Ireland’s economy is set to grow by 5% in 2021, while a period of high inflation could set in towards the end of the year, according to a report published by EY.

The EY Economic Eye report was created by Professor Neil Gibson (pictured), EY Ireland’s chief economist, and the team at EY-DKM Economic Consultancy, and is based on the latest all-island forecasts.

The report notes that the Republic of Ireland recorded the highest growth of all major economies in the world in 2020 (3.4%), although its domestic contraction and labour market performance were similar to comparative nations. Consumer spending fell by 9%, a similar figure to the UK contraction of 10.9%.

EY said that that strong performance reflects the strength of Ireland’s export base, which is dominated by pharma, ICT and agri-food – all of which were strong performers during the pandemic.

Despite headline unemployment rates peaking at 7.1% in Q3 2020, the latest Covid-adjusted unemployment rate stood at over 24% in March 2021.

In Association with

The EY Economic Eye report predicts that the Republic of Ireland economy will grow by 5% in 2021 and 4.6% in 2022, while the labour market is expected to recover its peak by late 2023.

Commenting on the report, Professor Gibson said that Ireland is exiting this economic crisis in much stronger shape than it did the last one. “Though the domestic economy has been hit very hard, the government has been able to borrow to support firms and individuals, and the prospect is for a very strong domestic surge later in 2021.”

EY estimates that an additional €11bn will have been accumulated in domestic deposit accounts over the course of the pandemic to the middle of 2021, over and above what may have been expected in the absence of any Covid-19 disruption.

Inflation Risk

The report also looks at the prospect of upward price pressures and suggests that there is a very real risk of a period of strong inflation in the near term. EY estimates suggest that RoI inflation will rise by 1.5% in 2021 in the base case, after a fall of 0.3% in 2020, rising to 2.0% in 2022.

Despite the relatively muted price increase in 2021 overall, inflation is expected to peak at 3.3% in the base case in October 2021. The higher inflation in late 2021 and 2022 is expected to result from increasing business costs relating to Covid-19, as well as businesses trying to recoup some of the lost sales of the pandemic.

EY warns that a period of high inflation would bring with it further challenges for those on lower incomes. If prices rise in staples such as food or fuel, it could disproportionately affect those who are on lower incomes who are already more likely to have been worse-off due to Covid-19.

“There are many reasons to be mindful of the prospect of high inflation later in the year,” said Gibson. “Rising commodity prices, extra costs associated with public health guidelines and Brexit allied to high levels of government and consumer spending would usually suggest the environment is ripe for prices to go up.

“The hope is that this does not trigger a damaging spiral in wages and future prices, but policy makers should be alive to the risk and businesses should be scenario planning for what that it might mean.”

Gibson added that the government still needs to be cautious when it comes to the timing of any reduction in current supports.

Graham Reid, head of markets with EY Ireland, said that the government will need to ease support as early as possible to avoid locking in additional costs and escalated debt levels.

“But, on the other, if support is retracted too early many firms or individuals may struggle to cope. The government was correct to support the economy in the way it did, but timing and prioritisation will be critically important when it comes to removing it,” Reid continued.

“Globally, firms and governments are keen to de-risk supply chains including thinking about how they move manufacturing closer to key markets.

“As the only remaining English-speaking, common law jurisdiction within the EU Single Market, Ireland stands well placed to capitalise on this new investment era.”