Irish Economic Outlook | January 2021

Irish GDP (Gross Domestic Product) held up better than most European countries during 2020 in the face of the Covid-19 pandemic, mainly due to a defensive export sector concentrated in pharmaceuticals, medical technology and ICT (Information & Communication Technology) services. However, Ireland’s restrictions were more prolonged and severe, so there was an especially hard hit  to sectors such as hospitality, retail, personal services and tourism. Thankfully, the development of Covid-19 vaccines promise that these restrictions should be gradually lifted.

How has Ireland fared?

Dealing with the aftermath of the pandemic will be made far easier by the resilience of Ireland’s public finances. The budget deficit in 2020 looks set to be inside €20bn, or 6% of GDP, one of the smallest across Europe. This reflects the extraordinary resilience of tax revenues despite falling employment and hits to corporate profitability. This has made it easier for the Fiánna Fáil/Fine Gael/Green coalition to maintain income supports for Irish households and SMEs (small-medium enterprises).

However, there will still be difficult choices to be made. The initial signs are encouraging that the vast majority of households and companies who utilised a payment break on their bank loans have been able to return to full repayments. However, many Irish SMEs, particularly in the hospitality and retail sectors, could face insolvency having had their cash reserves depleted by two lockdown periods. The Irish government cannot support these firms indefinitely.

Structural changes

At the time of writing, Ireland’s ‘Covid-19 adjusted’ unemployment rate was still above 20%. Though unemployment will fall as the Irish economy re- opens, the pandemic may have accelerated change in the retail sector, and it will take time for tourism to recover. This could lead to a higher structural unemployment in the coming years, placing the onus on the Irish government to fund re-training schemes and other measures to help those who have lost their jobs find employment in other sectors.

Brexit will also remain a live issue for Ireland. Exporters, particularly in the agri-food and indigenous manufacturing sectors, will have to adjust to new trading arrangements with the UK, involving costly and tedious form filling. Those who use the UK ‘land-bridge’ to Europe may have to cope with delays. That said, Ireland will be even more attractive for foreign direct investment now that its largest competitor has decided to leave the EU single market. So, there will be opportunities as well as costs from Brexit.

Looking ahead

As (hopefully) Covid-19 becomes a less pressing issue in 2021, many long-standing challenges for the Irish economy may return to the fore. House prices have been resilient through the pandemic, confounding gloomy forecasts for ‘double-digit’ declines, but at least in part because housing supply remains so weak. In Budget 2021 the Irish government announced funding for new first-time-buyer affordability measures, that will be announced this year.

Also, the OECD (Organisation for Economic Co- operation and Development) will push-on at efforts for global corporate tax reforms, likely to receive a more sympathetic hearing from President-elect Joe Biden – and increasingly seen as inevitable given the on-going expansion of the digital economy.