Another decade, another recession/financial crisis/depression (delete as appropriate)?
WHEN US presidents, UK prime ministers and other leaders in politics and business take charge, the first 100 days of their leadership is always seen as critical.
Last Thursday marked 100 days since the first case of Covid-19 was reported to the World Health Organisation (WHO) at the start of January. The scale of the change, political intervention and business disruption that we have seen since then has been truly unprecedented.
And what happens in the next 100 days will likely be just as alarming and unprecedented. Indeed, the word unprecedented is now so overused that it no longer does justice to just how rare and extreme events have been.
Such has been the scale of the economic disruption that we are no longer making comparisons with the Global Financial Crisis (GFC) of 10-12 years ago but rather with the Great Depression of the 1930s. The scale of what we are seeing is therefore a once in a hundred years event.
One factor that differentiates it from the GFC is the fact that it is truly global. Indeed, China always resented the label given to the GFC as it was largely unaffected by it and China saw it as a western phenomenon rather than a global crisis. Today's situation is different though, and indeed it originated in China with the first Covid-19 cases being identified there.
Indeed, China was the single biggest factor stopping the world from going into a depression in 2009. Today, China has already seen an economic contraction in quarter one of 2020 and will not provide the engine of growth the global economy requires to avoid a significant recession. The global economy is now expected to shrink by over three per cent this year; that's twice the decline in 2009 and five times the fall during the 1975 OPEC oil shock.
The health emergency has triggered lockdowns, which has created an economic stop, and as a result economic indicators are falling at rates never seen before. For example, the UK economy is expected to see output fall by 13 per cent in one quarter (Q2 2020) alone. A rebound in Q3 and Q4 will still see the economy shrink by close to seven per cent for 2020 as a whole.
Even with a strong recovery in 2021, the UK economy is not expected to get back to pre-crisis levels until early 2022. One of the key differences about this recession and previous ones is the fact that the service sector around the world is enduring the sharpest declines.
What about Northern Ireland? Freak economic indicators are the order of the day here too. During the last recession, private sector output fell by 13 per cent in six years between the second quarter of 2007 and the second quarter of 2013. This time, we are likely to see an even bigger fall in just one quarter, not six years.
Similarly, last time around Northern Ireland lost over 41,000 jobs (in net terms) in just over three-and-a-half years. When you see the shuttering of the hospitality and retail sectors that has already occurred in March, some will say that we've seen more jobs lost than this in just three-and-a-half weeks.
The number of new applications for Universal Credit has already soared by 10 times the normal levels. And one economic report has said that over 250,000 jobs could be furloughed. In Northern Ireland, more than 80 per cent of manufacturing firms are reported to have put workers on furlough.
Against this backdrop it's not surprising that the Northern Ireland is expected to see its economy contract in 2020 at its fastest rate in a century. It is likely to be a contraction in the order of at least eight to 10 per cent. The last recession Northern Ireland had was more of a downward escalator with graduated decline over a period of time. This time around, it's more like a high-speed lift dropping straight down, but the recovery will be an escalator back up.
Whilst there have been headlines about the amount that has been wiped off the stock markets around the world – quarter one was the worst quarter for the FTSE 100 since 1987 with 25 per cent wiped off its value – what is of more concern is how many billions have been wiped off the economy, household incomes, firms' balance sheets, the labour market, and the property market.
Economists and property professionals alike assumed the extreme falls in the commercial and residential property markets witnessed in 2007-12 were a thing of the past and wouldn't be repeated. Not for the first time, they were wrong.
But what we are seeing this time around isn't a property downturn, it is a property freeze. Between 2006 and 2009, the number of residential property transactions in Northern Ireland plunged over 70 per cent. And it was similar in terms of the levels of falls in house building. Are we going to see next to no transactions take in place in Q2 2020, meaning falls of 95-100 per cent?
Unlike the stock market, it will be unclear for some time how much has actually been wiped off our property assets; it will take time for the market to find the price level that reflects the new financial and economic reality post Covid-19.
Thankfully though, whilst there is a transaction crunch, there isn't a credit crunch. So, the market should at least have access to the finance needed to help get things moving again whenever the lockdown lifts.
One of the long-term impacts of the current crisis is likely to be what it means for people's wages. This was meant to be the year that wages in the UK a Northern Ireland would finally return to their pre-crisis inflation-adjusted levels. This followed what was the worst decade for wage growth in 200 years. Pay cuts are now very much on the agenda. To cope with the fall off in demand and in order to survive, businesses are having to wipe huge amounts of money off their wage bills. Many people may not even have jobs to go back to after the crisis.
One of the positives is that the speed and scale of the response by government has been simply phenomenal, with the measures introduced previously unthinkable, and we are likely to see more in the next 100 days. This makes the current crisis different from the Global Financial Crisis. Whilst there was major and dramatic action taken in 2008, that has already been dwarfed by what has happened this year to date. It is clear that policy-makers are determined to do ‘whatever it takes' to avoid a Great Depression 2.0.
This crisis is almost like all of the previous crises rolled into one, including the financial crisis, the Eurozone debt crisis, the volcanic ash cloud hitting the airline industry, and everything else.
But whilst this makes it a crisis of gargantuan proportions, never underestimate human ingenuity, given its great track record of solving problems. So whilst the challenges at present are vast, the likelihood is that the solutions will continue to be so too.
Over the next 100 days, let's hope we continue to be as surprised by the response and the solutions, as we have been by the scale of the problem.
:: Richard Ramsey (Richard.Ramsey@UlsterBankCM) is Northern Ireland chief economist at Ulster Bank