In a place where ROI can just as easily mean the Republic of Ireland as return on investment, you might expect the economy to be somewhat wackier than most. You would be wrong.
While real GDP is likely to contract by 8.5% in 2020, the economy is expected to grow year-on-year by 6.25% in 2021 as a result of pent-up domestic demand—dare we say it—normalizing and the global post-COVID-19 recovery. So says the European Commission’s Summer 2020 Economic Forecast, which predicts a deep economic recession in 2020 despite the swift implementation across Europe of comprehensive policies in response to the pandemic.
In these times of global uncertainty, there is little interest in what has led up to this point. Everyone wants to know what is on the cards in the short term and how their domestic economies will fare in the months ahead. Ireland is no different.
Read on for a brief glimpse at what to expect for the country and the pharmaceutical sector during the current recession and beyond.
First, the Basics
Stay-at-home restrictions mean that work stopped for everyone not in essential industries. When we work, we produce an output. That output contributes to the GDP. The gross domestic product of a country is widely taken as an indicator of economic health.
GDP growth is no indicator of human well-being as many economists since Keynes will tell you. The inadequacy of GDP growth figures to paint a true picture accounts for rosy general forecasts despite predictions of rising unemployment.
In short, the current situation calls for a temporary tightening of belts. This becomes even more evident, as news of fresh outbreaks of the new Coronavirus start appearing some five months after the first lockdowns came into effect.
The IMF says that a country is in recession if the GDP growth is negative for two consecutive quarters. In broader terms, a recession is a period of economic decline. Yet the EC’s Summer 2020 forecast figures show quarter-on-quarter GDP growth in Q4 2019 at 1.7% and that for Q1 2020 at 1.2%.
It’s no surprise that what followed in Q2 2020 is a whopping negative q-o-q GDP growth of -15.3%. The forecast for Q3 2020 is a more palatable -1.5%, with a downright cheery prediction for Q4 2020 of positive GDP q-o-q growth of 3%.
So, massive shrinkage could well give way to a determined recovery and a recession that is shorter than the 18 months of global recession resulting from the 2008/2009 crisis.
The thing to remember about economic forecasts is that they are always made based on a set of assumptions. The above figures seem to assume that the worst impacts of COVID-19 have already occurred. They also assume that recovery efforts will swing into action almost as swiftly as the pandemic lockdown measures did.
Consequences of Economic Recession
The consequences of a recession include:
- Lack of new hires
- A significant drop in consumer spending power
- High interest rates
- Lack of industrial demand and hence supply
For most people recession means they cannot find a suitable job. We’ll focus on the pharmaceutical sector in a moment and look at why this job market is set to remain healthy.
The prerequisites for a healthy job market are:
During a recession, all these things are negatively affected, which, in turn, has a negative effect on people’s lives. In April 2020, the Central Bank of Ireland forecasts a loss of around half a million jobs by the end of 2020. This is an obvious indicator of a drop in production across sectors and hints at a slower than hoped-for recovery.
This worries skilled workers in most sectors. Without demand for their skills in the workplace, the future looks bleak. The chances of them being productive members of society would be minimal.
Social Justice Ireland says the circumstances of this recession are very different from those in 2008/2009. Of the lessons learned from the last time around, the government’s fiscal response is the most significant. Government bail-out of Irish businesses is essential for recovery at a reasonable pace.
The big difference now compared to 2008/2009 is that the Irish Government can borrow money at a very low cost. In 2008/2009 yields on 10-Year Irish Treasury Bonds were around 5%. Compare that to the 2020 figure of 1%.
Because low-cost credit is available, the government has greater room for maneuver. This should go a long way toward Ireland avoiding many of the austerity-type measures they implemented during the previous major period of economic downturn less than a decade ago. Indeed, the Bank of Ireland is working hard to maintain reasonable levels of liquidity in the market.
Ireland might well prove to be resilient. After all, it clawed its way through the EUR 85 billion rescue deal signed by the Irish State in November 2010. That three-year plan consisted of €22.5 billion from the IMF, and €45 billion from the EU and bilateral lenders UK, Sweden and Denmark.
Irish authorities acknowledge that IMF expertise contributed much to the successful rebuilding of the economy at the time. Ireland will reap the benefit of that experience is this 2020 economic recession.
The Irish economy needs a major injection of government spending to reduce the supply-side shock engendered by COVID-19 mitigation measures.
Support for Workers and Businesses
As of May 2020, some 28% of the labor force was receiving some measure of government support. Such support has been either in the form of the special Pandemic Unemployment Payment (589,000 people) or the normal live register of those receiving Jobseeker’s Benefit (214,700 people).
Aside from that, the Covid-19 wage subsidy scheme is bolstering the efforts of some 53,000 businesses that employ 456,200 people. Despite these laudable and timely measures by the Irish government, the economy expects a shrinkage of around 8% by year-end.
One positive thing to emerge is that employee support action has protected around 75% of disposable income. Be that as it may, a consumer spending drop of 9% is forecast for 2020 as a whole.
The above measures are designed to ensure any troughs among intermittent peaks on the road to economic recovery are as shallow as is reasonable. It is what any country that went into the period of COVID-19 mitigation with a stable economy is seeking to achieve. Ireland was fortunate to have had health money reserves going into the pandemic stay-at-home situation.
June Butler, head of SME banking and sectors at Bank of Ireland, anticipates a phased recovery. She is quick to acknowledge that the various sectors will need tailored solutions.
The central bank’s monthly publication, the Economic Pulse shows that business sentiment rose in July 2020 from the previous month. The index reflected improvements in trading conditions in all four major sectors (Industry, Services, Retail, and Construction).
Consumers are showing some caution in this, Ireland’s third phase of its post-COVID-19 re-opening plan.
The Pharmaceutical Sector in Ireland
Ireland is a world player in pharmaceutical production, and a leading location for the European pharmaceutical industry. Its strength lies in having production plants representing 9 of the 10 largest pharma companies in the world. Pharmaceuticals before COVID-19 accounted for over 50% of all exports from Ireland
While international investment in this sector might have slowed somewhat, it has by no means stopped. As recently as July, the local press carried an announcement that a pharma manufacturing company is opening a new facility in Dublin. This represents approximately €7 million in private investment over the next 18 months and will create 140 new jobs.
Like much of the pharmaceutical sector in Ireland, investment from multinational companies already well-established in Ireland boosts production and exports. For employers and job seekers alike, MedPharm is at the center of an established network that matches the right candidate with the right job. World-class efficiency and constant innovation in this sector is likely to see pharmaceutical companies regaining the health they enjoyed pre-COVID-19.
Other factors are at play too. Aside from the impact of the COVID-19 pandemic, uncertainty surrounds the implementation of Brexit. The Republic of Ireland has shown dexterity in its diplomacy as a member of the European Union on this issue.
As one of the EU’s richest states, it is well-placed to ensure negligible fallout for Ireland as a result of the exit from the EU of the United Kingdom and Northern Ireland.
A Complicated Path to Recovery
Will Ireland recover. The global nature of the current economic situation complicates matters. Since much of its revenue is export-dependent, how the world deals with the situation will influence recovery in Ireland. On the domestic front, Ireland is dong everything within its power to return to steady economic growth as soon as possible.
Exports are set to grow year-on-year by 0.8% in 2021. The planned gradual resumption of economic activity within the pharmaceutical sector does not take into account any boost to production that might result if a COVID-19 vaccine is developed. People with the skills are prepared to leap into action as soon as this occurs.
Although still mired in uncertainty as to when one will be ready, a reliable COVID-19 vaccine sooner rather than later would be a welcome shot in the arm for the world economy and for the economy of Ireland. It would boost morale in businesses everywhere. It would also set the stage for a return to normalcy – and only having to deal with the usual peaks and troughs experienced in international trade.
Recovery from economic recession is contingent on sustained commitment through government policies to weather short-and medium-term difficulties. It would seem that Ireland has got the recipe right this time around. And it would seem that Ireland has the necessary strength to go the distance to reach stable economic growth within the next eighteen months.
That’s about as certain, or as optimistic, as we can be for the moment.