COVID-19 caused an unprecedented contraction over the last year which is likely to remain the dominant determinant of the path of the economy this year and next, Mark Cassidy, director of economics and statistics at the Central Bank, told an Oireachtas budgetary oversight committee this morning.

The near-term prospects for the economy have deteriorated following a resurgence in cases early in 2021.

Deployment

But a successful deployment of vaccines offers the prospect of recovery from the second half of the year, underpinned by continued support from accommodative monetary and fiscal policy, he said.

Cassidy said GDP growth of 3.4% last year indicates remarkable resilience. The headline GDP figure was boosted by strong export growth, accounted for by a surge in pharmaceutical exports and continued strength in the IT sector. 

Drop

This masked a drop in domestic demand which was among the most severe in the EU, with the largest declines in sectors with a high dependence on face-to-face contact with customers including the arts, hotels, bars and restaurants and high-street retailers. 

Private consumption last year was down by 9% compared with the previous year, with modified domestic demand down by 5.4%. 

“The impact of the pandemic is particularly evident in the labour market,” he said.

While the headline unemployment rate has not changed significantly, the COVID-adjusted rate which includes those availing of the pandemic unemployment payment (PUP) increased rapidly and currently stands at a rate of 24.8%. 

Including the employment wage subsidy scheme (EWSS), around 960,000 people, or 39.3% of the labour force, are currently in receipt of one form of income support or other.

Younger and lower-paid workers have been most affected. 

The concentration of the pandemic labour market shock among workers in the bottom half of the income distribution is reflected in a corresponding decline in earnings.

That this has not been reflected in a decline in disposable incomes – which actually increased last year by about 4% – is testament to the effectiveness of government income support measures, Cassidy said.

Similarly, government support measures have provided significant mitigation to the financial distress to SMEs most affected by pandemic-related business disruption.

These supports have been unprecedented in scale, amounting to over 11% of Modified Gross National Income, with an increase in public sector debt and the debt to national income ratio.

Uncertain 

Reimposed lockdown measures weakens the near-term outlook and make it more uncertain, Cassidy said, with significantly dampened economic activity.

But given a successful vaccine rollout, modified domestic demand is forecast to grow by 2.9% in 2021, while GDP is projected to grow by 3.8%, although the recovery in the labour market is likely to lag somewhat.

A further pick-up is projected in 2022, with modified domestic demand forecast to grow by 3.6% and GDP projected to grow by 4.6%, Cassidy said. 

While uncertainty and a subdued labour market are likely to keep precautionary savings elevated in 2021, these restraints should ease next year.

Unwinding 

The unwinding of the large stock of savings accumulated during the pandemic should support a strong recovery in consumption in 2022, he said.

Similarly, the reduction in uncertainty should allow investment to begin to recover next year.