ESRI: Economy set for ‘remarkable’ upturn but unemployment still at 10% at end of 2021

A busy pre-Christmas shopping scene on St Patrick's St, Cork, as the ESRI forecasts a huge economic recovery. Picture: Larry Cummins

After an extraordinary year, the economy is heading for a huge recovery helped by the unleashing of billions in household savings but even a strong rebound will still mean 240,000 are left unemployed and it will take a number of years for the jobless rate to return to its pre-Covid-19 pandemic level.  

These are among the key forecasts from the Economic and Social Research Institute (ESRI) as it tracks the likely path leading to the start of a strong recovery in 2021.

This year, the think tank's final major quarterly report of 2020 sets out the uneven victims of the crisis as well as the starring role played by the multinationals where exports of pharma and medical device products and computer services helped to support other parts of an economy pummelled by some of the toughest domestic lockdowns in Europe.

In GDP terms, the economy will grow by a “remarkable” rate of almost 5% this year, said senior research officer Conor O’Toole, after goods exports boomed. That's in sharp contrast to the domestic-facing economy facing the unprecedented shocks of the lockdowns and the surge in pandemic-driven unemployment.

In 2021, and even though the forecasts incorporate the effects of a further level 5 lockdown in the early months as Covid cases spike again after Christmas, the recovery marks "a very strong pickup in the economy", said the ESRI.  

"In its latest Quarterly Economic Commentary, the think-tank said exports by pharmaceutical and IT companies have remained strong but the shock of Covid-19 will impact the domestic economy for some time to come." https://t.co/jqi5vuHG8c

— Economic and Social Research Institute (ESRI) (@ESRIDublin) December 17, 2020

The think tank sees a likely large jump in spending of billions of euro next year, as savings built up because households who kept their jobs and had nowhere to spend their money during the lockdowns are run down. Consumption levels jump regardless of the economic hit taken should the UK and EU fail to agree on some sort of free trade agreement in the Brexit talks. 

The ESRI sees the savings ratio which climbed to 21%, or €25bn, falling back to below 14%, or around €17bn, as a large part of the Covid savings are spent, but the additional spending could put unwelcome pressure on parts of the economy.                

Under a no-deal Brexit outcome, the economy will still grow, but by only 1.5%, as trade to and with Britain suffers.

The report details that Ireland went through one of Europe's sharpest contractions for consumption in the second quarter, reflecting the relative severity of the lockdown here, but the fallout of subsequent lockdowns was much less severe. 

Despite the upbeat news in terms of economic activity, the ESRI sees unemployment staying at an elevated level for some time, said research professor Kieran McQuinn.    

Prof. McQuinn said that the unemployment rate, at 21% in November, will be at 10%, representing 240,000 unemployed, at the end of next year, even allowing for a successful rollout of vaccines.  

And while unemployment will fall sharply at first, getting back to February's pre-pandemic unemployment level of below 5% will take two or three years, said Prof McQuinn. "And even that may be on the optimistic side," he said. 

Nonetheless, there are few economies in the world that will grow this year, said the ESRI, as people working in multinationals and in the public sector kept their jobs and built up savings. 

Despite the upbeat news in terms of economic activity, the ESRI sees unemployment staying at an elevated level for some time, said research professor Kieran McQuinn.    

On the public finances, the ESRI is upbeat about the State being able to finance the additional enormous levels of debt entailed in the Covid crisis in the years to come, as long as the ECB ensures eurozone sovereign bond yields are kept low.      

The think tank assumes that the annual budget deficit will fall back to zero in a few years, but warns that the lesson of the past remains that additional spending will have to be funded from Government tax revenues.   

For that reason, the ESRI said it has reiterated the warning over the Government relying on now buoyant corporation tax receipts to fund large increases in spending into the future. 

Asked whether it was the wrong time to be cutting levels of pandemic unemployment payments, Prof McQuinn said the ESRI's general view was that Government measures will be tapered as the economy emerges from the crisis, but as long as there are health restrictions and elevated levels of unemployment that "crucial" supports are still required. 

Much will depend on the rollout of vaccines, said Prof McQuinn.