Scenario analysis suggests Irish economy to fall into recession in 2020 as a result of economic deterioration caused by Covid-19

March 26, 2020

The ongoing COVID-19 pandemic is the greatest threat that the Irish economy has faced since the financial crisis. At present, the primary policy objective is the implementation of the necessary public health measures in whatever form is required including the closure and restrictions on normal economic and social life.

Given the uncertainty around the current virus outbreak, it is not possible to undertake traditional economic forecasts. In this commentary, instead, we provide a scenario analysis which attempts to assess the economic impact of the current restrictions and closures. At this juncture, we assume that these measures stay in place for a 12-week period and the economy recovers afterwards. Under this scenario, the Irish economy would shrink by 7.1 per cent in 2020. Consumption, investment and net trade would all fall sharply; households would cut spending, firms would cancel or postpone investment and external demand for Irish goods and services will fall.

The labour market, which had been in a position of strength before the spread of the pandemic, is set to face the largest one quarter shock in living memory. Under the scenario the unemployment rate increases to 18 per cent in Q2 up from 4.8 per cent in the previous quarter, as over 350,000 people lose their jobs.

The general government balance, which had been expected to be in surplus at the start of the year, would now register a 4.3 per cent deficit. This is as a result of the significant fall in revenues the exchequer will face due to the contraction in the economy. It also reflects the significant increase in spending the government will implement in order to support workers who have lost their jobs, assist businesses facing declines in revenue and provide additional health expenditure needed to combat the virus.

It must be noted that this current scenario may turn out to be too benign. As events are unfolding rapidly, we will revisit these scenarios more frequently than our traditional release pattern.