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State’s chief economist warns on state of the economy

A presentation by the Department of Finance’s chief economist describes the fall in the economy in the second three months of this year as ‘the largest economic contraction on record.’

It also warns that budgetary policy will have to walk a ‘fine line’ between support and ‘fiscal sustainability.’ 

Chief Economist John McCarthy’s presentation to the Tax Strategy Group outlines how Modified Domestic Demand, a measure which strips out the multinational sector, fell by 16% in the second quarter of this year. 

He notes that GDP only fell by 6% highlighting a ‘two speed’ economy, with multinationals continuing to export. 

Mr McCarthy also draws attention to the ‘excess’ savings by households running to €5-€6 billion. 

He notes that unemployment peaked in April at 28% which was twice the highest level recorded during the financial crisis. 

However, a pick up in the economy is currently underway after an initial ‘bounce-back’ during the summer. 

The number of people on the Live Register, the PUP and the wage subsidy scheme remains high though with 800,000 in receipt of support up to last week. 

The multinational sector is described as having done most of the ‘heavy lifting’ in the economy this year helping to mitigate the negative impact from domestic demand.

For next year, the question mark over the future EU-UK trade relationship is noted as are the potential threats of tariffs and disruption to supply chains. 

On the public finances, the paper notes that our national debt is amongst the highest in the developed world.

Debt is expected to rise further next year and the exposure of the tax base to corporation tax is highlighted.

It notes that whatever debt we take on now will have to be refinanced in the future at a higher cost and that the ECB is expected to end its support in June next year. 

The economy, it concludes, is in a ‘finely balanced position’ with the shock of Covid-19 having had a disproportionate impact on labour intensive sectors.

It says budgetary policy will have to walk a fine line between support and what it describes as ‘fiscal sustainability.’

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