At the beginning of 2020, Irish employment was at the highest level ever recorded and the unemployment rate stood at just 4.7 percent of the labour force. The economy was steadily progressing towards full employment. Consequently, policymakers and employers had concerns about the implications of full employment for the retention, recruitment, and cost of labor. However, within a few short months, these ‘first-world’ concerns were blown out of the water by COVID-19 and the ensuing economic and social carnage.
From March onwards, the global pandemic had a dramatic impact on domestic and international economic activity. Growth literally fell off a cliff in dramatic fashion, but the unprecedented response of global policymakers was equally dramatic. Official interest rates everywhere were taken to historically low levels; massive programs of Quantitative Easing or bond-buying ensued and pushed long-term interest rates to historic lows, and governments everywhere were encouraged to borrow heavily and run up significant levels of debt in order to protect households and businesses and to respond to the need for dramatic increases in health expenditure. This policy response was sensible and appropriate and will need to remain in place until some semblance of global normality returns.
The global and domestic outlook in 2021 will be determined by the trajectory of the virus, and the rolling out of a safe and effective vaccine program. Epidemiology rather than economics will determine what the growth recovery will look like, but there are solid grounds for optimism as the year progresses. Unfortunately, the early part of the year will be dominated by the stringent but necessary restrictions in place in most countries, but there after lies hope.
Ireland in 2020 was very much a story of two economies. The FDI segment of the economy continued to perform very strongly. Exports of Chemicals and Pharmaceuticals expanded by 11.9 percent in the first 10 months of the year and accounted for almost 66 percent of total merchandise exports.
This sector along with other parts of the multinational sector provided a very solid base for economic growth, employment, and the public finances. Indeed, the end-year results from the IDA show that IDA supported companies increased net employment by 8,944 during 2020 to reach 257,394. These jobs of course support many more jobs elsewhere in the economy. This is really important in the current challenging environment.
Apart from the FDI component of the economy, employees in the public sector, professional services, and financial services were relatively insulated from the economic and financial pain caused by COVID-19. However, accommodation and food services, non-essential retail, personal services, or any tourism-related activity had a dreadful 2020, and the outlook will remain challenging in these sectors until the vaccine program is successfully rolled out. Notwithstanding the uncertainties relating to the virus and vaccines, there is a basis for a strong recovery in domestic activity and employment later in the year. The ongoing strong performance of the FDI sector and the other sectors that were not adversely affected over the past year is important; but it is also likely that at some stage this year, consumer spending and business investment will be unleashed like a coiled spring.
In the first 11 months of 2020, household savings increased by a very large €13.1 billion to reach a record high of almost €123.6 billion. In the right set of circumstances, these savings will find their way into the economy. While the most negative ‘hard Brexit’ scenario was avoided, it must be recognised that the ‘bare bones’ trade deal agreed will still have significant implications for Ireland’s trade relationship with the UK, which is vital for indigenous Irish SMEs in particular. The deal agreed relates to goods, with the consequence that tariffs or quotas will not apply to trade in goods between Ireland and the UK. However, the UK decision to leave the single market and the customs union will necessitate border, customs, rules-of-origin, and veterinary checks and controls that will cause delays and increased bureaucracy, and will increase the cost of trade. In addition, the deal does not cover services to any extent.
The UK is now fully gone from the EU, but the future will be characterised by negotiations and haggling in relation to many aspects of relations between the EU and the UK, which is pretty much the situation between the EU and Switzerland. This implies significant uncertainty ahead on many aspects of the bilateral. Brexit, as delivered, is not good news for Ireland, the EU, or the UK, but it could have been considerably worse. Meanwhile, I believe that the demand for skilled labour will remain very strong in 2021 and beyond. However, we will just have to keep an eye on the two Vs –Virus and Vaccine.
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