The Government is being urged “to hold its nerve” and continue to support the economy through any second wave of the Covid-19 pandemic.
Kieran McQuinn, research professor at the Economic and Social Research Institute (ESRI), said the new restrictions for Dublin will likely slow the fall in unemployment this year, but that recovery could still be robust when it finally gets underway.
The underlying strength of the economy “validates” Government policies in supporting the economy, Prof McQuinn said.
“We are spending huge amounts of money, as most countries are, in supporting the economy and it is right and proper that we do that. But obviously it is leading to a large deficit this year, and more than likely a large deficit next year,” he said in an interview.
For a second time in a decade, the multinationals are to some degree insulating the economy from the worst of the economic damage.
The message for the Government was to hold its nerve under any second wave of the disease, he said.
The budget deficit this year could be closer to €25bn and below the official projection of between €25bn to €30bn amid the outsized performance of corporate tax receipts and “remarkably” resilient income tax receipts, the ESRI forecasts.
In 2021, assuming restrictions settle at Level 2 through the year, the ESRI projects a budget deficit of €15bn or €16bn, which is again at the lower end of the Government forecast.
Prof. McQuinn said if the increases in Covid cases were to be reined-in, the economy is heading toward a strong recovery.
However, if the restrictions were to return to Level 4 then there would be a return to “very stark numbers indeed”.
Before the announcement of the Level 3 restrictions in Dublin last weekend, the ESRI had anticipated unemployment would continue to fall, to around 12.5% by the end of the year, from around 15%, Prof. McQuinn said.
With Dublin moving into Level 3 for at least three weeks, unemployment will likely settle at between 13% or 13.5% by the end of the year.
For 2021, ahead of the Dublin announcement, the ESRI had anticipated unemployment would fall below 10%. However, under Level 3 and Level 4 restrictions, unemployment would struggle to fall again in 2021.
A jobless rate of between 12.5% and 13.5% implies over 300,000 people are unemployed, while a single-digit unemployment rate implies between 230,000 and 240,000 people are caught up in the crisis.
Meanwhile, the Central Bank said new research showed that households were in better financial health ahead of the Covid-19 crisis than they were going into the global financial crisis of over a decade earlier.
Its researchers showed net wealth had increased as house prices recovered and paid down mortgages, while inequality also fell.
The figures showed “the improved financial position and resilience of households prior to the Covid-19 crisis than by comparison to the lead-up to the 2008 financial crisis,” the Central Bank researchers said.