Contraction
The latest Central Bank quarterly bulletin is predicting robust growth, if public health restrictions are eased, he said, in contrast to 2020’s “sudden and unprecedented contraction in economic activity”.
“To some extent it is easy now to take both events for granted, but had the EU and UK failed to reach agreement, and if effective vaccines remained elusive, the economic landscape could have looked quite different,” Scott points out in this year’s Smith & Williamson survey.
Ireland has weathered the COVID-related economic impact remarkably well, Scott added, and the understandable pessimism of last year has largely proved unwarranted though a number of downside risks still persist.
Forecast GDP growth of 15.3% for 2021 (5.9% in 2020) reflects this turnaround, he said.
The pace of recovery is demonstrated by the fact that the updated forecast for 2021 is almost double the 8.3% predicted in the previous quarter’s bulletin.
GDP growth is expected to moderate to 7.2% in 2022 and 5.3% in 2023, Scott added.
“Given the shortcomings of GDP in an Irish context, Modified Domestic Demand (which strips out the significant distorting elements of multinational activity) is seen as a much better measure of the underlying domestic economy.
“After a contraction in 2020 of 4.9%, growth of 5.5% is forecast for 2021 and 7.1% for 2022 before moderating back to 4.1% as economic conditions normalise.
Pre-pandemic levels
“Consequently — and surprisingly given what the country and economy have been through — the CBI forecast that domestic activity will be back to pre-pandemic levels by the end of 2021,” he said.
Personal consumption has been the primary driver of this growth and the labour market is continuing to recover, with 160,000 jobs forecast to be created by the end of 2023.
The unemployment rate is forecast at 7.3% for 2021 and 7.2% for 2022 before dropping back to 5.9% in 2023.
However, the spectre of inflation has returned, driven by a post-pandemic surge in demand for goods, significant supply constraints (both product and labour) and energy price rises.
Inflationary cycle
The key question is whether such issues are temporary or will prove to be more persistent leading to the risk of a dangerous wage demand-driven inflationary cycle, Scott added.
However, both CBI and the ECB remain sanguine at present, viewing the issue as temporary, with supply/demand imbalances resolving themselves and energy prices normalising, thus avoiding the need for interest rate rises.
Inflation as calculated using the Harmonised Index of Consumer Prices (HICP) is forecast at 2.1% for 2021 increasing to 2.9% for 2022 before falling back to 1.9% in 2023.