Quarterly Bulletin 2021:2 - Recovery in the second half of 2021 to gain momentum next year

• Economic weakness in the first-half of 2021 to give way to recovery later in the year
• Modified domestic demand is forecast to grow by 2.8% in 2021 and by 3.9% in 2022
• 3.4% GDP growth in 2020 masks a severe decline in domestic demand

Today the Central Bank published the second Quarterly Bulletin of 2021. The Covid-19 pandemic will remain the main determinant of the economic outlook this year and in 2022. Activity in the domestic economy is likely to remain subdued in the first half of the year reflecting a more protracted duration of level 5 restrictions than had been assumed in the last Bulletin. On the assumption of a successful deployment of vaccines by the second half of the year, and underpinned by continued support from accommodative monetary and fiscal policy, domestic demand remains well placed for a strong recovery. On this basis, modified domestic demand is forecast to grow by 2.8% in 2021 and by 3.9% in 2022. Supported by a strong export performance, GDP is projected to grow by 5.9% in 2021 and by 4.7% in 2022.

Mark Cassidy, Director of Economics and Statistics said “The Covid-19 pandemic, and the measures to contain its spread, continue to suppress economic activity. Our forecast is for activity to remain subdued in coming months before gradually recovering in the second-half of 2021 and then picking up momentum in 2022. This should bring the level of domestic economic activity back to 2019 levels, however, the rate of unemployment in 2022 will still remain higher than its pre-pandemic level.”

Preliminary Irish National Accounts, which show GDP growth of 3.4% last year, point to remarkable resilience in headline growth however the headline GDP figure masked a decline in domestic demand of 5.4% which was among the most severe in the EU. Output declined in all but pharmaceutical and IT sectors, with the largest declines in sectors with a high dependence on face-to-face contact with customers including the arts, hotels, bars and restaurants and high-street retailers. Private consumption in 2020 was down by 9% compared with the previous year.

The impact of the pandemic is particularly evident in the labour market. The Covid-19-adjusted rate of unemployment, which includes those workers who are availing of the pandemic unemployment payment currently stands at a rate of 24.8% (February 2021). Around 960,000 people, or 4 in 10 in the labour force, are currently in receipt of one form of income support or other.

The concentration of the pandemic labour market shock among workers in the lower half of the income distribution is reflected in a corresponding decline in earnings per worker. Average disposable incomes have been protected reflecting significant government income supports. While indicators of financial distress, such as firm liquidations, have been limited to date, due to government supports and exceptional levels of creditor forbearance, unfortunately they are likely to become more evident as we emerge from the pandemic.

Household deposits increased by €15.7bn between March 2020 and February 2021. Higher income households account for the bulk of this increase. The timing and extent to which this exceptional build up in household savings is unwound will have a significant impact on the pace and timing of the post-pandemic recovery in domestic demand.

The impact of the pandemic has been mitigated by a range of fiscal and monetary policy actions to support vulnerable households and businesses. In the near term, fiscal policy must remain focused on supporting household incomes and firm liquidity to provide the most solid basis for recovery. However, the size and nature of support should be ready to adapt to changing circumstances. Ultimately, more favourable growth dynamics in coming years should support a decline in the public debt ratio. However, even if action does not need to be taken now, it is important to plan to reduce the level of the debt ratio in time to a more sustainable level, to ensure that the economy can face future shocks with sufficient headroom such that all available policy instruments can be deployed. Policy support should continue to counter the threat to viable economic activities and employment from the pandemic and, facilitate structural transformations which support economically sustainable activities. This would help to enhance resilience, support the productive capacity of the economy and mitigate scarring effects, such as long-term unemployment.