The Irish economy will rebound dramatically this year – growing by 11 per cent – on the back of stronger exports and a resurgence in consumer spending and investment linked to the easing of restrictions, the Economic and Social Research Institute (ESRI) has said.
This is the highest rate of growth ever forecast by the ESRI and more than double what the Government is forecasting.
The think tank, however, warned that the pandemic would still have a scarring effect on the economy in terms of higher unemployment and fewer homes being built. The latter is likely to “exacerbate” existing supply pressures in the housing market, it said.
In its latest economic commentary, the ESRI delivered one of its most upbeat assessments of the Irish economy and its future growth prospects.
It suggested growth this year and next would be driven by a combination of stronger exports, particularly from the multinational sector, and a rebound in consumption and investment linked to the easing of restrictions.
Consumer spending, which contracted by almost 10 per cent last year, is expected to grow by 7.5 per cent this year, aided by the unwinding of excess savings.
These forces would drive “substantial growth” of 11.1 per cent in 2021 and 6.9 per cent in 2022.
The ESRI said recovery is likely to be uneven and focused on those goods and services which households have been constrained from consuming.
“It is therefore likely that many of the retail sales areas which are currently operating well below pre-pandemic levels (bars, restaurants, clothing and footwear, department stores) are likely to experience notable increases in expenditure as the economy begins to recover,” it said.
The institute also cautioned that its forecasts were predicated on the permanent relaxation of health measures and that this assumed the current suite of vaccines would continue to work against new Covid variants and that “social mixing is not constrained by restrictions or public confidences”.
It calculated that the cost of the pandemic – in output terms – in 2020 and 2021 would be in the region of €24 billion. However, it predicted the economy would return to pre-pandemic levels of output by as early as 2022, which is significantly earlier than previously envisaged.
Despite the faster-than-expected recovery, the pandemic was still likely to have “significant long-lasting” impacts on the Irish economy.
Unemployment would remain elevated at 9 per cent even by the end of this year, it said, and average about 7 per cent next year.
Separate Central Statistics Office (CSO) figures, published on Wednesday put the State’s Covid-adjusted unemployment rate at 21.9 per cent in May, which corresponds to nearly 490,000 people being out of work.
In its report, the ESRI also highlighted the impact of restrictions on residential construction, noting that the imbalance between housing supply and demand is greater now than it was at the start of the pandemic. It expects 18,000 housing units to be built this year.
“This decline in supply may further exacerbate the gap with structural demand, especially in the short run,” it said.
To address the shortfall, the ESRI said the Government needed to double the existing level of capital investment on housing to €4 billion, which would deliver an additional 18,000 housing units a year.
This could be financed by running “on an ongoing basis” an annual budget deficit of between €4 billion and €7 billion, which equates to about 1.5 per cent of gross domestic product.