Irish economy to contract by 12%, ESRI forecasts

The Republic’s economy is on track to shrink by 12.4 per cent this year, marking the largest annual slump in its history, as the Covid-19 pandemic wreaks havoc on households, firms and government finances, according to the Economic and Social Research Institute (ESRI).

The forecast, contained in ESRI’s summer economic commentary, is more pessimistic than the Government’s projection that gross domestic product (GDP) will fall 10.5 per cent this year.

It is also starker than the 7.5-8 per cent contraction factored in by the country’s two main banks, Bank of Ireland and AIB, as they revealed earlier this month that they had started to set aside money to cover an expected fresh spike in bad loans.

The ESRI’s baseline scenario, which sees a gradual easing of lockdown restrictions and Covid-19 unemployment and wage subsidy supports expiring as planned in June, also envisages the Government posting a budget deficit of €27 billion or 9 per cent of GDP this year.

A so-called severe scenario, involving a second wave of infections and another lockdown in the final months of the year, would see the economy contracting by 17 per cent, with a benign case of the economy returning to normal in the fourth quarter resulting in the downturn coming to 8.6 per cent, it said.

Speaking to reporters, ESRI research professor Kieran McQuinn warned against the “tapering” of the special weekly €350 Covid-19 pandemic unemployment payment in the coming months, particularly as the economy is only gradually being opened up.