The Central Bank has said the outlook for the domestic economy this year is more uncertain, as tighter COVID-19 restrictions have lasted longer than it had assumed earlier this year.

In its latest quarterly economic bulletin, however, the bank says weaker prospects for domestic demand this year will be offset by better prospects for exports. This is due to rising global demand and continued strength in areas such as pharmaceuticals and computer services.

As a result, the bank has forecast that modified domestic demand will grow by 2.8% this year, a slight downward revision from 2.9% in its last bulletin. The GDP growth forecast has, however, been raised sharply to 5.9%.

Vaccine roll-out 

Preliminary figures for 2020 showed that GDP grew by 3.4%, but this masked a decline in domestic demand of 5.4%, which the bulletin says was among the most severe in the EU.

The Central Bank still believes there will be a strong recovery in the domestic sector, if vaccines are successfully rolled out by the second half of the year.

Mark Cassidy (pictured), the bank’s director of economics and statistics, said the pandemic, and the measures to contain its spread, were continuing to suppress economic activity.

Subdued

“Our forecast is for activity to remain subdued in coming months before gradually recovering in the second half of 2021 and then picking up momentum in 2022,” he said.

The bank says a €15.7 billion increase in household deposits between March 2020 and February 2021 will have a significant impact on the pace and timing of the post-pandemic recovery in domestic demand, depending on when and how it is spent.

The underlying unemployment rate is forecast to increase to 6.6% this year and 8.1% in 2022 as measures such as the Pandemic Unemployment Payment (PUP) are wound down.

Maintaining supports

On the public finances, the Central Bank backs the additional Government spending on pandemic support measures, adding that this will need to be maintained over the short-term to stabilise the economy.

But it warns that, when health risks diminish, any continued support spending should be “targeted and temporary”. It says that, although action may not be needed now to reduce debt levels, “it is important to plan to reduce the level of the debt ratio in time to a more sustainable level”.

On Brexit, the bank says recent UK and Irish trade figures provide “tentative early evidence” of a negative effect on the economy, though it stresses that much of the drop in trade volumes may be related to pandemic effects and stock-building in the last three months of 2020.