ESRI: 'Groundhog day' should Omicron flare and derail exceptional recovery

Any more severe restrictions could stifle rebound of the economy and hit certain sectors severely

Ireland’s leading economics think tank details “a very robust” recovery in the domestic economy, citing the much better than anticipated fall in Covid-driven unemployment, higher than expected levels of household spending, and the healthy state of the public finances despite the scale of the economic crisis over the last 21 months.

The Irish economy is facing a “Groundhog day” as the Omicron variant again places a huge uncertainty over jobs in cafés, pubs, hotels, and tourism even as the domestic economy roars back, according to the Economic and Social Research Institute (ESRI).

In its latest major economic commentary, the ESRI said that hanging over its outlook for an exceptionally strong recovery next year is the threat that Omicron could lead to a new round of severe restrictions.

“The current and perhaps most concerning issue is the risk that new variants of Covid-19 will prove to be highly contagious and severe, perhaps including the existing Omicron variant, and the potential need for increased restrictions to curb their spread,” it warns in what is otherwise an upbeat assessment.

In the absence of new restrictions, Ireland’s leading economics think tank details “a very robust” recovery in the domestic economy, citing the much better than anticipated fall in Covid-driven unemployment, higher than expected levels of household spending, and the healthy state of the public finances despite the scale of the economic crisis over the last 21 months.

However, the unknown scale of the threat entailed by the Omicron variant means there is a huge number of risks both to the downside and the upside of its economic forecasts, ESRI research professor Kieran McQuinn and associate research professor Conor O’Toole told reporters.

The ESRI forecasts that inflation, which is currently running at 5.3%, will not dissipate in the winter months as international energy costs continue to push up consumer prices and sees consumer price inflation peaking at 6% in March before falling rapidly through the rest of the year.

On the €100 rebate for household utility bills the Government has pledged, the ESRI said such payments were among the range of measures recommended by the European Commission.

Although not at the centre of its forecasts, any onset of high wage settlements to compensate for inflation could set off a wage growth spiral, Mr O’Toole said.

However, house price inflation will be much more long-lasting. Mr McQuinn said the part of inflation that the Government can do something about, namely house price increases, will likely continue to remain at elevated levels over the next 12 months.

Shortages of new homes due to the pandemic, and demand probably being further driven by the release of pent-up savings will mean that house prices and rents will rise in the next 12 months.

He said there were risks of overheating in the economy before the onset of the pandemic, and that such pressures could re-emerge again.

That is why it has supported the Government’s plans for capital spending projects while calling “for discipline” over current spending, Mr McQuinn said.

House prices rose by an annual 13.5% in November, new CSO figures published yesterday showed.

The ESRI said household spending was playing a significant part in driving overall consumption as built-up savings during the crisis will likely continue to be released.

However, some of the savings will inevitably flow into house purchases and potentially fuel house prices at a time of acute shortages, the ESRI warned.

Meanwhile, employment and unemployment levels showed “the most dramatic improvements” for the domestic economy, Mr O’Toole said, but he added that some workers in wholesale, retail, accommodation and food service — the parts of the economy worst hit by the pandemic — are those who face the greatest risk of long-term unemployment.

Exports are behind the “exceptional growth” in the Irish economy, and multinationals are not the only corporates pushing the exports drive, as smaller indigenous firms also contribute hugely, the ESRI said.

Kieran McQuinn,  a research professor at the  ERSI, says inflation will not dissipate in the winter months as international energy costs continue to push up consumer prices.

Exporters selling across the Irish Sea have also benefited because Britain has yet to impose full customs checks on goods arriving at its ports from the EU.

Investment levels in the economy have been boosted, but much will rely on the course of the developing Omicron outbreak.

The public finances are also at this stage in good shape, the ESRI said. The think tank forecasts the Government’s budget deficit of around 2.3% of GDP this year, equivalent in money terms to €9.7bn, will fall to a deficit of 1%, or €4.8bn, in 2022.

As a proportion of economic activity, the size of the Government or its spending has already peaked and, based on Government spending plans over the coming years will be back at 2015 levels and “relatively stable”, Mr McQuinn said.

The ESRI forecasts that GDP will surge by 13.6% this year and by 7% in 2022, as long as the Omicron variant fails to make a significant impact.

Under the modified domestic demand measure, which more accurately describes what is going on in the domestic economy by excluding the effects of some of the activities of multinationals, the economy will also grow strongly — by 6.2% this year, and by over 7% in 2022.

The risks to the outlook are considerable “notwithstanding the strong domestic economic performance”, the ESRI warned.

“The increase in Covid-19 infections during quarter four 2021 along with the emergence of the Omicron strain does give rise to the possibility of additional public health restrictions in early 2022,” it said.

“At the very least this creates considerable uncertainty for those operating in the sectors of the economy most affected,” according to the report.

The ESRI also highlighted the cloud of uncertainty caused by Brexit, should the talks go badly: “...the possibility of significant disruption in EU-UK trade would have particularly adverse implications for the Irish economy given its small open nature”.

“The ongoing negotiations between the British Government and the European Union concerning the Withdrawal Agreement and the implementation of the Northern Ireland Protocol has led to more uncertainty in terms of the nature of the trade relationship between the EU and the UK and the UK and Ireland.”