The ESRI forecasts are based on data available by 18 May 2020.
In a conference call yesterday, Professor McQuinn said there was an argument for broad-based fiscal stimulus for the rest of year, as the economy opens up.
A lot depends on how quickly the storm is ridden out, he said, predicting that demand for pharma products manufactured in Ireland is unlikely to be affected.
However, reduced globalisation will have an impact on the Irish economy, he said.
Professor McQuinn said that output will likely contract by 12% in 2020 and the tax take will be down €59.3 billion to just €51 billion.
A significant build-up in personal savings due to lockdown could act as stimulus to spending as the economy recovers.
However, this will depend on sufficient disease suppression so there is confidence to go out and spend, the webinar heard.
“Policy is needed to both stabilise and ignite the economy for consumers to regain confidence”, Professor McQuinn said.
“The incoming government needs to be aware that there will be a need for fiscal adjustment,” he said.
However, he warned that too-early adjustments will compound a downturn, and the focus should be on igniting economic activities.
“The Irish economy was in very good health in February and outperformed most competitor economies, so it is in a good position to recover,” he observed.
But government steps will be crucial, in limiting the scale of adjustment required down the road.
Erosion of wealth
He said there was a huge erosion of wealth in the last financial crash, due to the credit bubble, and because of that Ireland was ultimately locked out of credit markets.
“This pandemic is a shock … but we have to be confident that, once the medical crisis passes, the economy can go back to being very, very strong,” he said.
He said it was important that environmental and sustainability criteria and targets are met, despite current duress.
Professor McQuinn said this was a good time to address the substantial imbalance in supply and demand for social and affordable housing.
The €1.5 billion allocated in the budget for social and affordable housing should be both spent, and if possible, increased, he said.
Meeting these commitments would stimulate economic activity, as would commitments on retro-fitting of housing stock to modern environmental standards.
The ESRI Summer Quarterly Economic Commentary assesses the future prospects for the Irish economy under three different scenarios: baseline, severe and benign.
The baseline scenario is considered the most likely whereby the economy begins to recover after August 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 in Q4.
The benign scenario assumes that successful disease suppression allows a return to economic normality in Q4.
In the baseline scenario, real GDP declines by 12.4% this year. This compares with a decline of 17.1% in the severe scenario and an 8.6% fall in the benign scenario.
Regardless of the scenario, the Irish economy is set to experience the largest annual decline in its history.
All aspects of the economy will be considerably affected with significant declines in consumption, investment, and exports of goods and services, the ESRI said.
Consumer spending is assumed to fall sharply, by 13%, and investment by nearly one-third in the baseline scenario.
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 in the commentary indicates that young workers and those living outside of Dublin have been most heavily impacted.
While unemployment is expected to decline as the economy reopens, the ESRI baseline scenario still has unemployment above 17% for the year as a whole.
The unprecedented increase in public expenditure to combat the virus, coupled with the loss in revenue from the fall in economic activity, will lead to a significant government deficit in 2020.
In the baseline scenario, this deficit is expected to be over €27 billion or 9% of GDP.
Analysis in the commentary highlights the importance of continued intervention by the ECB to support Irish bond spreads given the increase in the country’s debt and the fall in aggregate income.