The Government has warned that the COVID-19 pandemic is expected to leave long-term scars on the Irish economy, particularly the labour market, despite an expected recovery as restrictions ease.

The Department of Finance’s Stability Programme Update (SPU) sees economic output, as measured by GDP, growing by 4.5% this year, with modified domestic demand rising by 2.5%.

The latter includes domestic consumer and Government spending, as well as investment.

Labour market bears brunt

The document forecasts, however, that domestic growth will outstrip GDP growth in 2022 due to pent-up consumer demand.

It expects domestic demand to increase by 7.5% in 2022, compared with 5% for GDP.

The department points out, however, that although activity in the domestic economy should return to its pre-pandemic level by the end of this year, activity over the next few years will remain below what would have been expected had COVID-19 not arrived.

It says the labour market has borne the brunt of the pandemic, with the number of hours worked at the end of last year 9.5% below the pre-pandemic peak.

Debt levels to rise

The SPU says the level of employment will remain below its pre-crisis peak until the first quarter of 2023. The unemployment rate is projected to average just over 16% this year, before declining to just over 8% in 2022 as the economy is fully reopened.

The 5.5% rate forecast for 2025, however, will still be above the pre-pandemic average rate of 5%.

The department expects a slightly lower general government deficit of €18.1 billion, or 4.7% per cent of GDP, this year, falling to €11.6 billion (2.8% of GDP) in 2022.

The document also warns that a projected public debt of €239 billion this year would represent almost 112% of domestic economic output and would put Ireland’s debt-to-income ratio among the highest in the developed world. Lower interest rates are easing the burden of debt repayments.

The department also warns that a deterioration in the virus situation would delay the recovery and could increase the scars associated with the pandemic.