In one of several macroeconomic scenarios outlined in its half-year report, AIB warned that a global credit crunch would severely impact the Irish economy and lead to a sharp rise in unemployment, with hundreds and thousands out of work. However, the bank estimated there was only a 1 in 10 chance of that scenario playing out.
A global credit crunch – a sharp decline in lending by the banks, usually in order to counter persistent inflation – could prove overly restrictive and lead to a “collapse in economic growth in 2024-25, exacerbated by geopolitical tensions”, the bank said, addressing one possible scenario.
While they said that financial conditions and “an elevation in banking system vulnerabilities” might be more likely to occur in the US, and that emerging economies could face debt distress if a credit crunch occurred, with economic growth in China possibly also “greatly curtailed”, the impact on Ireland would “hit harder than most” because of our “reliance on the multinational sector”.
The report warned that – in one of the least likely scenarios – that global downturn generates a deep recession, with GDP in major economies experiencing a significant contraction in both 2024 and 2025.
In this scenario, the bank said that “due to its reliance on the multinational sector, the Irish economy is hit harder than most, with GDP falling 2.9% and 2.8% in 2024 and 2025 respectively. This leads to a sharp rise in unemployment which helps to dampen inflationary pressures and allows central banks to aggressively cut interest rates in 2024-2025.”
AIB said that if that scenario came to pass, unemployment in Ireland could hit a high of 11.9% by 2027, which would leave hundreds of thousands of people without work, with levels of joblessness that have not been seen since the last financial crash.
“In that scenario, residential and commercial property prices would experience significant declines in Ireland and the UK”, the report said, adding that these declines “would be less severe than the previous collapse during the global financial crisis”.
The report examines three other scenarios: looking at the impact of both delayed rate cuts and a ‘quick economic recovery” – but says that the ‘base case’ is the most likely outcome of all forecasts, with Irish GDP projected to grow by a range of 2.4% to 2.6% annually from 2024-2026, and “solid growth in domestic demand and exports”.
“Conditions in the Irish labour market are expected to normalise after a period of strong performance. Unemployment is expected to increase slightly over the period 2024-2026, particularly in the UK, as labour market conditions loosen,” the report says.
Fears about a contraction in the US economy have mounted after figures last Friday from the Labor Department showed unemployment had risen to its highest level in three years, with a significant slowdown in hiring. The increase in the unemployment rate from 4.1% in June to 4.3% for July marked the fourth straight monthly increase.
The US Purchasing Managers’ Index (PMI) – which is survey indicating business conditions – also fell in July to 46.8 points, its lowest value in the last eight months, with a deterioration that came in even lower than analysts’ expected, with new purchasing orders shrinking month-on-month. A 50-point mark for the PMI indicates an expansion of activity in industry.
This morning, the latest PMI index for the Eurozone stood at 45.8 points. “This is yet another setback for those hoping for an economic rebound in Europe. The July result remains well below the 50-point mark that indicates an expansion of industrial activity,” one analysis said.
“The widespread belief that the recovery in the Eurozone would significantly accelerate in the second half of the year has not materialised. At the beginning of the year, it seemed the sector would recover from the downturn, but doubts that emerged in June have been exacerbated by a further decline in July,” commented Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
Subsequent reactions in the bond and equity markets indicated a fear amongst investors in an economic downturn, along with concerns regarding volatility in the Middle East, and the impact of an economic crunch in China where real estate market declines are causing concern.
AIB’s general Outlook said that “modest growth is anticipated for the global economy,” and that while the US economy would grow by 2.6% in 2024, growth in the Eurozone would be “sluggish” – acknowledging that there are signs that the “US economy is starting to cool following successive years of exceptional growth”.