Fiscal watchdog says Irish economy may have contracted by 21% in April

The Irish economy may have contracted by as much as 21 per cent in April, according to the Irish Fiscal Advisory Council (Ifac).

The monthly estimate, not to be confused with the annual decline, which is expected to be around 10 per cent, reflects the forced closure of businesses and the surge in unemployment linked to the Covid-19 pandemic.

The State’s spending watchdog said gross domestic product (GDP) is likely to have fallen by 15-21 per cent in April, which it said was broadly in line with the contractions seen or predicted in other countries.

The UK is predicting a 20 per cent fall in activity for April, while the US is forecasting a 31 per cent decline in headline GDP for May.

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The estimate for the Republic, Ifac said, was based on the historical relationship between Markit’s Purchasing Manager’s Index (PMI) for manufacturing and services here and GDP.

The forecast is likely to have been built into the Government’s own forecast for a 10.5 per cent contraction in headline GDP for 2020.

It comes as the Organisation for Economic Co-operation and Development (OECD) warned that the extra debt being taken on by already heavily indebted governments and companies to tackle the coronavirus crisis will “come back to haunt us”.

Speaking in an interview during the FT’s Global Boardroom online conference on Wednesday, Angel Gurría, secretary general of the OECD, said: “We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more.”

Mr Gurría, who has run the Paris-based club of mostly rich nations for 14 years, said governments may have to “capitalise” some of this extra debt by bailing out companies or writing off some of the vast loan guarantees they have extended to keep banks lending.

Shock

He forecast that many countries’ economies would recover more slowly than initially expected from the record post-war recession that is expected in the first half of this year; it could take at least two years before many countries recover from the shock to their economies.

“I am not convinced that we are going to have a V-shaped recovery. I think it will be more like a U. The key thing is to shorten the lower part of the U...When you are thinking about the recovery, we don’t know whether it is going to be 2021 or 2022.”

The Department of Finance predicted last month that the Government's deficit would deteriorate to €23 billion in 2020, but already that estimate appears to have been overtaken, with several analysts now suggesting it will swell to at least €30 billion.