merrion street

• The Department of Finance’s Budget 2021 forecasts show that both Covid-19 and a disorderly end to the ‘transition period’ will have a significant impact on the Irish economy;
• Modified domestic demand – proxy for domestic economy to fall by -6.5 per cent this year;
• GDP is projected to fall by -2.5 per cent in 2020 and to grow by only 1.4 per cent in 2021;
• Impact of Covid-19 on GDP is less than previously expected, mainly due to the resilience of Multi-National Company (MNC)-dominated exports, however the hit to the domestic economy has been severe;
• Employment set to fall by 13.8 per cent this year this with an annual average unemployment rate of just under 16 per cent this year, and 10.7 per cent in 2021;
• Economic forecasts have been endorsed by the Irish Fiscal Advisory Council.

The Minister for Finance, Paschal Donohoe TD, has today (Tuesday) published his Department’s macroeconomic forecasts that will underpin Budget 2021.  These forecasts were endorsed by the Irish Fiscal Advisory Council on 28^th September – this is a legal requirement for all euro area Member States.

Commenting on the endorsement, Minister Donohoe said:

I welcome the Irish Fiscal Advisory Council endorsement of the macroeconomic projections for Budget 2021’.

The macroeconomic projections are based on two key assumptions: firstly, from the beginning of next year, bilateral trade between the UK and the EU will be on World Trade Organisation terms and secondly, a widespread vaccination for Covid-19 vaccine will not be available.

Under this scenario, my Department is projecting that GDP will fall by -2.5 per cent this year.  While this headline figure is less severe than envisaged in the spring, it reflects the contribution to GDP from parts of the multinational sector*.  Other – more relevant – indicators confirm a severe economic fall-out from the pandemic.  Modified Domestic Demand, perhaps the best indicator of domestic economic conditions, is projected to fall by 6.5 per cent this year.

Under the assumption of a disorderly end to the transition period, there will likely be significant disruption to trade next year.  GDP is projected to grow by 1.4 per cent, around three percentage points lower than it would otherwise be if a Free Trade Agreement was put in place.

While the economic decline is expected to be less severe in 2020 than previously envisaged there is no doubt that we have experienced a significant shock since March and the onset of Covid 19. On the plus side, however, it is important to note that employment is expected to grow by around 7% or 145,000 jobs next year, having a very real impact on the economy and society more generally. 

The pandemic, however, will result, in all likelihood, in some level of permanent damage to the economy – so-called ‘scarring effects.  However, policy can help to minimise these.  The forthcoming Budget will continue to provide counter-cyclical support to the economy and provide details on the Recovery Fund which is provided for in the Programme for Government.

• *It is important to put this figure in context as GDP is not an accurate measure of what is going on in the domestic Irish economy, given the size of the multinational sector.

• To put it another way: we’ve had a significant upward revision from earlier forecasts published in the spring, but this is largely due to the strong performance of parts of the exporting sectors, most notably in the pharmaceuticals sector where exports have surged this year.

• While these exports are of course welcome, the spill-overs to the rest of the economy are somewhat limited: they are not as employment-intensive as our own domestic enterprises and the profits are recycled to non-resident shareholders.