A guest post by Enda Keenan from the Central Bank, highlighting some of the key messages from Bank’s latest Quarterly Bulletin.
Today the Bank published its fourth and final Quarterly Bulletin for 2020. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in July as well as our latest macroeconomic forecasts out to 2022.
The forecast for GDP growth has been revised upwards to -0.4 per cent in 2020 reflecting more positive developments in consumption, strong export performance and an enhanced level of fiscal support arising from the July stimulus package. Growth prospects for next year and 2022 are more subdued compared to the previous Bulletin due to the implications of a WTO Brexit. As outlined Box A, a disruptive transition to a WTO trading relationship would frontload associated output and employment losses. In this baseline scenario, the growth rate of the Irish economy is 2 percentage points lower in 2021 relative to a Free Trade Agreement due to the introduction of tariff and non-tariff barriers. The ILO unemployment rate is projected to average 5.3 per cent for this year, rising to 8 per cent in 2021 following the closure of income-support schemes at the end of the first quarter (Box D in the Bulletin discusses the challenges that arise for measuring unemployment in the time of COVID-19).
Since re-opening from a period of lockdown, the recovery of the Irish economy has been uneven as levels of domestically focussed economic activity remain well below pre-pandemic levels. In particular, consumer-facing services sectors, such as tourism, hospitality and retail services, which are also more labour-intensive, have been slower to recover contributing to a projected decline in underlying domestic demand of 7.1 per cent this year. The strong performance of exports, which are expected to decline by just 0.3 percent in 2020, is the main factor driving an upward revision in the baseline projection for GDP. Box C details the relative resilience of high-value exports such as computer services and pharmaceuticals during a period of declining trade-weighted world demand.
The Central Bank’s Business Cycle Indicator (BCI), a monthly summary indicator of overall economic conditions estimated from a larger dataset of high-frequency releases, fell sharply during the months of March and April reaching a historical low (Figure 1). The latest estimates show that economic conditions continued to improve into July and August, but the rate of recovery has slowed down. Despite the improvement over the four months to August, the overall level of the BCI remains substantially below that observed prior to the emergence of the COVID-19 crisis.
Figure 1: Business Cycle Indicator (BCI) for Ireland’s Economy
The outlook remains highly uncertain, depending not only on the economic consequences of COVID-19 and its containment, but also on the nature of the trading relationship between the EU and the UK. Recognising this uncertainty, Box E analyses the impact of a ‘severe’ COVID-19 scenario as an alternative to the baseline forecasts in which there is a strong resurgence of the pandemic, leading to the restoration of widespread and stringent containment measures for a more prolonged period. Underlying domestic demand is projected to fall by 8.5 per cent in 2020 in this case with a continued contraction of -1.3 per cent into 2021. While the economy does not begin to recover until 2022, underlying domestic demand remains 6 percentage points below 2019 levels. In the ‘severe’ scenario, the unemployment rate rises to 12.5 per cent in 2021 before moderating to 10.1 per cent the following year.
The bulletin also contains analysis on the latest income tax developments and measurement difficulties for the unemployment rate arising from COVID-19.