'Sudden and severe'
The bank’s latest economic bulletin published this morning (Friday) is devoted entirely to the “sudden and severe” impact of the virus, which it says is “fundamentally different in nature and scope from anything previously witnessed”.
The Central Bank adds that it is not possible to produce a conventional economic forecast due to the “extraordinary” uncertainty surrounding the situation, and the way economies across the world have come to a sudden stop.
It bases its estimate of the drop in GDP on its initial observations on the effects of the pandemic, and the assumption that containment measures and restrictions remain in place for a three-month period before being rolled back.
It warns that its estimates should be treated with a “high degree of caution” and warns of a risk that the figures could be worse.
“The near-term outlook for the economy is very unfavourable and, beyond that, the path ahead for economy depends on the path of the virus, both domestically and globally,” says the bank’s head of economics and statistics, Mark Cassidy.
He adds that the pace of any recovery will also depend on how much households and firms have been scarred by the downturn – and on the nature of any economic stimulus package put in place to boost the economy.
Efforts to contain the spread of Covid-19 have resulted in the widespread shutdown of businesses, mainly in the services sectors of the economy, with retail, food and drink, and accommodation, tourism and travel particularly affected.
The Central Bank puts the cost of Government measures to deal with the effects of Covid-19 – including increased health spending – at €8.2 billion, or 4.3% of economic output.
Coupled with an estimated 11.5% slide in tax revenue, this could lead to a general Government deficit of 6% of GDP.
The bank itself has already lowered the amount of capital it requires banks to hold in reserve, known as the CCyB, in an effort to keep credit flowing.
The Central Bank welcomes the measures taken by European countries to support their economies, but adds that a “unified and coordinated approach” would be the most appropriate response.
It acknowledges the growing calls from policy makers, academics and the media for a “common and significant response” from the euro zone.
Referring to Thursday’s figures showing that more than half a million people were either claiming unemployment or pandemic-related supports, the bulletin says further job losses are possible.
It adds that the unemployment rate could hit 25% in the second quarter of this year.
The bank says the rate could begin to move gradually lower in the second half of 2020, but this assumes that domestic and global economic activity begin to recover.
It estimates that consumer spending could fall by about 10% this year, with business investment also slumping.
A decline in world demand will also hit exports, but this could be partly offset by sales of pharmaceutical products and medical devices by companies based here.
The bank also sees housing output falling to around 16,000 new homes, from 21,240 last year.