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Economic outlook depends on the virus – Central Bank
Mark Cassidy of the Central Bank Picture: RollingNews.ie

03 Jul 2020 / covid-19 Print

Economic outlook depends on the virus – Central Bank

The Central Bank has said that the Irish economy could shrink by as much as 14% this year as a result of the disruption caused by the COVID-19 pandemic.

In its latest quarterly bulletin, the bank says the pandemic has had a severe impact across the economy, triggering sudden and large-scale job losses and hitting consumer spending and investment.

It welcomes government measures to ease the impact of the virus, but warns that higher debt levels could leave the public finances exposed to future economic shocks.

Scenarios

Its bulletin says the hardest hit sectors have been those with a high dependence on face-to-face contact or physical interaction, including accommodation and food services, retail and construction, with high-tech manufacturing, computer services and the pharmaceutical and chemical sectors less affected.

The Central Bank sets out two scenarios for the year. Under the first, the planned phased easing of restrictions comes into effect and there is an initial rebound in economic activity over the near term.

Under this scenario, consumer spending recovers, but still falls by 10% this year, while the unemployment rate comes down to about half its current 25% level. Overall, GDP falls by 9%.

Severe

In a more severe scenario, many restrictions remain in place in anticipation of a resurgence of the virus, and the recovery is more subdued. Unemployment averages almost 17% and consumer spending drops by 14%, leading to a 13.8% slump in GDP this year.

The Central Bank warns that both of these scenarios assume that a free trade agreement between the EU and the UK, with no tariffs and quotas on goods, takes effect in January 2021.

If such an agreement is not reached, then the EU and the UK would move to trading on WTO terms from January 2021, which would exacerbate the effects of the pandemic on some sectors of the economy, such as agriculture.

'Deep downturn'

Mark Cassidy, the bank’s director of economics and statistics, said that while there was considerable uncertainty, the scenarios it had outlined pointed to a “deep downturn” this year, followed by a gradual recovery.

“The path ahead for the economy will depend on the path of the virus,” he added.

Mr Cassidy described the rise in government deficit and debt ratios as “both warranted and necessary”, and the bank estimates that measures taken at home and internationally could reduce the fall in the Irish economy this year by almost four percentage points.

Vulnerable

But it warns that the high level of the debt leaves government finances vulnerable to future shocks to growth and interest rates.

“While additional policy measures may be required to give some impetus to recovery, it will be important, in due course, for the government to provide for a clear and credible return to much lower and sustainable deficit and debt positions,” says Mr Cassidy.

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