The Central Bank has said the economy has fared better than forecast during the pandemic but the impact on jobs has been worse.
In its latest quarterly bulletin, the bank warns recovery will remain uneven and a ‘no-trade deal’ Brexit will hamper any growth next year.
Ireland recorded the smallest fall in GDP across Europe due to the pandemic, but experienced one of the highest falls in spending by consumers.
In today’s bulletin, the Central Bank highlights the divergence between the continuing strength of the economy’s exporting sector, dominated by pharmaceuticals, and the downturn due to Covid-19 restrictions brought upon the labour intensive domestic sector that has shed jobs.
This means unemployment is forecast to remain in double digits into next year under a severe scenario.
The bank also warns that if there is a no-trade deal Brexit, the biggest impact will be felt in the first three months of next year with food exporters bearing the brunt of potential falls in demand for their goods of up to 75%.
The regulator describes the recovery that has taken hold in recent months as “partial and uneven”.
It contrasts the resilience of export growth – which mitigated the overall fall in GDP – with the 16% decline in underlying domestic demand in the year to the second quarter.
It now forecasts an overall decline in GDP of 0.4% in 2020 – a substantial upwards revision on the 9% reduction forecast earlier in the year.
But the Central Bank has revised downwards its outlook for the coming years.
Its baseline forecasts are predicated on there being only partial success in containing Covid-19, with some containment measures remaining in place, and that trade between the EU and the UK moves to WTO terms from January next.
“A transition to a WTO trading relationship is likely to frontload the losses arising from Brexit, subtracting around 2 percentage points from GDP growth in 2021 and 0.3 percentage points in 2022, relative to our previous projections based on a Free Trade Agreement,” the report states.
GPD growth of 3.5% is now projected for 2021, rising to 4.7% in 2022.
Reflecting the impact on the domestic economy, underlying domestic demand is projected to grow by a modest 1.6% in 2021, rising to 4.8% the following year.
Unemployment is forecast to increase from 5.3% in 2020 to 8% in 2021, moving back to 7.5% in 2022, higher than pre-crisis levels of 5%.
“The outlook remains highly uncertain and will depend not only on the economic consequences of the Covid-19 pandemic and its containment, but also on the nature and impact of the future trading arrangements between the EU and the UK, around which there still remains considerable uncertainty,” Mark Cassidy, Director of Economics and Statistics at the Central Bank, said.
“On the assumption that containment measures remain targeted and less severe than in the Spring, and that consumers and businesses continue to adapt, the baseline forecast in response to the Covid-19 shock is for activity to continue to recover slowly from its earlier lows, though not necessarily without setbacks,” Mr Cassidy added.
The Central Bank acknowledges that the rise in the deficit and debt ratios is both “warranted and necessary” and is affordable at this time.
However, it warns that a path to lower and more sustainable levels will eventually have to be taken.
Policy should continue to focus on supporting the productive capacity of the economy and avoid scarring effects, such as long-term unemployment, it added.
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