Irish economy shrugs off toughest restrictions in EU to post 2020 growth

Export growth pushes GDP up 3.4% but Covid-19 pandemic hits domestic economy hard

 Minister for Finance Paschal Donohoe expects the economy to contract in the first three months of this year.  Photograph: Julien Behal.

Minister for Finance Paschal Donohoe expects the economy to contract in the first three months of this year. Photograph: Julien Behal.

 

The Irish economy grew by 3.4 per cent in 2020, despite one of the toughest pandemic related lockdowns in Europe, on the back of record growth in the export sector.

However, the domestic sector contracted by 5.4 per cent, as Covid-19 restrictions hit.

According to final year national accounts from the Central Statistics Office, gross domestic product (GDP) grew by 3.4 per cent in the year. This is ahead of a projection from the European Commission in February, which forecast growth of 3 per cent for the Irish economy for 2020. Ireland was the only European Union economy to post positive growth last year, with an average contraction across the EU of 6.8 per cent. GDP fell by 5.1 per cent in the fourth quarter of 2020.

Minister for Finance Paschal Donohoe said that the outturn was “remarkable”, given international comparisons, and original economic expectations when the pandemic first hit in March 2020.

“ This is entirely a result of the growth in exports, up 6.25 per cent growth despite a sharp decline in world demand,” he said, pointing to “extraordinary export growth” in the pharma and ICT sectors, driven by blockbuster immunological drugs, Covid related products, and the shift to home-working.

Overall, the multinational sector produced a strong return, advancing by 18.2 per cent. The importance of multinationals to the economy also grew during the year, accounting for 50 per cent of total value added in 2020, compared with a 43.4 per cent share in 2019.

Similarly, a decline in personal spending (9 per cent) was offset by a similar incrase (9.8 per cent) in Government spending on goods and services.

Impact

However, the overall growth figures belie the performance of the underlying economy, and Mr Donohoe struck a note of caution in interpreting the results, noting that “GDP is not the most accurate measures of what is going on in the economy.”

Indeed modified domestic demand(MDD), a broad measure of underlying domestic activity that covers personal, government and investment spending, decreased by 5.4 per cent in 2020, which is more in line with the declines experienced by other European economies.

“The pandemic impacted various sectors of the economy differently during 2020 as the levels of Covid-19 related restrictions changed over the year,” said Jennifer Banim, assistant director general with responsibility for economic statistics.

Unsurprisingly, the domestic sector bore the brunt of Covid-19 restrictions, with the distribution, transport, hotels and restaurants sector contracting by 16.7 per cent, and construction also fell, down by a hefty 12.7 per cent. The arts and entertainment sector suffered one of the most severe hits, contracting by 54.4 per cent.

Gross national product (GNP), a measure that excludes the profits of multinationals, advanced by 0.6 per cent, but this was largely due to strong outflows of multinational profits in the year, as opposed to strong domestic performance.

Overall, the figures show that the balance of Payments Current Account recorded a surplus of € 16.9 billion, in transactions with the rest of the world in 2020. A surplus of of € 9.9 billion for trade in goods and services was recorded with the UK , up by € 0.4 billion on the 2019 trade balance.

Outlook

Looking ahead, Mr Donohoe said that a further contraction in the domestic economy is expected in the first three months of this year due to Level 5 restrictions.

However, he expects the decline will be less than that of last Spring, pointing to stronger retail sales and fewer people claiming the pandemic unemployment payment.