Is Ireland set for a K-shaped recovery?

Barely a week goes by without some dire warning about the Irish economy. We’ve been in the crosshairs of Brexit for four years, at the centre of a global row over tax for a decade, and now we’re contemplating the likely fallout from Covid-19, an economic shock three times worse than the 2008 financial crisis.

But the economy here keeps churning out positive data, forecast-defying numbers. The threat to Ireland from a revamped international tax code – highlighted by so many commentators in recent years – has instead triggered a massive onshoring of assets here and a corporation tax windfall for the Government.

And now the Covid-19-inspired recession has been scaled back. In July, the Central Bank of Ireland was predicting the Irish economy would contract by 9 per cent in 2020.

On Monday, it revised that down to just 0.4 per cent, an upward revision of 8.6 percentage points, on the back of stronger-than-anticipated exports and more resilient consumer spending. It also predicted the economy would return to growth of 3.5 per cent next year and 4.7 per cent in 2022.

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Lost year

That effectively means that Covid will result in just one year of lost growth and no material contraction in 2020, the Central Bank's director of economics and statistics, Mark Cassidy, said. "This will be a better performance that any other advanced economy that I'm aware of," he said.

In its report, the Central Bank highlighted what it described as a strong divergence in performance between the export sector led by pharmaceuticals and computer services, which has proved resilient; and the domestic economy, which has been weighed down by falling demand and restrictions on hospitality.

Multinational exports are effectively shielding the economy from the worst of the downturn. The Central Bank also noted that the Government’s budget deficit was now expected to be €25 billion this year instead of €30 billion as a result of better-than-expected tax revenues. While a huge figure, it could have been a lot worse.

IT and pharma

So it seems Ireland will experience an exaggerated K-shaped recovery from coronavirus, perhaps the most exaggerated K-shaped recovery in the world, with some sectors such as IT and pharma bounding forward while others, such as hospitality, remain on the floor.

The overall fallout is proving more benign that previously thought even if the outlook for hospitality and tourism is less than rosy.

It’s too early to say how we’ll fare under Brexit and admittedly the initial signs don’t look good, particularly with the talks seemingly on the point of failure every other week. According to a recent report by the London School of Economics, up to one-third of the State’s food exports could be knocked out if the EU and the UK fail to reach a deal. And a no-deal Brexit is now the working assumption of both the Government and the Central Bank.

In its report, the Central Bank said the transition to a World Trade Organisation trading relationship was likely to frontload the losses arising from Brexit, subtracting about 2 percentage points from gross domestic product growth in 2021 and 0.3 percentage points in 2022. Will Brexit be the event to finally break our winning streak?