Ireland’s economy to contract by 8% this year, European Commission forecasts

Spring economic forecast is ‘clouded by a higher than usual degree of uncertainty’

“Europe is experiencing an economic shock without precedent since the Great Depression,” said the European commissioner for the economy Paolo Gentiloni. Photograph: iStock

The State's economy will shrink by about 8 per cent this year before rebounding by about 6 per cent next year, according to the spring forecast from the European Commission which is, this quarter, "clouded by a higher than usual degree of uncertainty".

The euro zone economy is forecast to shrink by a record 7.7per cent this year with the overall European Union not far behind.

The Irish contraction results from the “severely weakened external environment and lockdown measures hitting investment, private consumption, and external trade,” the forecast said. The commission warned its outlook was contingent on several unpredictable international factors, including decisions by multinationals, international attitudes towards taxation, and Brexit.

“We see three big risks. One is generally associated with pandemics, and its development. We also see Brexit as a continuous risk because at this stage we evidently still don’t have an agreement so it remains an important risk,” an EU source said. “The last one is... on taxation.”

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The OECD’s base erosion and profit shifting (BEPS) initiative, which aims to curb international tax avoidance by large corporations, holds high risks for the Irish economy, the source added.

The commission expects private consumption to shrink by about 9 per cent this year before recovering next year and it anticipates that inflation will be negative for the rest of the year.

On unemployment, the picture is less grim. While the forecast expects the unemployment rate to rise to 7.5 per cent by the end of this year as a result of the collapse in consumption and exports, unemployment is predicted to return to pre-crisis levels by the last quarter of 2021.

“Negative risks to the macroeconomic and fiscal outlook remain exceptionally elevated,” the commission said, as it forecast the Republic’s debt-to-GDP ratio to rise to 66.75 per cent next year.

Both the contraction this year and the anticipated rebound in 2021 in the Republic are forecast as being below the euro zone as a whole. The spring 2020 economic forecasts see the bloc’s economy contracting by 7.75 per cent this year and growing by 6.25 per cent next year.

"Europe is experiencing an economic shock without precedent since the Great Depression," European commissioner for economic and financial affairs Paolo Gentiloni said.

“Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of... tourism in each economy and by each country’s financial resources,” he said.

The forecasters warned that the outlook was highly uncertain, and said there was potential for worse economic damage and a slower recovery if the disease is not brought under control.

Losses made up

While the forecast anticipates economic growth next year, the losses sustained this year will not be fully made up by the end of 2021, the commission said. The unemployment rate in the euro zone is set to rise from 7.5 per cent last year to 9.5 per cent next year before falling again in 2021. Consumer prices, too, are expected to drop across the bloc although, unlike in the Republic, the commission is not forecasting negative inflation at this point.

The commission’s forecast is based on the gradual lifting of lockdowns from May onwards. It said that the risks surrounding the forecast are “exceptionally large and concentrated on the downside”.

In the absence of a strong recovery within the EU, “there is a risk that the crisis could lead to severe distortions within the single market and to entrenched economic, financial and social divergences between euro area member states,” the commission said.

Peter Hamilton

Peter Hamilton

Peter Hamilton is a contributor to The Irish Times specialising in business

Naomi O’Leary

Naomi O’Leary

Naomi O’Leary is Europe Correspondent of The Irish Times