A Look Back at the 2008 Crisis
These are unchartered waters. Ireland is now in effective lockdown. As the dust settles on the enormity of the health crisis, the economic challenge we face is similarly formidable. The ESRI warns that unemployment could peak at 18% this year, that incomes over the year will fall by 7%, and that public finances will also come under pressure. While those unemployment numbers do not incorporate the wage and income subsidies that will effectively reduce the numbers on the Live Register, they also do not incorporate the lockdown now in place. We’re still in for a rough ride. However, assuming the worst of the health crisis is over in a few months (an assumption based on no expertise), and with appropriate policies pursued afterwards, our economy should recover much quicker than it did 12 years ago.
The 2008/09 crash is usually remembered as being a severe financial and banking crisis. After all, the banks massively overextended themselves with property loans in the 2000s. When these loans subsequently went bust, it was clear that the banks were insolvent. A monumental bank bailout was enough to save the most important institutions, but lending, the oil that greases the wheel of a market economy, froze afterwards. On top of that, households reduced consumption to pay off accumulated debts. This, coupled with some harsh austerity, led to a protracted economic downturn.
It is not that this story is wrong, but it overplays the importance of the financial crisis per se. The downturn was in the first instance a result of lost demand due to the collapse of the property bubble, which is not quite the same thing. In 2006 around 93,000 houses were built. This fell to just 4,911 in 2012 and returned to 21,241 in 2019. Similarly, 13% of people in work were employed in the construction sector in 2006. This fell to 4.4% in 2012 and was back at around 6% in 2018, which is closer to average by international standards. And these are just the direct effects. Auctioneers, estate agents, retailers selling housing goods, and indeed the rest of the economy all experienced large knock-on effects.
In other words, there was massive overbuilding of housing as a quick buck could be made by building now and selling shortly after at a higher price. This fuelled the economy through direct and indirect employment, and through greater consumption. Even if there had been no financial crisis where, say, the banks were saved by the EU, Ireland would have still experienced a very large recession. There was simply too much lost activity and too many houses, which people did not need. Absent a large fiscal stimulus, double digit levels of unemployment were on the horizon.
The Reality Today
The crisis that besets us today is different. Obviously, it did not originate in financial or housing markets, but through the spread of a global pandemic. The shock to the economy today is also more severe. The hospitality and retail sectors combined are much larger employers than the construction sector and its offshoots. And that's to say nothing about the childcare and entertainment sectors, and the other industries that rely on face-to-face interaction. In the space of less than a few weeks unemployment may increase to or past the level that it took four years to reach after the previous crash.
Moreover, people are not spending today not only because many have lost their jobs, but also because they are prevented from doing so through social distancing. Even those who have seen no reduction in income are hoarding their cash. Add to that the general fear and uncertainty about what the future might bring and it's easy to see why the economy has come to a standstill. But that situation is quite different to what we had during the financial crisis when many wealthy people lost much of their income.
The point is that economic activity is primed to resume when fears about the public health crisis dissipate. There is no ‘overhang’ of housing and the incomes that have been lost are less to do with a permanent correction of an unsustainable bubble. Rather, they are employment losses arising from a temporary reduction in, or postponement of discretionary spending. Importantly, the government has introduced income supports and other measures to keep activity ticking over. This is in contrast to austerity last time round which had lasting effects. Arguably the biggest factor in the property crisis of recent years has been a labour shortage as there have been insufficient numbers of construction workers to ramp-up supply. Training apprentices all but stopped post-crisis. Whatever happens the construction sector in the coming weeks, that is unlikely to repeat itself.
Though the economy is currently in survival mode, it should bounce back faster this time if the health crisis subsides in the next few months. It will require a significant investment stimulus to repair some of the damage, which was not carried out last time. Of course, the ability to implement current and subsequent measures on a sustained basis will depend on factors significantly beyond the government's control - how long the crisis lasts, and whether the ECB or European authorities choose to provide finance and lower borrowing costs. In the meantime it’s about surviving and being ready to restart.
An earlier version of this blog appeared in The Journal last weekend: https://www.thejournal.ie/readme/coronavirus-economy-5058278-Mar2020/
Robert Sweeney is a policy analyst at TASC and focuses on issues surrounding Irish political economy and distribution. He has a PhD in economics from University of Leeds, which concentrated on financial markets and investors, banking, international macroeconomics, and housing. He is also interested in debates on alternative schools and methodology in economics, and ownership.