The Central Bank of Ireland has warned it will take until 2022 for the economy to rebound from the coronavirus pandemic. And that's provided there is a gradual reopening of the economy this year and no resurgence of the virus.
A second outbreak, however, would result in a more severe economic slump, with output and unemployment not returning to their normal pre-Covid trajectories until 2024, the Central Bank said.
Given the scale of uncertainty surrounding the economic outlook, the bank sets out of two different scenarios for the economy in its latest quarterly bulletin.
In the first, involving a gradual reopening of the country this year and a rebound in economic activity, the economy contracts by 9 per cent in 2020 but grows by 5.7 per cent next year.
In this scenario, unemployment declines from its second-quarter peak of about 25 per cent as the year progresses and is projected be about half that level by the year end, before averaging just over 9 per cent next year and 7 per cent in 2022.
This baseline scenario sees output recovering to its pre-crisis level by 2022. However, the level of activity will be significantly below where it would have been had the economy grown in line with expectations before the pandemic, the financial regulator said.
Under a more “severe” scenario, which assumes the strict lockdown period has a more damaging impact on economic activity and that there is a resurgence of the virus at some point over the next year, the economy contracts nearly 14 per cent for 2020 with the Government’s budget deficit ballooning to €30 billion.
Under this scenario, the projected recovery in growth in 2021 and 2022 would not offset the loss of output this year, leaving the level of gross domestic product (GDP) in 2022 about 5 per cent below its pre-crisis level.
Unemployment would also remain elevated for several years, as high as 10 per cent in 2022.
Both of these scenarios assume that a free trade agreement between the EU and the UK, with no tariffs and quotas on goods, takes effect in January 2021.
If such an agreement is not reached, the Covid-19 impact would be amplified, with the economy contracting by a further 1 or 2 per cent.
"While there is considerable uncertainty about the outlook, the scenarios we present ... point to a deep downturn in 2020, with a gradual recovery in coming years," the bank's director of economics and statistics Mark Cassidy said.
“The path ahead for the economy will depend on the path of the virus, which makes the strength of the recovery and the future impact on sectors uncertain,” he said.
Mr Cassidy said the rise in government deficit and debt ratios was both warranted and necessary and “we estimate that domestic and international policy responses announced to date could reduce the fall in output in Ireland by almost four percentage points in 2020”.
In its report, the Central Bank said it expected 30,000 fewer homes to built in the coming three years as a result of the pandemic.
“The uncertainty around prices, financing and demand increases the likelihood that some projects will be postponed, reducing supply over the projection horizon,” it said.
At the same time, Mr Cassidy expects to see a significant fall-off in mortgage drawdowns this year and a general downturn in housing demand due to falling incomes and higher rates of unemployment.
“What effect that will have on prices is too uncertain for us to estimate,” he said.