The virus shaping our economy is unpredictable and surprising
Covid-19 continues to be the predominant issue in all our lives. It also continues to be the predominant factor shaping our economy. And because it’s the Irish economy, it continues to be unpredictable and surprising.
Economists at the Department of Finance have been analysing different aspects of our Covid economy.
Its latest Economic Insights publication looks at two of the most striking aspects of what’s been happening since Covid struck.
You may have heard, or you may have noticed, that people are saving more. In fact, people have been saving a whole lot more. In the year to October, bank deposits by households increased by an incredible €12bn. That was twice the amount seen over the same period in 2019.
The savings rate, measured by the amount households have left after taxes and spending, doubled in the second three months of last year to 34%. Its long run average is 10%. In the third quarter between July and September, the latest for which we have figures, it fell back to 20% as more shops and restaurants (briefly) reopened. So we’re still saving a lot.
Ireland’s saving rate at its peak was higher than the UK’s (29%) and the eurozone average (25%).
So what happens next?
Several politicians have expressed the hope that this massive wodge of cash will deliver a consumer-led boom once Covid recedes. And it might.
But for added insights the Department of Finance looked back on what happened with Special Savings Incentive Accounts (SSIA’s), which were introduced back in 2001 to encourage savings.
What they found was that they did increase the savings rate during the years in which they were on offer and the savings rate did go down once they expired. But not all that dramatically – by around 2%.
Furthermore, they suggest that households may have been just as much influenced by particular conditions at the time, such as the dot come bubble bursting and rising property prices requiring higher levels of savings than the SSIA bonus or the giddy prospect of what to do with a nest egg of cash.
They quote a CSO survey conducted at the end of 2005 just before most accounts were due to mature. It found most households intended to spend around a third on consumer items, including cars and foreign holidays, 10% on debt repayments and just under half on continued savings or investment.
The analysis points out that higher income households, which probably account for most of the savings achieved during Covid, tend to save a larger proportion of any windfall gain. In this case savings made as a result of being unable to spend normally are a once-off event.
Also, if consumers do decide to spend their savings on foreign holidays or a big purchase like a car then the lion’s share of this money will go abroad.
So, it may turn out that any Covid-19 pot of gold waiting in the wings will not provide as big a boost as many hope.
Another facet of the Covid economy has been the resilience of our export sector, particularly pharmaceuticals. This sector, along with the tech sector, will probably be enough to make Ireland the only economy in the eurozone to record growth in 2020.
And that’s despite demand in the domestic part of the economy falling by over 6%.
The department’s analysis shows how the pharmaceutical and medical products industries here have seen demand for their products shoot up during the Covid pandemic.
While Irish monthly trade statistics are notoriously volatile (some months show massive increases, some months steep decreases…) the fact that exports of pharmaceutical products went up by 75% in March alone is a clear indicator of the demand from health systems around the world and the key role Ireland plays as a location for the manufacturing of these products.
46% of these exports went to the EU and 38% to the US.
40% of the growth in March was accounted for by just one product classification: antisera. They are blood serums which are used for vaccines which were undergoing intensive trials and research across the labs of Europe and beyond during the early onset of the pandemic.
Exports of disinfectants and sterlilisation products went up by a staggering 72%.
Demand for pharmaceutical products evened out over the year but remain strong as we head into this critical third phase of Covid. The Insights study estimates that two thirds of the 15% increase in demand for pharma exports from January to September was accounted for by Covid-related products.
These include diagnostic, testing and sterilisation kits. The increase in these products alone accounts for an additional €5.1billion in exports.
The Department believes that when Covid passes, demand will return to more normal levels.
This may all be cold comfort to the 58,000 people who signed on for the PUP over Christmas and the many, many more who will join them under this current lockdown.
But it proves – as it did during the financial crisis – that having an economy where people work and sell lots of different things is perhaps the most important economic policy of all.