How well will the Irish economy recover in 2021?
Speed of the vaccine rollout is now the key economic variable for this year
Members of the public wearing face masks on Grafton Street, Dublin, in August. Photograph: Gareth Chaney/Collins
2021 looks set to be game of two halves for the Irish economy. All the indications are that coronavirus restrictions are going to remain in place for some time – we will have Level 5 now until at least the end of January – after which we must presume the reopening is likely to be gradual as the numbers vaccinated slowly rise. But by the second half of the year, a fuller reopening – albeit with some ongoing rules and restrictions – should allow the economy to gather some momentum.
2021 will not be a normal year, as some sectors, like tourism, splutter slowly back to life. But with vaccines being rolled out and a worst-case Brexit scenario avoided, it will surely be better than 2020, the year when the domestic economy ran into a wall as coronavirus restrictions were introduced as the pandemic hit. What we don’t know is when the balance will shift, allowing consumer demand to start to rebound back and removing the threat of further heavy restrictions.
Just as the economics of 2020 was dominated by the path of the virus, so will 2021, but with a twist. The logistics of the vaccine rollout will be perhaps the most vital economic – as well, of course, as public health – project of recent times.
If we are three or four days later in starting vaccinations than many other countries, it won’t really matter. But if we are three or four months later finishing than others, it surely will. The average cost of State spending last year for the coronavirus response was about €2 billion a month. Even in cost terms, almost any investment is now justified if it accelerates the vaccine rollout.
Judging the prospects for 2021 depends to an extent on where you start from. The latest official forecasts – published with the budget – were drawn up on the basis of no wide availability of a vaccine and no trade deal being reached between the European Union and United Kingdom. This led to a forecast of modest 1.7 per cent GDP growth in 2021, as some sectors were hit hard by Brexit and rolling restrictions applied to combat the virus.
Now a Brexit deal has been done. The Department of Finance said that the difference between a trade deal and no deal could be worth as much as three percentage points on the Irish 2021 GDP growth rate. So the original forecast of 1.7 per cent growth next year could now be 4.5 per cent-plus, in line with recent estimates from the Economic and Social Research Institute and Irish Business and Employers Confederation.
The ongoing impact of the virus will be the dominating factor. As Level 5 restrictions are imposed to the end of January, at least, this will lead to another fall in consumer spending, which has bounced up and down as restrictions have been imposed and relaxed. As this accounts for about half of overall economic activity, the early months of 2021 will be subdued in economic terms.
For the consumer sector to bounce back requires not only restrictions to ease – but also for people to feel confident in heading back out.We don’t know when this will happen, and the recent rapid rise in cases and the appearance of an apparently more infectious variant are concerning.
What we do know that in economic terms, the firepower is there, with some €11 billion put into savings accounts in 2020. So the latter part year could see a big bounce back in spending, if the conditions are right.
More State cash will be spent in the early months of this year – on wage and income supports, subsidised grants and loans and so on. And longer term costs on a significant scale will come from helping the devastated sectors to recover and assisting those who have lost their jobs. A significant increase in business closures is likely as supports are wound down at some stage this year – a painful economic aftermath.
So while we should see recovery gradually set in this year , it will be against the backdrop of a massive hit to the consumer-facing parts of the economy. As well as the vaccine rollout, this will be the economics and the politics of 2021 – dealing with the fallout from a pandemic which has severely damaged some parts of the economy and left others largely untouched.
The massive Government supports have gone a way to support businesses and people out of work. Helping these businesses and individuals rebuild their economic prospects will be the big challenge of the second half of this year and 2022. Much will be dictated by the pandemic and how economies emerge. When will tourists travel freely again? When will people be packed into a “wet” pub (surely one of the phrases to forget when this is over)? When will there be crowds back at sport events and gigs?
We are still looking through a fog at our post-pandemic future, but at least the arrival of the vaccine brings real hope that, some time this year, the worst really will be behind us. The speed at which vaccinations will take place is now the key economic variable of 2021.