Up to €5bn could be unleashed into the Irish economy from the savings accumulated by households during the pandemic once the impact of the virus starts to subside, the Central Bank has estimated.
But speaking during a lecture to students at NUI Galway, Central Bank Deputy Governor, Sharon Donnery, said much will depend on whether people have saved during the crisis out of precaution, or because they are worried about their future income.
"In this case, people are less likely to spend their increased savings, but to hold onto them. Research suggests that in these circumstance only about 5% of the extra savings may be spent on consumption in the economy," Ms Donnery said.
"If, however, the savings are being accumulated because people can't spend their income due to the restrictions that are in place, or what we might call 'deferred spending’ the savings may be ultimately viewed as ‘extra income’."
"And in this instance, research suggests that roughly half of the savings may be spent or consumed, which would suggest a boost to domestic demand."
Ms Donnery said the latest analysis suggests the so-called "pandemic savings" are more likely to be deferred spending than precautionary in nature.
"This suggests that the additional spending effects from pandemic deposit savings to date could be in the order of about €5 billion, or roughly 5% of the aggregate consumption for 2019," she added.
If this amount were to be spent, it would still leave a substantial amount of savings for other purposes and this could have implications, Ms Donnery claimed.
Were the funds to be used for deposits for home purchases for example, it could have implications for house prices, she stated, while if utilised for home improvements, this could increase demand that could divert resources from already much-needed housing supply, she warned.
The money might also be kept as savings and used to buy financial assets or pay down debt, although recent evidence suggests the latter is less likely.
She added that it is simply not possible at this stage to provide a timeframe within which this wall of cash might be unleashed into the economy and exactly what it might be spent on.
Ms Donnery also said the question of whether incentives should be used to channel the savings into particular types of spending is one that needs to be carefully explored, with risks of the various options clearly outlined to people.
Addressing the implications of the end of the pandemic for the Government supports, Ms Donnery said a broad range of labour market policies including training, hiring subsidies and employment activation programmes, will be important considerations as the economy recovers.
"Policy support will need to be maintained over the short-term in order to stabilise the economy," she said.
"And as the economy re-opens any ongoing current expenditure support should be targeted – in particular at getting people back to work, as I have outlined above – and temporary.
"The continued sustainability of the public finances is critical to avoid limiting the scope to respond to future crises."
A delicate policy trade-off will present itself for the rest of the year and into next year, Ms Donnery claimed, because if traditional insolvency triggers are implemented rapidly, many long-term viable yet currently distressed companies risk being liquidated.
But she added that on the other hand, perpetual forbearance and unlimited supports to all distressed SMEs would also damage our economy through the inefficient allocation of capital.
She said given current levels of uncertainty a continuation of current policies are appropriate until such time as the economy normalises.
"At that point, when companies have had a chance to trade and traditional financial signals become more meaningful, it will be imperative that our systems function smoothly so that restructuring of viable businesses can occur, and they can contribute to employment and growth of the economy," she claimed.
"At that stage, though, unfortunately it will also be evident that some firms will not survive and in that instance, its important that impediments to liquidation are eased so that liquidation of the least viable businesses is also possible."
"Thereby giving businesspeople and entrepreneurs the opportunity of a fresh start."
Regarding the question of whether austerity measures are inevitable to pay for the fallout from the pandemic, Ms Donnery said that while much of the necessary spending has been temporary, one area of concern would be if there were going to be a shift to more permanent spending which will have to be paid for.
Ms Donnery also told the students that when it comes to unemployment due to the pandemic, younger, female and less educated groups all come out worse.
While looking at household income, younger, lower income, renters, and single parents - over 90% of whom are women – are all relying most heavily on pandemic income supports, she said.
