The COVID-19 pandemic and the necessary measures to contain the spread of the virus caused a sudden and unprecedented contraction in economic activity, both domestically and globally, during the second quarter of 2020. Similar to the pattern seen elsewhere, since the trough reached in the April-May period, Irish economic activity has rebounded somewhat with the re-opening of economy. However, the recovery has been partial and uneven and, in many cases, levels of domestic-focussed economic activity remain well below pre-pandemic levels. In overall terms, the evolution of domestic economic activity in recent months has been broadly consistent with the baseline scenario outlined in the previous Bulletin, with labour market developments marginally weaker than envisaged, while consumption and underlying domestic demand have performed slightly better.
Since the publication of the last Quarterly Bulletin, evidence from real-time data, and indicators such as retail sales, suggest that there has been a strong rebound in some elements of spending, but with continuing weakness still evident in other areas. In particular, consumer-facing services sectors, such as tourism, hospitality and retail services sectors, which are also more labour-intensive, have been slower to recover. Reflecting this, the pace of decline in the COVID-adjusted unemployment rate has become more gradual and there continues to be differences in labour market impact across sectors and regions, and also by age and gender. While the damage to household incomes has been mitigated by the provision of large-scale income supports, precautionary behaviour has intensified, evidenced most clearly by the sharp rise in household savings. How these savings are used will be important in shaping the recovery from the current downturn. There has also been evidence of a strong divergence in performance between the resilience of exports and the weakness of domestic demand. In the case of exports, strong growth in pharmaceuticals and computer services exports (see Box C, page 31) masked the fact that most other exporting sectors saw sharp declines in the second quarter. The overall resilience of export growth has significantly mitigated the fall in GDP, which only fell by 3 per cent in the year to the second quarter, in contrast to underlying domestic demand, which fell by 16 per cent over the same period. The outlook remains highly uncertain and will depend not only on the economic consequences of the COVID-19 pandemic and its containment, but also on the nature and impact of the future trading arrangements between the EU and the UK, around which there still remains considerable uncertainty. In relation to the impact of the pandemic, as has been noted in previous Bulletins, the path ahead for the economy will depend on the future path of the virus, the immediate and longer-lasting effects on behaviour and economic activity and the extent to which there is lasting damage to the productive capacity of the economy. In the latest forecasts, the baseline assumption with regard to COVID-19 is that there is only partial success in containing the virus over coming quarters, with, from time to time, some resurgence in infections necessitating some corresponding targeted stepping up of containment measures, though less so than in the initial wave. The type of additional restrictions imposed in a number of counties during August and September broadly fit with this assumption. On the assumption that containment measures remain targeted and less severe than in the Spring, and that consumers and businesses continue to gradually adapt, the baseline forecast in response to the COVID-19 shock is for activity to continue to slowly recover from its earlier lows, though not necessarily without setbacks. A supportive policy environment and some improvement in prospects for the broader international economy also underpins this outlook. However, a slow unwinding of precautionary behaviour and the maintenance of some containment measures are expected to continue to constrain activity in some sectors. Contact intensive sectors, which also tend to be labour-intensive sectors, are likely to be slowest to recover. For 2020, on the basis of the National Accounts data for the first-half of this year and available higher frequency data for more recent months, the contraction in activity this year is now likely to be less than previously projected. The strong performance of exports, and a collapse in imports, is driving a significant upward revision to the baseline projection for GDP growth, which is now forecast to decline by only 0.4 per cent in 2020, an upward revision of 8.6 percentage points compared to the previous Bulletin. Revisions to the projections for 2020 on the domestic side of the economy have also been upward, but much smaller. Although consumer spending declined by 22 per cent in the second quarter, the combination of a somewhat smaller fall in consumption and a slightly stronger subsequent rebound than expected, is driving an upward revision of just over 2 per cent to the projection for underlying domestic demand for 2020, which is now forecast to fall by just over 7 per cent this year. Looking beyond this year, the outlook for the economy also depends on the nature of the trading relationship between the EU and the UK after the Brexit transition period ends on 31 December 2020. The projections set Quarterly Bulletin 04 / October 2020 Central Bank of Ireland 6 out in the previous Bulletin assumed that a Free Trade Agreement (FTA) between the EU and the UK, with no tariffs and quotas on goods, would take effect in January 2021. However, the situation in relation to future trading arrangements remains very uncertain. Therefore, in preparing these forecasts, it was considered prudent to make a change and assume that the EU and the UK move to trading on WTO terms from 1 January 2021 (see Box A, page 17). This would see the introduction of tariffs and non-tariff barriers with respect to goods trade with the UK. Such a development would have the effect of increasing costs, raising uncertainty and disrupting trade flows. Comments are closed.
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