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The Irish economy is set to experience the largest annual decline in its history with a significant downturn in consumption, investment and exports of goods and services, research has found.<\/p>\nThe Irish economy is set to experience the largest annual decline in its history with a significant downturn in consumption, investment and exports of goods and services, research has found.<\/p>\n
A report by the Economic and Social Research Institute (ESRI) stated that the unprecedented increase in public expenditure to combat Covid-19, coupled with the loss in revenue from the fall in economic activity, will lead to a significant government deficit this year.<\/p>\n
The ESRI\u2019s summer quarterly economic commentary assesses the future prospects for the Irish economy under three different scenarios \u2013 baseline, severe and benign.<\/p>\n
The baseline scenario, which is considered the most likely to occur, follows the government roadmap for reopening through to August.<\/p>\n
After this point, the economy begins to recover but operates below its pre-pandemic level due to ongoing measures such as physical distancing.<\/p>\n
In the severe scenario, a second wave of the Covid-19 outbreak with strict lockdown is assumed towards the end of the year.<\/p>\n
The benign scenario assumes successful disease suppression which allows a return to economic normality.<\/p>\n
In the baseline scenario, real GDP is expected to decline by 12.4% this year.<\/p>\n
The ESRI said that regardless of the scenario, the Irish economy is set to experience the \u201clargest annual decline\u201d in its history.<\/p>\n
Consumer spending is assumed to fall sharply by 13% and investment by nearly one-third if the country follows its current roadmap.<\/p>\n
In what is described as a \u2018new normal\u2019, food spending will drop by 1%, drink and tobacco is expected to fall by 18%, clothing and footwear will drop by 25% and transport by 34%<\/p>\n
Two areas where the economic impact of Covid-19 has been clearly visible are the labor market and public finances.<\/p>\n
The unemployment rate reached a record high of over 28% in April.<\/p>\n
Research indicates that young workers and those living outside of Dublin have been most heavily impacted.<\/p>\n
It also shows that people living in the border region account for almost 30% of people claiming the pandemic unemployment benefit.<\/p>\n
While unemployment is expected to decline as the economy reopens, unemployment is expected to be above 17% for the year as a whole.<\/p>\n
In the baseline scenario, the government deficit is expected to be over \u20ac27bn or 9% of GDP.<\/p>\n
\u201cThe financing of such large deficits will come into sharp focus in the months ahead and hard choices will have to be made,\u201d the report said.<\/p>\n
\u201cOngoing, coordinated, action by EU policymakers will be required to ensure national governments including Ireland have the fiscal space to deal with the virus and reboot their economies.\u201d<\/p>\n
Dr Conor O\u2019Toole, senior researcher, said: \u201cThe scale of shock that we have faced is completely unprecedented and without equivalent in modern economic times.<\/p>\n
\u201cWhen we come out of the pandemic phase, many households will have accumulated savings that they can use for expenditure and this may provide a stimulus.\u201d<\/p>\n
The report stated that future disposition of household savings could have a significant impact on the nature of the economic recovery, and an increase in consumption next year could act as a significant stimulus to the economic recovery.<\/p>\n
However, continued uncertainty next year could postpone such a consumer boom to 2022 or beyond.<\/p>\n
Dr O\u2019Toole said that it depends on how fearful households are of disease transmission.<\/p>\n
Professor Kieran McQuinn, research professor, said that people will only spend their savings when they are confident the economy has reopened.<\/p>\n
\u201cWhen people see the economy is back to a relatively significant growth, you may begin to see people spending but people will be reluctant to do so if the economy continues to decline,\u201d he added.<\/p>\n
Prof McQuinn said that as the economy opens up over the coming weeks and months, there is a argument for a \u201cbroad base\u201d fiscal stimulus in a bid to kick-start activity for the rest of next year.<\/p>\n
\u201cA stimulus that concentrates on investment issues and significant increases in investment is probably the most appropriate of response,\u201d Prof McQuinn added.<\/p>\n
\u201cThose investment projects would look at ones which would have environmental and sustainability criteria, I think it\u2019s important we try and maintain and reach our environmental targets, notwithstanding the duress that is there.<\/p>\n
\u201cWe also think the housing area is crucial.<\/p>\n
\u201cSocial and affordable housing is an area where there has been a substantial imbalance between supply and demand over the last number of years.<\/p>\n
\u201cAddressing that and meeting the commitments made would meet two criteria, it would help stimulate economic activity and meet a key policy issue.\u201d<\/p>\n