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The Irish economy is likely to see only a small contraction of around 0.4 percent this year, with stronger-than-expected exports from the pharmaceutical sector offsetting much of the impact of Covid-19, the Central Bank of Ireland noted.
However, he warned that a no-deal Brexit, now the bank’s job assumption, would affect 2 percent of economic growth next year.
In its latest quarterly bulletin, the Central Bank said that it assumed that trade between the EU and the United Kingdom passes to the terms of the World Trade Organization (WTO), which involve tariffs, as of January 1, 2021.
Ireland’s food exports are forecast to fall by around a third if both sides fail to agree on a future trade deal.
The Central Bank said that the transition to a WTO trade relationship will likely offset losses from Brexit, subtracting around 2 percentage points from GDP growth in 2021 and 0.3 percentage points in 2022.
Different impact
As a result, it has lowered its forecast for growth next year to 3.5 percent next year and has risen to 4.7 percent in 2022.
“In our latest forecasts, it was considered prudent to make a change and assume that the EU and the United Kingdom will go on to negotiate under the terms of the WTO as of January 1,” he said.
“Such a development would have the effect of increasing costs, increasing uncertainty and disrupting trade flows. Although the impact would differ between sectors and regions, for the economy as a whole it would detract from the projected recovery, especially in 2021, ”he said.
In its latest quarterly bulletin, the Central Bank said stronger-than-expected exports, particularly from the pharmaceutical sector, and more robust consumer spending had mitigated the decline in overall activity stemming from the coronavirus.
As a result, the economy was expected to contract just 0.4 percent in terms of gross domestic product (GDP) this year, instead of the 9 percent decline it forecast in July.
“This will be a better performance than any other advanced economy that I know of,” said Central Bank chief economics and statistics officer Mark Cassidy.
Last week, the Finance Department improved its growth outlook for the economy, forecasting that it would contract 2.5 percent in 2020, having previously forecast that it would shrink by more than 10 percent.
“From the low reached in the April-May period, Irish economic activity has recovered with the reopening of the economy,” the Central Bank said.
“However, the recovery has been partial and uneven and, in many cases, the levels of economic activity centered in the country remain well below pre-pandemic levels,” he said.
Uneven recovery
Underlying domestic demand, a better measure of domestic activity in Ireland’s multinational economy, is still forecast to decline significantly in 2020, declining by 7.3 percent, the Central Bank said, while unemployment would remain high in 15 percent.
Cassidy also warned that further restrictions to slow the spread of the virus, including a Level 5 shutdown, the highest level of government restrictions that involves the closure of all non-essential businesses, would alter the outlook and lead to further deterioration in employment. .
In its report, the Central Bank considers the impact of more severe restrictions from Covid-19 and a prolonged deterioration in the international environment.
In this scenario, the economic recovery is restricted and delayed with a fall in GDP of 1.1 percent this year and 0.3 percent next, followed by a moderate recovery in 2022.
The Central Bank noted that the better-than-expected economic outlook has been led by “unexpectedly robust growth in exports of pharmaceuticals and business services” and stronger-than-expected consumer spending.
However, he said the recovery had been uneven.
“In particular, consumer-oriented service sectors such as tourism, hospitality and retail services sectors, which are also more labor intensive, have recovered more slowly,” he said.
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