THE DEPARTMENT OF Finance has warned that it is too soon to predict the long-term impact of Covid-19 on the economy. 

Publishing the Stability Programme Update (SPU) today, Finance Minister Paschal Donohoe said the report does contemplate a so-called “scarring” of the economy that could mean certain jobs do not return once the pandemic has passed. 

The annual SPU is published each year for consideration by the European Commission and European Council under requirements under the Stability and Growth Pact.

The 2021 SPU is forecasting GDP growth of 4.5% for this year and 5% next year.

Modified Domestic Demand, which strips out the effect of multinationals, is being estimated to grow by 2.6% this year and 7.4% next year, following a decline of 5.4% last year. 

The predictions for the growth of the domestic economy is largely based on estimates of pent-up demand, with the department estimating that there is between €11-12 billion in “excess savings” within the economy. 

The Department of Finance’s chief economist John McCarthy said this afternoon that these savings are concentrated in “better off or middle or high income households”.

He added that the department expects that “about €3 billion” of these excess savings will be used for consumer spending.

The projections for the economic outlook assume that there will be a gradual relaxation of Covid-19 restrictions over the second quarter followed by even further relaxation in third and fourth quarters. 

The SPU outlines that, should there be a “severe epidemiological scenario” whereby the current restrictions need to remain in place for a prolonged period, GDP growth this year would be almost one percentage point lower than forecast and 2.5 percentage points lower next year. 

In terms of unemployment, the projections estimate an average unemployment rate of 16.3% over the course of this year, declining to 8.2% next year and then 6.7% in 2023. 

Early last year, before the effect of the pandemic hit, the seasonally adjusted unemployment was 5.4% in March 2020 and 4.8% in February 2020.

Speaking to reporters this afternoon, the Finance Minister said employment is estimated to increase by 80,000 jobs this year and 225,000 jobs next year but that it would not be until 2023 that the country sees employment “comparable” with pre-pandemic levels. 

He acknowledged, however, the potential for some jobs not returning: 

The figures here do recognise that awful phrase which is ‘a degree of scarring’ within our economy, which translates to jobs that were there that are not coming back in the way that they were. And of levels of income that were there that might not be coming back in exactly the way they were. 

This possibility is also noted within the SPU itself, which says that “a slow exit from social restrictions” raises the prospect of “deeper and wider scarring effects”.

“Some businesses would fail under the strain of a continuing lockdown, leading to more jobs being permanently lost,” the report says. 

It must be stressed, however, that until the pandemic subsides, any assessment of scarring is highly tentative. Estimates are also time-sensitive and will be revised as additional information becomes available.

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The SPU also notes that it is “extremely challenging” to predict how the economy might recover, noting a range of uncertainty surrounding Covid-19 variants, the roll-out of vaccinations and the unwinding of restrictions. 

Government supports 

Minister for Public Expenditure Michael McGrath said this afternoon that the amount spent on Covid-19 related supports last year and so far this year was “in excess of €28 billion” and that the amount allocated for such spending in 2021 was €12 billion. 

He added that, while no decision has yet been taken on the extension of supports beyond the currently approved timeline of the end of June, there would be no “cliff edge” stopping the supports suddenly. 

“We recognise that if there was a cliff edge on those supports it would in many respects be a false saving given the consequences that it would have for employment levels in the country,” the minister said. 

“So I can’t be specific about what the impact will be over the course of the full year but we stand by the commitment that the supports will not end entirely at the end of June.”

He added:

“We will be very much guided by the evolving public health situation and we recognise that when it comes to the economic supports in particular, there is a need as they are being removed that it would be done in a careful and a gradual way.”