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At least 2 years to recover from €23bn virus hit, warns Paschal

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Finance minister Paschal Donohoe

Finance minister Paschal Donohoe

Finance minister Paschal Donohoe

The economy could bounce back from the massive shock caused by the coronavirus crisis in the space of two years, but it will depend on the success of efforts to combat the disease both here and abroad.

The assessment of the prospects of Ireland recovering from the economic impact of the Covid-19 pandemic was made as Finance Minister Paschal Donohoe also set out in stark terms the damage it is set to cause.

"We are clearly now in the midst of a severe recession both domestically and globally," he said.

However, Mr Donohoe also pledged that he is "determined to do all we can" to avoid the kind of lost decade experienced after the last economic crash.

The Government's Stability Programme Update (SPU) for 2020 makes for grim reading.

It shows that:

  • The economy is set to shrink by 10.5pc this year;
  • An expected budget surplus may now be a deep deficit of €23bn;
  • Ireland has gone from full employment to a jobless rate of 22pc in a matter of weeks.

The projections are based on a scenario that sees the lockdown last 12 weeks and restrictions gradually easing after that, allowing the recovery to begin in the second half of this year.

In the worst-case scenario plotted - where the recovery does not start until the start of next year - the drop in GDP could hit 15.3pc with a deficit of €30bn.

Department of Finance chief economist John McCarthy said the result of the crisis will be "the deepest recession since the Great Depression of the 1930s".

Visibility

He cautioned against hopes of a rapid 'V-shaped' recovery, predicting that it will be a slower, more 'U-shaped' path to restoring the economy.

The SPU outlines a possible recovery starting in the second half of this year with economic growth of 5.8pc in 2021.

It says employment could grow next year, with the numbers out of work set to fall below 10pc.

Mr Donohoe said the SPU sets out a scenario and is not a forecast. He said that's because of a "lack of visibility about the path ahead" that is "due to factors outside our control".

"We will recover public health and we will renew our economy," the minister added.

He insisted the country is able to respond to the economic impact from a "position of strength".

Mr Donohoe said there was a budget surplus, the State had cash reserves and Ireland has a restored reputation on the international market.

He said there are "very important differences" between this recession and the last economic crash a decade ago, pointing to the lack of a private lending bubble and the Government's ability to borrow.

Mr Donohoe said if the public health response is successful and can be sustained next year, unemployment and the deficit will come down and incomes will begin to recover.

He said it all depends on efforts to combat the virus in Ireland and in the country's main trading partners abroad.

"If the scenario that we are identifying were to happen in 2020... in 2022 it's very possible that we would then begin to see an economy that in employment and income terms would be quite similar to the economy of last year."

Last night's forecasts are harsher than those issued by the Central Bank of Ireland just two weeks ago that estimated the economy would shrink by 8.3pc.

It is a result of the economic slump that has put a million workers on State wage support schemes at a cost in the region of €4bn-a-month.

Debt ratios will rise sharply as a result of the extra spending and the economic contraction.

The National Treasury Management Agency (NTMA), which manages funding for the State, has massively hiked its estimate for how much it will borrow this year to a new range of €20bn to €24bn.

The NTMA previously said it expected to borrow between €10bn and €14bn this year and that was mostly to pay off old bonds. The new higher estimate is based on the expected budget deficit.