Donohoe: Country clearly in midst of a severe recession

The country is “clearly now in the midst of a severe recession” and is set to shrink by 10.5% this year on foot of the Covid-19 crisis, Finance Minister Paschal Donohoe said.

As a result, the public finances are under severe strain and a deficit of €23bn is now projected for this year.

That compares with a forecasted surplus of €1.4bn or 0.4% of GDP at the start of the year.

Mr Donohoe was speaking as his department published the annual Stability Programme Update (SPU) which is a legal requirement for members of the European Union.

This forecast is based upon the full restrictions in place at present being lifted after 12 weeks, but that deficit could spike to €30bn by year-end if the lockdown is continued.

The country’’s debt position will rise from €204bn to €218bn by the end of the year but that could be higher if more money is needed to combat the economic impact of the pandemic.

Chief economist at the Department of Finance John McCarthy said this recession is the most severe experienced since the Great Depression.

He said unlike the financial crash of a decade ago which affected only rich countries, this recession is hitting rich and poor countries alike across the globe.

Mr Donohoe said he is “hopeful” the country can avoid another “lost decade” as it experienced after the 2008 financial crash, but conceded there is still a huge level of uncertainty around the impact of the pandemic.

The Finance Minister said: “The labour market is bearing the brunt of the recession, moving from effectively full-employment in the early part of the year to exceptionally high levels of unemployment now and in the coming weeks. Unemployment of 22% projected for the second quarter. We anticipate that total employment will fall by 9.3% this year, with approximately 220,000 jobs being lost. Next year, employment is expected to grow by 5½% (115,000 jobs), reducing the unemployment rate to below 10%.”

While the economic deterioration has been unprecedented in terms of speed and scale, he said, so has the response from the Government.

Mr Donohoe said the deficit of around 7½% of GDP or €23 billion is very much in line with other euro-area Member States. “The SPU allows for an increase in expenditure of €8 billion on previously announced figures to account for measures taken in response to the Covid-19 crisis and also to fund income supports for our people. In particular, almost €2 billion is to be provided to support the Health service to boost capacity, purchase PPE and hire new staff,” he said.