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Irish economy well placed to rebound from Covid-19 – Davy

A new report from stockbrokers Davy said that while the outbreak of Covid-19 presents significant challenges, Ireland’s economy should prove to be far more resilient relative to the rest of Europe than it did in the last downturn. 

The stockbrokers noted that recent years have been characterised by a lack of credit demand, mainly due to Brexit uncertainty. 

They noted that over half of Irish SMEs now have no bank debt whatsoever compared to 25% in 2012. Similarly, bank lending to SMEs has declined from €60 billion to €20 billion over the past ten years. 

Irish household debt has fallen from a peak of €203 billion in 2008 to €135 billion, while new mortgage lending has been held in check by the Central Bank’s lending rules. 

Davy said that while many Irish households and SMEs will find themselves in financial distress due to the coronavirus outbreak, fiscal and macroprudential policy should help support incomes.

These supports will limit the scarring effects from the Covid-19 business shutdowns.

The Government has already rolled out a wage subsidy scheme and enhanced social welfare supports for those hit by job losses due to the outbreak of the coronavirus, similar to measures in Europe. 

Davy noted that the 45,000 people who have applied for mortgage payment breaks so far account for a fraction of the 533,000 job losses.

It said this perhaps reflects the fact that employment cuts have been in sectors – hospitality, retail and tourism – where workers are less likely to have mortgage debt.

The stockbrokers also noted that Central Bank Governor Gabriel Makhlouf has said that work is underway on a credit guarantee scheme targeted at SMEs.

Davy said the hit to Irish GDP from Covid-19 looks set to be at the upper end of its estimates given the 533,000 unemployment claimants. 

But the stockbrokers said the bigger question, however, is how quickly activity can recover, depending on how long business and travel restrictions remain. 

“Ireland’s export-oriented economy will continue to provide flexibility as in the last recession, but fiscal and macroprudential policy will support the recovery this time around,” Davy said. 

“Also, after a decade of deleveraging, many indigenous sectors were still at an early stage in the housing, credit and investment cycle – pointing to a latent recovery going forward,” the stockbrokers added.

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