In this week's blog, Dr Tom McDonnell NERI Co-director summarises some of the key findings from his Report Series paper 'Economic Trends and Outlook: April 2021 update'.
The NERI's most recent economic report can be found here.
We are now one year into the worst global pandemic in a century. Almost 3 million people have lost their lives and many millions more have lost their livelihoods. Unemployment rates are at their highest since the great depression of the 1930s. While the outlook is now hopeful, the pandemic has undone years of progress in the global fight against poverty.
The short-run outlook in Ireland is still uncertain as it depends on the diffusion of the virus through the population and the duration and severity of lockdown measures. There is still significant lack of clarity around the pace of vaccine rollout. The transition away from the temporary supports and the eventual scale of business failure during that transition remains another source of great uncertainty. Fiscal and monetary policy will need to remain supportive for the next 2-to-3 years at least.
Our view is that the economy will experience a prolonged economic expansion starting in the third quarter of this year. The recovery should be much swifter than the recovery from previous recessions. Overall, real GDP should grow by more than 4% this year and then by over 5% in 2022. Modified domestic demand will be slower to recover this year but will experience faster growth in 2022.
The projected expansion is based on (1) the realisation of pent-up demand with the household savings rate declining closer to its historical average levels (2) increased business confidence and private investment as uncertainty fades (3) increased public investment from domestic fiscal policy and the EU recovery programme (4) increased demand for exports as trading partners experience strong demand-based recoveries.
The public finances will remain in deficit until the middle of the decade. Even so, strong employment growth and the removal of temporary supports will see the deficit significantly improve from 2022 onwards. The scale of potential loss of corporation tax receipts remains uncertain but could be north of €2 billion per annum. These losses will eventually necessitate higher yields under other tax or social insurance headings.
We expect that the unemployment rate will remain elevated well into 2022. Our projection is that unemployment will be close to 8% (200,000) around the middle of 2022. The labour market will not recover until 2023 and even then, the unemployment rate will exceed the pre-pandemic level. The extent of structural damage to the labour market is unclear but scarring should be significantly less than was the case in the aftermath of the great financial crash and other crises.