IMF: Strong but 'two-speed' recovery for Ireland is under way

Domestic side of the economy that has been worst hit by Covid health restrictions will take longer to recover, while the IT and pharma multinationals will continue with their exporting boom, report says

The domestic economy will grow less robustly than the IT and pharma sectors, and take a while longer to recover, IMF says. Picture: Dan Linehan

Ireland's economy is getting out of the Covid slump at a rapid pace as the vaccines are rolled out, but an uneven rebound suggests a two-speed recovery is underway, the IMF has said.

In an upbeat report, the fund said the domestic side of the economy that has been worst hit by the Covid health restrictions will take longer to recover, while the IT and pharma multinationals will continue with their exporting boom. 

In GDP terms, the Irish economy will grow 4.6% this year and by almost 5% in 2022, thanks to the foreign-owned IT and pharma exporting giants, while the domestic economy will grow less robustly, and take a while longer to recover. 

Unemployment will average 6.8% this year and fall back to 5.7% in 2022, meaning the jobless rate will still be above the sub-5% level in February last year, on the eve of the pandemic taking hold, according to the IMF forecasts.       

Ireland was one of the few advanced economies in the world to post an expansion in GDP terms during the height of the pandemic last year, thanks to the multinationals. 

However, other measures of the economy, including domestic demand, revealed the true nature of the hit taken by the domestic side of the economy, after Ireland adopted "one of the most stringent containment regimes", the IMF said.   

"The domestic sector, which is more labour-intensive, contracted by about 10% in 2020, but the strong growth of MNEs [multinationals] softened the blow to the economy and public finances," the fund said. 

With the vaccine rollout under way and an EU-UK trade deal in place "notwithstanding uncertainties surrounding implementation of some aspects", domestic-owned exporters face brighter prospects, while the outlook for the IT and pharma multinationals also looks promising, the IMF said. 

Economy to roar back

The IMF's GDP forecasts appear conservative compared with the expectations of some senior Irish forecasters, who forecast the economy to roar back this year, with double-digit growth in GDP.  

The Economic and Social Research Institute will reveal its latest forecasts next week. 

The IMF said Government plans to spend big on infrastructure and affordable housing will require greater efficiencies to rein in the elevated debt levels after the pandemic.  

On the the global talks to upend the way multinationals are taxed around the world, the IMF is also sanguine about the fallout for Ireland, in terms of the potential hit for the exchequer's corporate income tax, or CIT, receipts.    

"Future  CIT revenue could be impacted by a possible adoption of an international minimum tax that is higher than Ireland’s 12.5% although it would be mitigated by Ireland’s non-tax comparative advantages that are likely to continue to attract FDI [foreign direct investment]," the IMF said. 

Finance Minister Paschal Donohoe has reiterated the tax reforms could cost the Government about €2bn a year in lost revenues.