Oliver Mangan: GDP figures mask difficult year for Ireland's domestic economy

The economy started to emerge from lockdown in April and all the signs are of an exceptionally strong rebound in domestic activity since then

Mon, 09 Aug, 2021 - 15:00

Oliver Mangan

The Irish economy weathered the global recession caused by the Covid-19 pandemic better than most, thanks to a robust performance by its multinational sector that saw exports rise by 9.5% last year. The latest CSO data show GDP increased by 5.9% in 2020, with GNP increasing by 3.4%.

However, this masks a very difficult year for the domestic sector, with modified final domestic demand contracting by 4.9%, largely driven by a 10% fall in consumer spending. The domestic economy, though, did stage a good recovery in the second half of the year.

Meanwhile, real net national income fell by 4.3% last year. These declines, while steep, are quite a good deal less than the contractions of 6.5% and 9.8% recorded by the eurozone and UK economies, respectively, last year.

Dual economy

With the country back in lockdown during the first quarter of this year, we saw a continuation of the dual economy trends evident in 2020. Exports continued to perform strongly, rising by a further 2.3% in the quarter, fuelling a continued rise in GDP.

The domestic economy, though, saw a renewed contraction, with modified final domestic demand falling by 3.5%, driven by a near 6% decline in consumer spending.

The economy started to emerge from lockdown in April and all the signs are of an exceptionally strong rebound in domestic activity since then. Core retail sales (ie excluding the motor trade) rose by 10% in the second quarter, leaving them 5.3% above their pre-pandemic levels.

Meanwhile, new car sales in the first half of 2021 were up by more than 20% on the same period in 2020.

PMI survey data for the services and manufacturing sectors have been very buoyant in recent months. The services PMI reached a 20-year high of 66.6 in July, with the manufacturing PMI hitting a record high in May and remaining close to this level in the following two months. The construction PMI has also rebounded very strongly in recent months.

Indeed, house building activity performed much better than anticipated in the first half of the year. Completions rose by 10% in the opening six months of 2021, while there was a very encouraging pick-up in commencements of new builds in April and May. Mortgage lending was up by 25% in the first half of 2021.

Positive impact on labour market

The sharp economic rebound is having a very positive impact on the labour market and public finances. The number on the Pandemic Unemployment Payment (PUP) had fallen to 163,000 by the end of July from 485,000 earlier in the year. The unemployment rate, including those on the PUP, is in sharp decline, falling from 27% in February to 13.5% in July. The standard unemployment rate was at 6.5% in July.

Meanwhile, Government tax receipts were up by 13% to the end of July, and over €1bn ahead of target, with the budget deficit starting to decline.

The recovery in activity can be expected to continue, especially as the very high level of vaccination rates in Ireland should allow for more restrictions to be lifted and for other sectors to reopen.

Meanwhile, the large-scale build-up of private sector savings continued in the second quarter. By the end of June, they were €45bn, or 20%, above their pre-pandemic levels of early 2020.

Some of these savings can be expected to be run-down, adding fuel to the recovery in activity. With both fiscal and monetary policy remaining supportive of growth and the global economy also recovering strongly, it augurs well for the robust rebound by the Irish economy to continue in the months ahead.