The Irish economy is set to experience the largest annual decline in its history with a significant downturn in consumption, investment and exports of goods and services, research has found.
A report by the Economic and Social Research Institute (ESRI) stated that the unprecedented increase in public expenditure to combat Covid-19, coupled with the loss in revenue from the fall in economic activity, will lead to a significant government deficit this year.
The ESRI’s summer quarterly economic commentary assesses the future prospects for the Irish economy under three different scenarios – baseline, severe and benign.
The baseline scenario, which is considered the most likely to occur, follows the government roadmap for reopening through to August.
After this point, the economy begins to recover but operates below its pre-pandemic level due to ongoing measures such as physical distancing.
In the severe scenario, a second wave of the Covid-19 outbreak with strict lockdown is assumed towards the end of the year.
The benign scenario assumes successful disease suppression which allows a return to economic normality.
In the baseline scenario, real GDP is expected to decline by 12.4% this year.
The ESRI said that regardless of the scenario, the Irish economy is set to experience the “largest annual decline” in its history.
Consumer spending is assumed to fall sharply by 13% and investment by nearly one-third if the country follows its current roadmap.
In what is described as a ‘new normal’, food spending will drop by 1%, drink and tobacco is expected to fall by 18%, clothing and footwear will drop by 25% and transport by 34%
Two areas where the economic impact of Covid-19 has been clearly visible are the labour market and public finances.
The unemployment rate reached a record high of over 28% in April.
Research indicates that young workers and those living outside of Dublin have been most heavily impacted.
It also shows that people living in the border region account for almost 30% of people claiming the pandemic unemployment benefit.
While unemployment is expected to decline as the economy reopens, unemployment is expected to be above 17% for the year as a whole.
In the baseline scenario, the government deficit is expected to be over 27 billion euro or 9% of GDP.
“The financing of such large deficits will come into sharp focus in the months ahead and hard choices will have to be made,” the report said.
“Ongoing, coordinated, action by EU policymakers will be required to ensure national governments including Ireland have the fiscal space to deal with the virus and reboot their economies.”
Dr Conor O’Toole, senior researcher, said: “The scale of shock that we have faced is completely unprecedented and without equivalent in modern economic times.
“When we come out of the pandemic phase, many households will have accumulated savings that they can use for expenditure and this may provide a stimulus.”
The report stated that future disposition of household savings could have a significant impact on the nature of the economic recovery, and an increase in consumption next year could act as a significant stimulus to the economic recovery.
However, continued uncertainty next year could postpone such a consumer boom to 2022 or beyond.
Dr O’Toole said that it depends on how fearful households are of disease transmission.
Professor Kieran McQuinn, research professor, said that people will only spend their savings when they are confident the economy has reopened.
“When people see the economy is back to a relatively significant growth, you may begin to see people spending but people will be reluctant to do so if the economy continues to decline,” he added.
Prof McQuinn said that as the economy opens up over the coming weeks and months, there is a argument for a “broad base” fiscal stimulus in a bid to kick-start activity for the rest of next year.
“A stimulus that concentrates on investment issues and significant increases in investment is probably the most appropriate of response,” Prof McQuinn added.
“Those investment projects would look at ones which would have environmental and sustainability criteria, I think it’s important we try and maintain and reach our environmental targets, notwithstanding the duress that is there.
“We also think the housing area is crucial.
“Social and affordable housing is an area where there has been a substantial imbalance between supply and demand over the last number of years.
“Addressing that and meeting the commitments made would meet two criteria, it would help stimulate economic activity and meet a key policy issue.”