Week Ahead (9 March)

W/C Monday, 9th March – Scale of challenge presented by coronavirus to inject impetus into coalition negotiations with unity government a realistic outcome

With internal modelling at the Irish Department of Health (DoH) reportedly showing that 40% of the Irish population, or 1.9 million people, will fall ill with coronavirus, government formation talks will recommence this week with a renewed sense of urgency. Previous ‘red lines’, such as the refusal by both Fianna Fáil (FF) and Fine Gael (FG) to enter coalition with Sinn Féin (SF), will be severely tested by the prospect that, according to the DoH’s internal modelling, in the best case scenario, 30% of the Irish population will fall victim of the virus with 50% falling ill in the worst case scenario.

The likelihood of a dramatic shift in negotiating positions was well demonstrated by FF’s Justice Spokesman Jim O’Callaghan, who has led the FF frontbench’s heretofore refusal to negotiate a programme for government with SF, publicly acknowledging that the party may have been “too definitive” in ruling out SF. While this will not necessarily result in a FF-SF tie-up, given the enmity between the leaders of the two parties, it strengthens the possibility of the formation of a national unity government to deal with the crisis.

Although the Dáil is scheduled to remain on St Patrick’s Day recess until Thursday 19 March, we would anticipate government formation negotiations to accelerate in the coming days with the possibility that the Dáil is recalled before then.

W/C Monday, 9th March - Europe to ramp up response to Coronavirus with Christine Lagarde under pressure to deliver at Thursday’s ECB meeting

With the virus having been detected in every EU member state, Europe will accelerate its efforts to contain the spread of the coronavirus this week. Italy, the most affected country, has allocated €7.5billion for the emergency which will see its deficit increase to 2.5% of GDP. This will see it deviate from the requirements of the stability and growth pact and it is difficult to see the Commission objecting to this given the seriousness of the outbreak and the immediate economic impact it has had.

At 2.30am on Sunday morning, Italian Prime Minister Giuseppe Conte announced that from yesterday until 3 April, any movement within, to and from Lombardy and 14 other provinces (mainly in the North) is prohibited, with exceptions allowed only in very limited circumstances, with 17 million people affected. The health system in the North is on the verge of the collapse with very few intensive care places still available in hospitals. The priority now is to stop contagion towards the South, where healthcare facilities are less advanced. The measures are directed only to people and not to the transportation of goods.

Although Germany opposed any coordinated EU response at last week’s Eurogroup, this morning it announced an increase of €3 billion in investments and we would anticipate significant spending increases across the EU Member States in the coming weeks. Ahead of its meeting this week, the ECB had reportedly preparing another round of targeted longer-term refinancing operations (TLTROs) which would be directed at SMEs in Italy and throughout the Eurozone. Given the scale of the market meltdown this morning, we would expect that it will go further than this, potentially by expanding the scope of its QE programme.

Although a 10 bp rate cut is priced in by markets, the ECB will be conscious of how poorly markets reacted to a 50bp rate cut by the Federal Reserve on Tuesday. Globally, the average interest rate of central banks across the globe is below 2008 levels and at an all-time low. It remains to be seen whether further reductions will prove effective in combating the coronavirus.

Wednesday, 11th March - UK budget to be announced

The new British Chancellor of the Exchequer, Rishi Sunak, will announce the first post-Brexit budget on Wednesday. Changes to tax, pensions, housing and social care are all likely to feature, as well as increased spending in the north of England as the Tories look to cement the support of voters who helped the party win an outright majority in December’s election. There is an expectation that the national insurance threshold will be increased, an extra €1 billion for social care services and an end to the freeze on fuel duty will be announced.

It is believed Sunak is currently re-working the budget to take account of the coronavirus outbreak, the extent of which only became clear after the official forecasts from the Office of Budget Responsibility were finalised several weeks ago. Measures being considered include the provision of emergency funding for the NHS in order to tackle the outbreak and a "time to pay" allowance for businesses which might struggle to meet tax payments due to virus-related cash flow problems. The OECD has cut forecast growth in the UK to 0.8% for 2020, taking into account falling production and weaker public demand.