IRELAND’S BELEAGUERED DOMESTIC economy is set to rebound more quickly in 2021 than anticipated, the Central Bank has said.

Despite the Government’s decision this week to delay the resumption of indoor dining, domestic activity is now on schedule to return to pre-pandemic levels and above as early as 2022.

Modified domestic demand — a measure of indigenous economic activity that attempts to strip out the activities of multinational companies — is forecast to grow by 3.4% in 2021 and 5.6% in 2022 after collapsing by 5% in 2020.

The Central Bank had pencilled in domestic growth of just 2.8% in its last Quarterly Bulletin in April.

But according to the latest bulletin, published this morning, business conditions have improved throughout the first half of the year and “a strong rebound of the Irish economy is emerging”.

“With an increasingly successful deployment of vaccines, and bolstered by continued support from monetary and fiscal policy, there is a widespread improvement of consumer and business sentiment,” the Central Bank notes.

Speaking to reporters ahead of the release, Mark Cassidy, Director of Economics and Statistics at the Central Bank of Ireland, said that temporary delays to the reopening plans are unlikely to have a major impact on the forecasts.

“Of course, the longer the extension of those restrictions, the greater the effect will be,” he added.

The Central Bank has upwardly revised its forecasts across the board Central Bank of Ireland Central Bank of Ireland

“And because this has been with us for so long because the sectors and these firms have been bearing the brunt of the crisis so far, the longer the restrictions last, the greater the probability that more firms will close down permanently.

“But if we’re talking a matter of weeks, then you wouldn’t expect it to show up in the numbers. It’s just pushing things a little bit further back.”

Overall Irish economic activity — as measured by gross domestic product (GDP) is now forecast to grow by 8.4% in 2021 — up from just under 5% in April’s Bulletin.

As was the case last year, headline growth will largely be driven by exports, particularly in booming multinational-dominated sectors like IT and pharmaceuticals.

With global trading conditions improving, exports are forecast to grow by 9%, up from 4% from the Central Bank’s last set of projections, while imports are expected to fall by 1%.

Combined, net trade will add 12% to Irish GDP in 2021.

Labour shortages

The Central Bank expects the Covid-adjusted unemployment rate to fall from 21.9% in May to 11% in early 2022.

Employment is only expected to reach pre-pandemic levels by the end of 2023.

However, there are signs of labour shortages in certain sectors of the economy such as financial services and public administration, Cassidy said.

“We’re seeing this in other economies as well: emerging labour shortages in some parts of the economy being accelerated or encouraged by some of the structural transformations we’re seeing in the economy.

“Therefore we do expect in some sectors of the economy, particularly those I mentioned there that you will see a rather rapid pickup in wage growth,” he explained.

Household savings

“As the Covid-19 restrictions have relaxed, we are seeing that domestic economic activity is rebounding,” Cassidy said. 

“While the possibility of a more protracted recovery in certain sectors cannot be discounted, the prospects for the economy as a whole appear to be more favourable, and risks to the growth outlook appear to be relatively balanced.”

On the domestic front, the Central Bank believes postponed purchases “will support a surge in demand in some sectors, such as retail, motor trades and restaurants and hotels”.

Consumer expenditure, which fell by 9.1% in 2020, is now expected to recover by 4% in 2021 before returning to pre-pandemic levels in 2022.

Household deposits with banks, meanwhile, have continued to hit record highs and stood at €131.5 billion at the end of May, according to the latest figures.

How and when these savings are unwound will have major implications for the recovery, economists believe.

“We don’t think that people will go out and immediately seek outlets to spend this money. It will occur over time,” Cassidy said.

“We think there are reasons why people may be cautious about the outlook, and they may hold on to higher savings, and therefore our central assumption is that savings rate does remain above pre-pandemic levels.”