Strong exports and multinationals contributing to double-digit GDP growth, however challenges ahead with housing, climate change, and healthcare

Despite the ongoing effects of the COVID-19 pandemic, both domestic and foreign sources of growth have contributed to the Irish economy’s robust performance in 2021. As public health measures are eased considerably, we anticipate a return to more normal economic activity by the end of the year. For the present year, our expectation is that Irish GDP will grow by 12.6 per cent. The double-digit growth rate is mainly due to multinational related activities, in particular strong export figures. Modified domestic demand, a more accurate measure of underlying economic activity, is expected to grow by 7 per cent in the present year. Into 2022, we expect a continued strong performance of the economy, with GDP set to increase by 7 per cent.

The recovery from COVID-19 has contributed to inflationary pressures in many advanced economies stemming mainly from global supply chain problems and energy prices. While the current expectation is that these factors are largely temporary, further domestic inflationary risks remain relating to the rapidity of the recovery in household spending as well as how price changes feed into wage expectations. At this juncture, our expectation is that inflationary pressures will peak in Q4 2021 and abate through 2022. We expect an inflation rate of 2.3 per cent in 2021 and 2.5 per cent in 2022.

The monthly unemployment rate continues to fall as public health restrictions are eased. Consequently, we expect the unemployment rate to fall to 9 per cent in Q4 2021 and average 16.3 for 2021 overall. Unemployment is set to fall further into 2022 and will average just over 7 per cent for the year. However, we do not expect to see the unemployment rate fall back to pre-COVID rates until late 2023 at the earliest.

The significant reduction in unemployment along with strong underlying growth in taxation receipts has contributed to a smaller deficit in 2021 than expected. The eased pressure on the public finances comes at a time when significant investments will have to be made in the years ahead to tackle issues such as housing, climate change, and healthcare. Making these investments, while ensuring the domestic economy does not overheat, will be a key challenge for fiscal policy over the medium-term.    

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

“The Irish economy has performed in a highly robust manner during the pandemic. Fiscal policy must ensure that, while key investment priorities are met in the medium-term, the domestic economy is not allowed to overheat.”

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

“The economy continues to recover strongly from the pandemic but a new set of challenges come to the fore. The optimal tapering of the remaining pandemic policy supports and managing inflationary factors from global and domestic sources, in a rapidly growing domestic economy, will require considerable attention from policymakers.”