Domestic economy remains subdued despite rebound in Q3

This Commentary highlights a significant recovery in the Irish economy in Q3 coinciding with the easing of restrictions over this period. Exports continued to perform very strongly in Q3, propped up by an ongoing strong performance in medicinal and pharmaceutical products and computer services. Consumption and Investment were also significantly improved relative to Q2 but are expected to be lower for the full year. As a result of the strong export performance in particular, our GDP forecast for 2020 has been revised up and we now expect the Irish economy to grow by 3.4 per cent this year.

Despite this, the substantial impact of the pandemic can still clearly be seen in the unemployment rate which increased above 20 per cent in the fourth quarter and the considerable drop in domestic demand.

Forecasts for 2021 are based around a number of assumptions. The first is that there will be another 6-week period of strict public health measures during the first half of the new year, the second is that a vaccine will become widely available over the second half of the year. The final assumption is that there will be a trade deal in place between the EU and the UK in January. Under these circumstances the Irish economy is expected to grow by 4.9 per cent next year, however, the unemployment rate is still likely to be 10 per cent by the end of the year.

Given the continued uncertainty around the outcome of trade negotiations between the UK and EU we also provide a set of forecasts for no deal being reached between the two sides. In this case GDP growth is revised down to 1.5 per cent in 2021.

Government expenditure, which increased significantly in 2020, is expected to remain elevated in 2021. While most tax headings will see a rebound next year, the deficit is expected to remain substantial at €18.5bn. A box in the Commentary analyses the sustainability of Irish public debt by modelling different growth and interest rate scenarios over the next decade. A separate box explores how Irish corporation taxes may be impacted by the changing administration in the US.

Commenting on the report, author Kieran McQuinn of the ESRI stated:

“While a positive growth rate for the domestic economy in the present year is quite remarkable, the Irish labour market is likely to witness high rates of unemployment for some time.”

Commenting on the report, author Conor O’Toole of the ESRI stated:

“A rebound can be expected in 2021 even in the case of a no-deal Brexit if widescale vaccination allows for a more permanent lowering of public health measures. This should allow a lowering of elevated housing savings rates leading to an increase in household spending in 2021.”