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Vaccine roll-out lifts economic prospects but recent virus surge has impeded progress, says Central Bank

Irish GDP grew by 2.5% in spite of the pandemic, according to the updated data.

Image: Sam Boal; Photocall Ireland

THE IRISH ECONOMY expanded in 2020 in spite of the pandemic, according to the Central Bank of Ireland.

Spurred on by a 4% increase in exports, driven mainly by the booming pharmaceuticals, tech and business services sectors, Irish gross domestic product (GDP) grew by 2.5% last year.

However, “strict containment measures” currently in place across the country “are likely to dampen activity significantly in the first quarter” of 2021, the Central Bank has said in its latest Quarterly Economic Bulletin.

Against the backdrop of the recent virus surge and tightening of public health restrictions, growth will “remain subdued” in the near-term.

But assuming a successful ramping up of the vaccination programme by the second half of the year, “the economy should begin to recover,” according to the Central Bank forecasts, which have been upgraded since last October.

GDP is then forecast to grow by a better-than-expected 3.8% in 2021 — a 0.3% improvement from the last Bulletin in October 2020 — and 4.6% in 2022.

“Reflecting the recent resurgence in cases, both domestically and globally, the near-term outlook has deteriorated and become more uncertain,” the report said.

“However, the development and prospect of widespread deployment of vaccines offers hope for a path out of the crisis and, further out, an improved outlook for economies and societies.”


But GDP doesn’t tell the full story.

Modified domestic demand — a measure of indigenous activity that strips out the influence of the multinational-dominated export sector — is forecast to improve by just 2.9% this year after a 7.1% collapse in 2020.

Ireland suffered the worst initial collapse in domestic demand in Europe at the outset of the crisis last year. The situation improved as restrictions were loosened over the summer and again in the run-up to Christmas, the Central Bank said — but domestic activity remains well below pre-pandemic levels to start the year.

Consumer spending is projected to have fallen by 8.3% last year and is only forecast to improve by 2.1% in 2021 before a further 6.9% recovery in 2022.

Meanwhile, the post-Brexit trade agreement reached before Christmas between the European Union and Britain may have averted “significant disruption to economic activity”, according to the latest Bulletin.

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But “in the long run, the negative impact of the UK’s EU exit on trade flows, migration and productivity will reduce output in the Irish economy”.

Screenshot 2021-01-21 at 17.37.55 Graph illustrating flucutations in the labour market in 2020

Unemployment is also likely to remain a sticky issue well into next year with the labour market “likely to lag somewhat until the broader economic recovery becomes more well established”, according to the Bulletin.

The standard rate of unemployment averaged 6.2% last year but will increase to 9.3%, as Government income supports are gradually wound down and firms come off State-financed life support.

This assumes that the vaccine drive will allow the economy to be substantively reopened in the second half of the year.

In a more severe scenario, one that assumes a “substantially longer timeline for the deployment of vaccines”, unemployment could average out at 13% in 2021, the Central Bank warned.

“What I would say about this [severe] scenario compared to previous Bulletins is, I do think it’s clear that the probability of it happening is now much less than it had been,” Mark Cassidy, Director of Economics and Statistics at the Central Bank, said.  

“In none of our previous Bulletins did we have the positive news about the development and the commencement of the rollout of vaccines. So certainly, we will be more, much more confident in our baseline scenario than we would have been in previous Bulletins.”

Housing market

Across the EU, Ireland had the strongest increase in savings in the second quarter of last year.

The savings ratio — the percentage of gross disposable income saved by households — rose to 35.4% in the spring of 2020; a historically high level.

Screenshot 2021-01-21 at 17.35.58 Graph showing the development of household savings in 2020

“The savings rate then returned to 21.4% in the third quarter, but remains elevated,” the Central Bank highlighted.

“Between March and November 2020, Irish households have increased their deposits by €11.6bn.”

But the unwinding of these savings will be key to the recovery this year and beyond, Cassidy said.

“What happens with these will be a very important factor in determining the future path of the economy,” he explained.

“On the one hand, they could be retained or they could be used to pay down debt. They could also be spent but then it will matter what type of goods and services they are spent on.

If they’re spent on foreign holidays or imported goods, the savings can leak from the domestic economy. Some of the savings may indeed find their way into the housing market, which could further exacerbate some existing demand-supply imbalances, and some of the distributional issues that exist in that market.

This could inflate house prices given the current “significant shortage of housing”, Cassidy said.

On the other hand, the increase in unemployment could result in a decline in demand for property.

“Also the uncertainty [for workers] in relation to current and future incomes does make it more difficult for many to get access mortgages,” he explained.

“So I wouldn’t want to make a prediction as to whether the negatives and the positive will outweigh each other. I think, to an extent, they will probably largely offset each other.”

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