This article is from our April 2021 edition of MarketWatch.
28th April, 2021
Ireland’s near-term prospects remain largely dependent on the pace of vaccine rollout. At the time of writing only a marginal easing of business restrictions seem likely in April and the government may only be able to provide a very broad outline of how quickly the economy can re-open in the coming months, conditional on progress in fighting the virus.
In our last Irish economic forecasts published in January for GDP (Gross Domestic Product) to expand by 4.8% in 2021, we assumed activity would contract early in the year, with only a partial bounce-back in the second quarter and the recovery continuing into the second half. Three months on, this view seems broadly correct, but a clear risk is that restrictions could be extended through the summer.
Recent months have also shown a marked pick-up in business and consumer confidence towards pre-pandemic levels as companies and households anticipate activity levels returning to normal. Bank of Ireland’s economic pulse survey for March this year, showed that a positive net balance of firms expect employment to rise over the next three months.
Also, the third lockdown has had a marked negative impact on economic activity, but less so than in April and May 2020. For example, Pandemic Unemployment Payment (PUP) claimants peaked at 480,000 in February 2021, well below the 600,000 recorded last year. Similarly, credit and debit card spending in March was up 11% on the year.
However, Apple and Google mobility data point to a more marked impact on activity from Covid-19 related restrictions in Ireland vis-à-vis European countries, consistent with stricter business conditions.
One exception to the rule has been the housing market. Residential transactions show no impact from the third lockdown, in part because the busy summer trading season was delayed last year, with agreed sales only being finalised early in 2021.
Residential property price inflation accelerated to 2.6% in January. Further price rises are likely because the market has tightened due to the lack of housing supply, but with demand remaining robust.
For now, the Irish government has extended most income supports for companies and households. However, the Central Bank has warned temporary emergency spending measures cannot be allowed to become permanent features. Minister for Finance, Paschal Donohoe, has also warned October’s Budget 2022 will have to set out a credible path to deficit reduction.
Given €5bn of spending commitments on health, education, and housing in Budget 2021, tax rises may be required to close the deficit. That said, it should be remembered Ireland’s government €19bn deficit in 2021 will likely be close to 5% of GDP, one of the smallest in the OECD. So the starting point for Ireland in repairing the public finances is relatively favourable.