Growth remains strong despite ongoing pandemic uncertainty and greater than expected rates of inflation

Despite continued uncertainty surrounding the COVID-19 pandemic, we expect overall strong growth this year, with Irish GDP set to increase by 13.6 per cent. The double-digit growth rate is largely due to multinational related activities, in particular strong export figures. However, the domestic economy as measured by modified domestic demand (MDD), is expected to grow by 6.2 per cent in the present year. Into 2022, we expect a continued strong performance of the economy, with both MDD and GDP set to increase by 7 per cent.

We expect the unemployment rate to fall to 7.2 per cent in Q4 2021 and average 16.1 for 2021 overall. Unemployment is set to fall further into 2022 and will average just under 6 per cent for the year, assuming no major deterioration in the epidemiological situation for a protracted period.

A return to more stringent public health measures required to manage rising infection levels is, however, a considerable risk for 2022. The uncertainty surrounding the need for future public health restrictions could impact the recovery for those in the most affected sectors. A further risk for 2022 is the possibility of disruptions in the trade agreement between the EU and the UK could present challenges for Irish trade to the United Kingdom. 

While we still expect inflationary pressures to ease considerably in the second half of 2022, increases in prices next year are set to be greater than we previously thought. At present, we expect an inflation rate of 2.4 per cent in 2021 and 4.0 per cent in 2022, with inflation falling back close to 2.0 per cent by Q4 2022.

The pace of economic recovery has contributed to a smaller deficit in 2021 than expected. This comes at a time when significant investment is likely in the years ahead in areas such as housing, climate change, and healthcare. In a Box to the Commentary, McQuinn and Disch assess the trajectory of the size of the Irish state. Given stated future Government policy, they find that expenditure levels, as a percentage of output, are not set to increase significantly.

Commenting on the report, author Kieran McQuinn of the ESRI stated:

“The robust recovery in the economy has eased the fiscal cost of the pandemic and helped to put the public finances on a more sustainable footing.”

Commenting on the report, author Conor O’Toole of the ESRI stated:

“The reopening of the economy through 2021 has led to a sharp rebound in the domestic economy, as households have increased spending. While the outlook remains positive in 2022 significant challenges may arise due to the ongoing presence of Covid-19, inflation and uncertainty around EU-UK trade relations”