Irish economy will shrink by 2.3% this year, says European Commission

The Irish economy is expected to be one of the best performers in the EU this year, albeit that activity will shrink due to the impact of the Covid-19 pandemic, according to new forecasts from the European Commission.

The commission expects the Irish economy to shrink by 2.3 per cent this year, a performance only bettered by Lithuania, and significantly below the 8 per cent hit predicted in the spring. The commission expects a return to growth for the Irish economy in 2021.

Key to the difference in forecasts is the performance of the multinational sector, with strong production and exports by the pharmaceutical and IT companies key to the improved outlook.

However, the impact on investment in Ireland is the worst in the EU, as it is set to shrink by 41.3 per cent in 2020 before returning to strong growth next year.

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Employment here is expected to fall by 3.6 per cent next year. The forecast notes that employment support schemes such as Ireland’s Pandemic Unemployment Payment have helped to soften the economic blow to date.

A surge in Covid-19 infections that has triggered lockdowns across the continent to prevent healthcare systems being overwhelmed, darkening the EU’s economic outlook, the commission said in its autumn forecast.

"After the deepest recession in EU history in the first half of this year and a very strong upswing in the summer, Europe's rebound has been interrupted due to the resurgence in COVID-19 cases," the EU economy commissioner Paolo Gentiloni said as he launched the forecast.

“Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level.”

The impact of the pandemic is highly uneven between member states. Spain’s economy is forecast to shrink by 12.4 per cent this year, Italy’s by 9.9 per cent, France’s by 9.4 per cent, Greece’s by 9 per cent and Portugal’s by 8.4 per cent.

The UK is also forecast to be severely hit, with a shrinkage of 10.3 per cent this year and a recovery of 3.3 per cent in 2021 and 2.1 in 2022, which is a slower rebound than other states.

The hardest hit economies are those most reliant on tourism, according to the commission. Croatia, where tourism accounts for about a fifth of gross domestic product, is set for a hit to its economy of 9.6 per cent in 2020.

Also badly affected are countries that have had more severe Covid-19 outbreaks such as Belgium, which has one of the highest death rates in the world, and is forecast for a 8.4 per cent hit to its economy this year.

All economies are forecast to return to growth in 2021 and 2022, with Ireland set for growth of 2.9 per cent and 2.6 per cent respectively. However, Gentiloni warned that there were “exceptionally large” downside risks to this forecast, particularly if there are further resurgences of the virus in the future.

The outlook assumes there will be no deal reached between the EU and British negotiators by the end of the year and that the blocs will trade on World Trade Organization terms from January 1st. If a deal is reached with the UK, this could help lift the outlook, according to the Commission.

Equally, the stimulus from the EU’s €750 billion recovery package that is expected to kick in next year may support additional growth.