ESRI cuts growth forecast and says jobs market will not recover until 2023

Economic institute also warns of potential hit to housing supply from current restrictions

The Economic and Social Research Institute (ESRI) has revised down its growth forecast for the Irish economy, while warning that unemployment is unlikely to return to pre-pandemic levels until late 2023 “at the earliest”.

In its latest economic commentary the think-tank also warned of a significant falloff in house completions this year as a result of the current restrictions on construction, which, it said, would “exacerbate” supply shortages in the market, potentially leading to a further increase in house prices.

In light of the current Level 5 restrictions to curb Covid, the ESRI said it expected the economy here to grow by 4.4 per cent in gross domestic product (GDP) terms this year, down from a previous forecast of 4.9 per cent, and by 5.2 per cent in 2022.

The economy, it said, was likely to rebound strongly in the second half of the year on the back of a pick-up in consumption and investment aided by “the unwinding of excess savings”, which grew by €14 billion last year.

Its forecasts, however, assume the current lockdown measures last until at least April 5th – and probably until the end of June – and that the vaccination programme facilitates the relaxation of public health restrictions in the second half of 2021. They also assume there will not be another Level 5 lockdown this year.

The institute said it expected unemployment to peak at 25 per cent in the first quarter, before falling to just over 10 per cent by the end of the year, and to 7 per cent next year.

It said it did not expect unemployment to return to pre-Covid levels – it was under 5 per cent prior to the pandemic – until at least the end of 2023.

Unemployment

The Covid-adjusted unemployment rate, which includes Pandemic Unemployment Payment (PUP) recipients, stood at 24.8 per cent in February, which equates to almost 600,000 people.

The elevated rate of unemployment was likely to place “further strain” on the public finances, the ESRI warned, forecasting the Government’s budget deficit would be just under €19 billion this year, which equates to 4.7 per cent of GDP.

This will increase the State’s debt-to-GDP ratio to 61.3 per cent, but it noted that an alternative measure of debt sustainability – the ratio of real interest payments to GDP – suggested the Government had more scope for fiscal policy.

ESRI research professor Kieran McQuinn said the current low interest rate environment had triggered a debate about the EU's fiscal rules, and whether they were too prohibitive on countries like Ireland when it comes to investing in vital services and infrastructure.

Construction

The ESRI’s report also analyses the impact of the current lockdown on housing, suggesting it will have an “adverse” impact on supply.

It said the restrictions on construction combined with a falloff in investment was likely to see the supply of new homes fall to 15,000 this year, down from just under 21,000 in 2020.

Before the pandemic the ESRI had been expecting house completions to reach 26,000 units this year.

The leading indicators – commencement notices, planning – “are quite pessimistic in terms of where the level of supply is likely to be”, Mr McQuinn said.

This falloff in supply was likely “exacerbate” the gap between supply and structural demand in the State’s housing market, he said, potentially leading to a further acceleration in house-price inflation.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times

READ MORE