A successful Covid-19 vaccine rollout should see the Irish economy recover in the second half of the year, the governor of the Central Bank has said.
An ESRI report last month found that the impact of the Covid-19 crisis has been much “more severe” on the Irish economy than that of the global financial crisis in 2008.
But in a virtual address to staff and students at the University of Limerick, Gabriel Makhlouf said the economic forecast for late 2021 is positive.
He said: “Our latest economic analysis and forecasts suggest that while we must weather the lockdown – and subdued output – for another while yet, come the second half of the year, and assuming a successful deployment of the vaccine, the economy should begin to recover.
Speaking to staff and students in @UL today, Governor Makhlouf said “we must look beyond the pandemic, to understand longer term risks, rebuild resilience, and strengthen our frameworks” https://t.co/QWkKSlB1Ca [1/3] pic.twitter.com/AMHjOD8cnS
Advertisement— Central Bank of Ireland (@centralbank_ie) January 25, 2021
“Supported by strong government income support measures, we forecast modified domestic demand to increase by 2.9 per cent this year, following an estimated decline of around 7.1 per cent in 2020.
“We see a further rise in modified domestic demand of 3.6 per cent in 2022.
“But of course, this remains contingent on key assumptions regarding Covid-19 developments.”
Scarring effects
Mr Makhlouf said the resilience of the financial system and the economy had been key in mitigating the impact of the pandemic.
He said the financial system has been able to absorb rather than amplify the effects of the shock.
Mr Makhlouf added: “The Government has had significant resources available to respond to the pandemic, with the rise in the deficit and debt ratios both warranted and necessary.
“Policy has been in a position to support the productive capacity of the economy and in particular to avoid scarring effects such as long-term unemployment.”
But he warned that recovery in the jobs market will lag behind the broader economic recovery.
The recovery in the labour market is likely to lag somewhat
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He said: “Unfortunately for many people in the community, the recovery in the labour market is likely to lag somewhat until the broader economic recovery is better established.
“We estimate unemployment is likely to increase from 6.2 per cent in 2020 to an average of 9.3 per cent this year, before declining to 7.8 per cent in 2022, a rate well above the pre-pandemic level of about 5 per cent.
“Though high, for comparison, the unemployment rate peaked at just over 16 per cent in 2011/2012 following the crisis a decade ago.
“It will take time to regain pre-pandemic levels of employment. For that to happen, either sectors which were most affected by the pandemic will have to recover fully, or other sectors will have to grow faster in order to absorb the excess labour capacity.”
Looking ahead, Mr Makhlouf said: “All of our work will of course be dominated by our ongoing focus on the pandemic.
“We will continue to deepen our understanding of its impacts and take any necessary steps to enable the financial system to support the recovery.”
