THE IRISH ECONOMY has somewhat rebounded since the start of the pandemic but the recovery has been “partial” and “uneven”, according to the Central Bank.
Published this morning, the Central Bank’s fourth and final Quarterly Economic Bulletin for 2020 highlights the fact that in many parts of the economy, activity remains well below pre-pandemic levels.
Consumer spending and construction activity have recovered strongly since the reopening of the economy.
The Covid-adjusted unemployment rate is now expected to average out at 15.1% of the labour force this year — down from 29% in April — before falling to 11.1% in the first quarter of next year.
But the Central Bank the Central Bank noted a “strong divergence” between general demand levels at home and the performance of Irish exports abroad.
On the one hand, it expects domestic demand to fall by at least 7% for the full year.
On the other, the Central Bank said that the resilience of Irish export growth has buoyed economic output overall and “significantly mitigated the fall in GDP” experienced in the first half of the year.
“The resilience of exports reflects strong growth in high-value exports of pharmaceuticals, computer processors and business services,” according to the Central Bank.
Consequently, it has dramatically revised upwards its full-year forecast for Irish GDP from a contraction of at least 9% predicted in its July bulletin to just 0.4% in its most recent bulletin.
Irish GDP is then expected to increase by 3.4% in 2022 and 4.7% in 2021 in the Central Bank’s baseline scenario.
Mark Cassidy, Director of Economics and Statistics at the Central Bank said that this would mean just one year of lost GDP growth, representing “a better performance than any other advanced economies that I’m aware of”.
This baseline scenario assumes that efforts to contain the virus are only partially successful over the coming months and that some targeted “containment measures” have to be put in place.
“The type of additional restrictions imposed in a number of counties during August and September broadly fit with this assumption,” the report says.
In a more severe scenario, the Central Bank “envisages a strong resurgence of the pandemic, leading to the restoration of widespread and stringent containment measures for a more prolonged period.”
It also assumes a general decline in international trading conditions as a result of a resurgence of the virus abroad.
In this scenario, GDP is projected to fall by 1.1% this year and a further 0.3% next year.
Asked if the containment measures referred to in the model were similar to the Level 5 restrictions recommended by the National Public Health Emergency Team (NPHET), Mark Cassidy, Director of Economics and Statistics at the Central Bank, said that it was impossible to speculate what restrictions will be put in place by the government.
But he said that while a reintroduction of more stringent measures would likely lead to the shutdown of parts of the economy, “we do think that experience shows it would recover quite quickly after that.
“So in comparison with our severe scenario, we think that the outlook for this year will be somewhat between the baseline and the severe scenario. But we think for next year, we will still be much closer to the baseline.”
Brexit
Both the Central Bank’s baseline and severe scenarios assume that Britain and the European Union fail to reach a post-Brexit free trade agreement deal before 31 December.
This would mean, the Central Bank explained, “a sudden and disruptive transition to a World Trade Organisation trading relationship,” which could shave 2% off Irish GDP in 2021.
This default arrangement would result in new tariffs being applied to goods imported from the EU to the UK from 1 January, 2021.
“Although the share of Irish goods exports to the UK has declined over time and currently stands at around 10 per cent, the agri-food sector is still heavily reliant on the UK market,” the report explains.
“Estimates suggest that applying the UK’s global tariff schedule to Irish exports to Great Britain would result in a tariff cost of between €1.35 to €1.5 billion. The imposition of tariffs of this magnitude would substantially reduce, or possibly eliminate, Ireland-UK trade in some products.”
Exports
According to the Central Bank, Irish exports “remained remarkably resilient throughout the second quarter, and the peak of the pandemic.”
The latest data reveals that Irish exports fell by just 0.2% in the second quarter of the year, despite an expected 19% decline in global demand.
However, this figure “masks significant divergent trends”, the Central Bank warns.
Exports of Irish goods increased by 7.6%, while exports of services fell by 8.1%.
The strong performance in the first category is chalked up to the increased demand for pharmaceutical goods produced in Ireland.
According to the Central Bank, “pharmaceutical products alone accounted for 38% of total merchandise exports in the second quarter of 2020.”
“One product type — ‘immunological products, put up in measured doses or in forms or packings for retail sale’ — accounted for approximately 12% of total merchandise exports.”
Overall, exports of those products increase by 41% in the second quarter of the year, compared to the same period last year.
Sales of computer services also remained resilient, 58% of total services exports in the second quarter.
Without this, the 8.1% decline in services exports would have been even greater, according to the analysis.
Consumer spending
“Compared to our previous bulletin in July,” Cassidy said, “we now have quite a lot of official and real-time data to inform our assessment of how the virus has impacted the economy and the extent to which we have already rebounded.”
That data reveals that consumer spending fell by 22.8% in the second quarter of the year during the national lockdown.
Cassidy said that real-time indicators such as retail sales and card payment data show a significant improvement in the second half of the year so far.
In August, spending on transport and accommodation remained far below pre-Covid levels but some sectors had recovered fully or even experienced an increase.
Having fallen in April by 38% following the closure of all non-essential shops, hardware sales were 34% higher in August than before the pandemic.
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