6% while the Arts and Entertainment sector saw activity sinking 65.5%.

Personal consumption of goods and services, a key measure of domestic economic activity, also decreased by 19.6% in the three month period.

The CSO also said that modified domestic demand, a measure that strips out some of the ways large multinational firms can distort GDP here, decreased by 16.4% in the second quarter.

The economy declined by 3% on an annual basis, the CSO added.

Finance Minister Paschal Donohoe said today’s CSO figures show the largest quarterly decline in GDP on record, with the second quarter fall of 6.1% surpassing the 4.7% decline recorded in the fourth quarter of 2008. 

“However, the hit was not as severe as many of our trading partners, for instance the UK, euro zone and the US where GDP declined by over 20, 12 and 9% respectively in the same period,” Mr Donohoe said.

The Minister said that overall the numbers are broadly as expected based on dataflow on the second quarter released over the course of the summer. 

“They very much highlight the dual economic impact of the pandemic with net exports positively contributing to GDP in year-on-year terms on the back of robust growth in pharma exports, while the domestic economy suffered a severe hit,” Mr Donohoe said. 

“Despite the severity of the national lockdown, a large portion of manufacturers continued to trade and this is reflected in our export numbers. However many of our jobs-rich domestic sectors were temporarily closed giving rise to the large contraction in domestic demand seen today,” he added.

The Minister for Finance said today’s CSO data shows the impact on jobs, income and investment during a quarter when the Covid-19 pandemic was doing the most damage here. 

Paschal Donohoe said the effect on the economy had seen the biggest contraction over a 12 week period since records began. 

He said the expected impact had been the reason why the Government had introduced measures like the Temporary Wage Subsidy Scheme and the Credit Guarantee Scheme.

The Minister said indicators available to Government show that during the third quarter there was a very strong pick-up, with the economy moving beyond the economic effects seen in the second quarter. 

What the Government is doing now, he added, was putting together Budget 2021 and the National Economic Plan that will help the country move through these kinds of challenges.

He made his comments at the launch of the Credit Guarantee Scheme today.

Commenting on today’s CSO figures, Neil Gibson, chief economist at EY, said that an economic contraction of 6.1% would normally be cause for alarm, but today’s figures are well above the level expected by most forecasters and are being met with a sense of positivity. 

“The contraction will be considerably less than others in Europe and will likely keep Ireland atop the headline growth charts, albeit with the most severe quarterly contraction ever recorded,” Mr Gibson said. 

But he said that, as always with Irish GDP, the headline figure does not tell the full story. 

“A major contributing factor to the comparatively modest contraction was a very sharp fall in imports, down over a third in the quarter. This was largely due to falls in Intellectual Property imports as multinationals paid less royalties back to overseas parent companies,” Gibson said.

He also said the figures provide the Government with a tricky messaging challenge as the public may well feel that this means they have considerable spending available to support the economy, but this will be only partially true. 

“Today’s figures, coupled with relatively robust early year tax figures should not be downplayed, but taken in context with other data the severity of the Covid-19 impact is still very clear. Nevertheless, forecasters are likely to be revising up their Irish growth estimates for 2020,” the economist added.

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Pound falls on threat to Brexit divorce deal

Sterling fell to a 12-day low against the US dollar and the euro today as Brexit talks veered into fresh crisis after Britain threatened to undermine its European Union divorce deal.  

The pound was down 1% at $1.3145, its lowest level since August 26, while against the euro, it touched a low of 89.90 pence, reaching the same milestone. 

Britain is reportedly planning new legislation that will override key parts of the Brexit Withdrawal Agreement – a step that, if implemented, could jeopardise the January treaty and cause frictions in Northern Ireland. 

Sterling had enjoyed weeks of rallies as the dollar weakened and investors stayed on the sidelines.

But as traders return from their summer holidays and the deadline for a post-Brexit trade deal looms, the UK currency is looking more vulnerable. 

Britain formally left the EU in January but is currently trading on the same terms as before its exit during a transition period that runs to the end of this year. London and Brussels have both said October is the deadline for clinching a deal on post-Brexit trading arrangements. 

As time slowly runs out, any negative Brexit-related headline prompts traders to sell the pound, already beset by woes such as a deep economic recession caused by the new coronavirus and an above 100% debt-to-GDP ratio.

Another scare is how the British labour market is going to perform once the government’s furlough scheme runs out at the end of this month.

No extensions are expected and analysts say this could trigger massive waves of unemployment. 

British finance minister Rishi Sunak’s decision to scrap stamp duty on house sales up to a certain amount until March next year has helped trigger a mini rally in the housing market. 

Prices jumped by the most since 2016 in August to hit a record high, mortgage lender Halifax said today, mirroring a report last week from Nationwide, a mortgage provider. 

Today’s news on Brexit “is just the cherry on top of the cake” for the beleagured UK currency, said Jordan Rochester, currency analyst at Nomura. 

“We’ve had weeks of pretty negative stories about the UK doubling its fishing quota, which would not be agreed to by the EU. We’ve got the state aid regimes still not being laid out as well by the UK side. So I think sterling is going to underperform here,” he said. 

Rochester expects the British pound to continue falling against the euro in coming weeks ahead of an EU summit due in mid-October, forecasting the pound to trade around 92 pence going into the meeting. 

“And if we do get an actual announcement of no deal, prepare for a hard Brexit, the pound should continue to weaken, we’re talking something like 95 to 98 pence against the euro,” he added.

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Eurozone economy stalls as north-south divide emerges

The euro zone’s recovery ran out of steam midway through the third quarter, with gauges of activity pointing to contractions in Italy and Spain.

While manufacturing output rose markedly in August, the larger services sector saw only marginal growth, according to an IHS Markit report. Orders increased at a slower pace, job cuts continued and confidence about the outlook eased. A separate report showed an unexpected decline in retail sales in July.

“The rebound has lost almost all momentum,” said Chris Williamson, an economist IHS Markit. “The autumn is likely to still see the economy rebound strongly from the collapse witnessed in the spring,” but “the survey highlights how policy makers will need to remain focused firmly on sustaining the recovery”.

Coming in a week that saw the euro-area inflation rate drop below zero for the first time in four years, the PMI weakness is another worrying sign for the European Central Bank.

Policy makers meet next week, though it’s not clear if they’ll boost stimulus again just yet.

The decline in euro-area retail sales follows big gains in May and June as lockdowns were eased. But job concerns as unemployment edges higher could mean consumer favor saving over spending, which would damp retail demand in the coming months.

Governments are also trying to help the recovery along with more stimulus spending. France this week unveiled details of a €100bn stimulus plan, and German Chancellor Angela Merkel’s parliamentary caucus backed plans allowing for further extraordinary deficit spending next year.

Markit’s composite index of both sectors fell to 51.9 in August from 54.9 in July. Readings for Germany and France eased, while Italy slipped slipped below the 50 line that divides expansion from contraction.

The report also pointed to an ongoing squeeze on profit margins, with businesses forced to cut prices to help sales even as costs increased.

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Resilient taxes can’t match ballooning Government spending as €9.452bn defecit recorded

The amount of tax being collected by the State has continued to defy the scale of the pandemic economic crash but nowhere near enough to fund ballooning spending, new Exchequer data shows.

The State recorded a deficit of €9.452bn for the nine months to the end of August as government spending dramatically outstrips income.

Tax revenues for the month of August was €3.095bn, down just €11m compared to August 2019. Declines across most tax heads were compensated by increases in VAT and Corporation Tax receipts.

For the year so far, tax receipts of €34.248bn are down 2.3pc despite the hit to the economy from the Covid crisis. Income taxes have generally held up, helped by the fact that so far the higher earners who pay the bulk of income tax have been less likely to lose their jobs than lower paid and younger workers in sectors like hospitality and retail.

Combined with strong corporation tax receipts that has helped compensate for declines across most other revenue streams.

The bigger impact of the pandemic is on spending, which has ballooned dramatically since March, funded by increased government borrowing.

Total net voted expenditure to the of end of July was €43.2bn, up 28pc on last year.

The rise is driven by the State’s response to the Covid-19 pandemic, including a sharp rise in health spending and spending by the Department of Employment Affairs and Social Protection on wage supports and job subsidies.

One bright spot in the numbers was a payment of €2bn from NAMA to the Exchequer.

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Germany plans to borrow €80bn to see out Covid crisis

German Finance Minister Olaf Scholz is working on a budget for next year that would see Berlin take on net new debt of at least €80bn to fund more measures in the fight against the coronavirus pandemic, a source familiar with the matter said yesterday.

The move underlines Mr Scholz’s determination to move Germany further away from its former image as Europe’s austerity champion and cement Berlin’s new role as the biggest spender in the eurozone’s struggle to recover from the Covid-19 pandemic.

The exact debt figure for 2021 is still subject to negotiations within Chancellor Angela Merkel’s conservative-led coalition government, but Mr Scholz is trying to avoid net new debt exceeding €100bn in 2021, the source told Reuters.

The step will require another suspension of Germany’s constitutionally-enshrined debt limits after Berlin already abandoned them this year, though Mr Scholz is determined to stick to the fiscal rules from 2022 onwards, the source added.

A finance ministry spokesman declined to comment.

Mr Scholz asked parliament this year to suspend the debt brake in the constitution and allow the federal government to take on record new borrowing of some €218bn.

This means that Germany’s combined net new debt for 2020 and 2021 in the coronavirus pandemic could surge above €300bn.

Officials have said Germany expects its debt-to-GDP ratio to jump to around 77pc in 2020 from just below 60pc in 2019.

The overall public sector budget deficit is seen reaching 7.25pc of GDP this year after a budget surplus of 1.5pc last year.

The finance ministry plans to update its tax revenue estimates next week.

This will be followed by Mr Scholz’s proposal for the federal government’s budget in 2021 which the cabinet is expected to pass on September 23. Covid has seen all governments spend more.

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