The latest Quarterly Bulletin from the Central Bank says that domestic demand will grow by 3.4% in 2021 as pandemic restrictions are lifted, with a further 5.6% increase forecast for 2022.
The strict public health restrictions, in place from January until early-May, dampened economic activity in the first quarter of the year, according to the bulletin, as modified domestic demand contracted by 5% in year-on-year terms.
“However, a strong rebound of the Irish economy is emerging,” it continues. “With an increasingly successful deployment of vaccines, and bolstered by continued support from monetary and fiscal policy, there is a widespread improvement of consumer and business sentiment.”
The bulletin points out that GDP figures for Q1 highlight the difference between the externally focussed and the domestic economy, with net exports of predominantly foreign-owned multinationals engaged in contract manufacturing driving headline growth of 11.8%.
Supported by a strong export performance, GDP is projected to grow by 8.3% in 2021 as a whole, 5.6% in 2022 and 4.8% in 2023.
In Association with
Director of economics and statistics Mark Cassidy said: “As the Covid-19 restrictions have relaxed, we are seeing that domestic economic activity is rebounding. The risks to the growth k appear to be relatively balanced. The progress of the vaccination programme, more positive consumer and business sentiment and supportive fiscal and monetary policy all bolster the outlook."
Central Bank economists expect that unemployment rate will fall from 21.9% currently to around 8% by mid-2022. "Employment is projected to reach pre-pandemic levels in the second half of 2023 amid strengthening demand for labour,” says the bulletin.
The Central Bank recommends that government policy must change as work resumes progressively and should “shift to minimising supply constraints arising from labour market mismatches over the medium term, facilitating moves out of longer-term unemployment and inactivity into employment in sectors with high labour demand”.
The regulator's report hints that tax increases may be necessary due to “potentially strong demand on government resources”.
The Q3 bulletin and earlier editions are available on the Central Bank's website.
Elevated Debt
Speaking after the release of the bulletin during a virtual panel discussion at Les Rencontres Économiques d’Aix-en-Provence, Central Bank deputy governor Sharon Donnery cautioned that as health risks diminish considerations of elevated debt levels require more nuance.
“Our research demonstrates that Ireland is among the most vulnerable economies to both cyclical and structural changes in the global economy,” Donnery stated. “Accordingly, it is important to build resilience in our economy and public finances when the economy starts to recover so that we can respond to shocks as needed.
“Targeted and temporary supports should gradually replace the broad supports which were suitable as a rapid response to the onset of the pandemic. In particular, supports should facilitate post-pandemic structural adjustments in the way we live, work and travel, rather than targeting a return to pre-pandemic norms.”
In Donnery’s view, government may need to consider additional revenue-raising measures or cuts in spending in the medium term to address spending pressures related to an ageing population, the need to invest in critical infrastructure such as housing and in meeting climate change targets, and the potential fall-off in corporate tax revenue.
Donnery remarked that judging the appropriate level of government debt is challenging.
“Given the scale of the issues facing us, we need to reconsider traditional measures of evaluating the trade-offs of additional debt,” she added. “While low interest rates ease repayment burdens, this may not last. The resilience from having sufficient buffers in place proved vital in responding to the pandemic and will be paramount in dealing with future downturns.”
