Ireland faces the risk of long-term "scarring effects" from the Covid-19 economic crisis with unemployment remaining at stubbornly high levels, even as a strong recovery gets under way, the European Commission has warned.
In its latest country-by-country forecasts, the EU projects that a recovery led by increased exports from multinationals helped by a rapidly expanding US economy, as well as pent-up consumer spending will help the economy start on its recovery path.
GDP will grow 4.6% this year and by 5% in 2022, while the measure that more accurately reflects the economy as experienced by most Irish households, which strips out the accounting distortions of the multinationals, will grow even faster, by 4.3% and 7% over the two years.
Ireland was an outlier in the eurozone last year by posting growth, as measured in GDP terms.
That was thanks to the exports of pharma and IT firms, whose global exports boomed during the Covid pandemic.
The more accurate measure of modified domestic demand showed the economy actually shrank by 5.4% last year, amid the worst of the health crisis.
With the rollout of vaccines and the lifting of restrictions, private consumption will grow 5.5% this year "and accelerate" to grow by 8.6% in 2022, the EU projects.
However, the EU also warns that the legacy of unemployment could scar the Irish recovery.
It forecasts unemployment will average 10.7% this year, fall to 8.1% in 2022, which is above the pre-pandemic level of under 5%.
"There is a risk of "scarring effects" due to long-term unemployment and increased skill mismatches," the EU said of Ireland.
On the Government's finances, it forecasts that a budget deficit of 5% of GDP this year will fall to about 3% in 2022. That is lower than the eurozone-wide average of a deficit 3.8% of GDP.
"Overall, [Government] revenues were resilient," it said, with corporation tax revenues boosted by the pharma and IT exports. It forecasts Irish inflation will rise from about 1% this year to 1.3% in 2022.
On the EU-wide economy, Economics Commissioner Maarten Verwey said that the vaccines "are turning the page on the pandemic".
However, he said EU governments will have to refocus by withdrawing extensive emergency supports for companies and households.