Irish economy faces largest recession in history as lockdown takes its toll
Given the high degree of uncertainty about the spread of COVID-19, our Summer Quarterly Economic Commentary assesses the future prospects for the Irish economy under three different scenarios: Baseline, Severe and Benign. Our Baseline scenario (which is considered the most likely to occur) follows the government roadmap for reopening through to August. After this point, the economy begins to recover but operates below its ‘pre-pandemic’ level due to ongoing measures such as physical distancing. In the severe scenario a second wave of the COVID-19 outbreak with strict lockdown is assumed in Q4. The Benign scenario assumes successful disease suppression allows a return to economic normality in Q4.
In the Baseline scenario real GDP declines by 12.4 per cent this year. This compares with a decline of 17.1 per cent in the Severe scenario and an 8.6 per cent fall in the Benign scenario. Regardless of the scenario, the Irish economy is set to experience the largest annual decline in its history.
All aspects of the economy will be considerably affected with significant declines in consumption, investment and exports of goods and services. Consumer spending is assumed to fall sharply by 13 per cent and investment by nearly one-third in the Baseline.
Two areas where the economic impact of COVID-19 has been clearly visible are the labour market and public finances. The unemployment rate reached a record high of over 28 per cent in April. Research in the commentary indicates that young workers and those living outside of Dublin have been most heavily impacted. While unemployment is expected to decline as the economy reopens, our Baseline scenario still has unemployment above 17 per cent for the year as a whole.
The unprecedented increase in public expenditure to combat the virus, coupled with the loss in revenue from the fall in economic activity, will lead to a significant government deficit in 2020. In the Baseline scenario, this deficit is expected to be over €27 billion or 9 per cent of GDP. The financing of such large deficits will come into sharp focus in the months ahead and hard choices will have to be made. Analysis in the commentary highlights the importance of continued intervention by the ECB to support Irish bond spreads given the increase in the country’s debt and the fall in aggregate income. Ongoing, coordinated, action by EU policymakers will be required to ensure national governments including Ireland have the fiscal space to deal with the virus and reboot their economies.
ESRI Senior Research Officer Conor O'Toole and ESRI Research Professor Kieran McQuinn presented an overview of the Quarterly Economic Commentary, Summer 2020 to the media on Wednesday 27 May 2020 ahead of the document's publication on Thursday 28 May 2020. You can view the briefing in full below.
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