My Department publishes macroeconomic forecasts twice a year, in the spring as part of the Stability Programme Update (SPU) and in the autumn as part of the Budget. At the time of the SPU, my Department projected that GDP would decline by -10.5 per cent this year. This was based on a scenario in which COVID-19 related containment measures remained in place for three months. Thereafter, a very gradual recovery commencing in the third quarter was assumed.
As expected, the suspension of all ‘non-essential’ economic activity during the second quarter of the year resulted in the Irish economy suffering the largest contraction on record, with a contraction in GDP of 6.1 per cent relative to the previous quarter. As a result, the level of GDP was three per cent lower year-on-year. However, modified domestic demand, perhaps the best indicator of domestic economic activity, declined by 15.7 per cent year-on-year in the second quarter indicating that the domestic economy took the brunt of the economic shock.
Looking forward, a partial recovery in GDP is expected for the third quarter. Retail sales in July were 4.7 per cent above the pre-pandemic (February) level with a range of ultra-high frequency indicators (e.g. payments data) pointing to a general stabilisation in August and September. Similarly in the labour market the numbers of persons on the pandemic unemployment payment has fallen by around two-thirds from a peak of 600,000 in early May, with large declines seen throughout July and early August.
Overall, while a contraction of the economy is still likely this year, it is not expected to be as severe as the GDP projection at the time of the SPU. This is largely due to the earlier than expected re-opening, and the resilience of Ireland’s export portfolio. However, the hit to the domestic economy will still be severe.
My Department will continue to analyse incoming domestic and global economic data, along with epidemiological developments, in preparation for its upcoming forecast as part of the Budget.