Economy to grow by 3.4% despite record unemployment – ESRI
The Economic and Social Research Institute has forecast that the economy will end up growing this year by 3.4%, despite record unemployment.
In its latest Quarterly Economic Commentary, the think-tank said exports by pharmaceutical and IT companies have remained strong but the shock of Covid-19 will impact the domestic economy for some time to come.
The ESRI described its forecast as “somewhat surprising” and it comes as official government projections are for a decline in GDP of 2.4%.
Buoyed by exports of pharmaceuticals and IT services, the economy has continued to grow and spending by consumers has bounced back.
But it is an uneven picture.
The ESRI believes unemployment will end this year at 20%. Even with a post-Brexit trade deal, it will average 14.5% next year.
That is because sectors such as accommodation, the arts and parts of retail continue to struggle and are unlikely to recover until the second half of next year.
The ESRI also warned the incoming Biden administration in the US may herald changes to international corporate tax rules. This could reduce the tax take here.
Pharmaceuticals and chemicals, taken together, account for just over two thirds of the value of Ireland’s exports of goods.
Demand for these products is up 18% compared to last year.
Demand for computer services from abroad has also been strong. Computer services account for almost half of the value of service exports.
The value of exports has a big impact on how GDP is measured.
So, even when demand by consumers fell sharply (by close to 20%) during the depth of the Covid restrictions and unemployment soared to 30%, the economy measured by GDP continued to chug along.
It was also helped by a big bounce back in consumer spending over the course of the summer.
This has helped mitigate the impact of Covid on the public purse by reducing the impact on the income tax take.
But as the ESRI points out, it does mean Ireland’s economy is exposed to the fortunes of a small number of companies in a small number of industries.
The same goes for our corporation tax take. It now accounts for around a fifth of our taxes.
But just ten companies account for 40% of the take and 77% of them are foreign multinationals, according to an analysis by Revenue earlier this year.
On that front, the ESRI is warning that changes may be coming with the incoming Biden administration.
US economist Brad Setser, who has written extensively on the tax practices of US multinationals in Ireland, is reported by Bloomberg to have joined the Biden transition team.
The ESRI expects a Biden administration to adopt a more “globalised” approach to international corporate tax rules than the outgoing Trump administration. This may mean Ireland’s corporate tax receipts will decline in the future.
The ESRI forecasts the economy will grow by 4.9% next year.
It has factored in a six-week Level 5 lockdown sometime in the first half of 2021. It also does not expect a widespread rollout of a Covid vaccine among the general population until the second half of the year.
For that reason, it expects unemployment to remain high, averaging at 14.5%.
Its forecasts assume a post-Brexit trade deal will be agreed.
However, if it is not, growth could be scaled back to just 1.5%.
Regardless of whether a deal is struck or not, the ESRI expects that prices of goods for consumers will go up as a result of the UK leaving the EU.
Meanwhile, the scale of the economic hit is much more severe during the ongoing Covid-19 induced crisis than that experienced during the financial crash just over a decade ago.
However, the economy appears to have bounced back more rapidly on this occasion.
That is the conclusion of the Economic and Social Research Institute (ESRI) in a research paper comparing the two economic shocks published today.
It points out that during the Great Financial Crisis, the hit to the economy was more gradual and prolonged.
The ESRI said one of the most significant differences between the two periods has been the policy response at both the national and European level.
The Covid-19 crisis was marked by a rapid response from the European Central Bank and European Commission in the form of a massive stimulus programme providing cheap loans to banks and businesses and a programme of bond purcahses to keep the borrowing costs of governments low.
The Government here responded by running a significant deficit this year to support firms and incomes arising from the closure of much of the services economy for prolonged periods.
It plans to continue that spending and running another deficit in the year ahead.
The last recession was, in contrast, characterised by years of austerity in which Government spending was severely cut back at the direction of the troika of lenders – the European Commission, the ECB and the IMF.
“The scale and the rapidity of the negative impact are much more severe during the current crisis, while the recovery seems much swifter than that of the GFC (Great Financial Crisis),” the ESRI report’s author Petros Varthalitis said.
“These differences can be attributed to the nature of the two shocks but also to the significant differences in how policymakers have responded to both crises,” he added.