Irish economy likely to experience two-speed recovery, IMF says

Fund, however, warns of risk from Covid variants, Brexit and taxation

Shoppers on Grafton Street, Dublin. File photograph: Gareth Chaney/Collins

Shoppers on Grafton Street, Dublin. File photograph: Gareth Chaney/Collins

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The Irish economy is likely to experience a two-speed recovery from the pandemic because of the “highly asymmetric impact” of the shock, the International Monetary Fund (IMF) has said.

In its latest annual review of the Irish economy, the Washington-based fund also warned of possible risks to recovery here from new Covid variants, post-Brexit trade arrangements and likely changes in international taxation.

It said Ireland had entered the pandemic “on a favourable path of high growth and declining vulnerabilities”.

However, the crisis hit the country hard. Ireland, it said, suffered high infection rates and imposed one of the most stringent containment regimes.

It noted that the more labour-intensive domestic sector here contracted by 10 per cent last year but that strong growth in the multinational-led export sector “softened the blow to the economy and public finances, making Ireland the only EU country with positive growth last year.”

In its review, it forecast the Irish economy would grow by 4.6 per cent this year as restrictions eased and the “adaptability to remote working” increases.

While the domestic sector was likely to “partially recover” as conditions normalise, the worst- affected segments may struggle for an extended period.

The IMF said “past prudent policies” and large corporate tax receipts, including in 2020, facilitated a comprehensive Government policy response to the pandemic.

“The swift and unprecedented policy response has been effective in mitigating the crisis impact and protecting households and firms,” the fund said, noting that Government spending on crisis supports of around 10 per cent of gross domestic product (GDP) was similar in scale to other European states.

Uncertainty remains

However, it warned that there is still significant uncertainty over the near-and medium-term outlook.

“Risks are dominated by the pandemic dynamics, the execution of post-Brexit trade arrangements, and likely changes in international corporate taxation,” the fund said.

Changes to international taxation could impact both the economy here and the public finances, it said. The Department of Finance has factored in a €2 billion reduction in corporate tax receipts by 2025 on foot of the likely changes.

“Ireland should therefore continue to build on its strong non-tax comparative advantages, such as its qualified labor force, strong and stable legal and policy environment, and favorable business climate,” it said.

Another risk factor for the Irish economy were “non-tariff trade impediments” relating to Brexit, which the IMF said would remain “ given Ireland’s strong linkages with the UK”.

Minister for Finance Paschal Donohoe and Minister for Public Expenditure and Reform Michael McGrath jointly welcomed the report, noting the IMF’s assessment that the Government’s swift policy response has been effective in mitigating the crisis impact and protecting households and firms from the pandemic.

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