Omicron variant could derail economic recovery, ESRI warns

Economic recovery could stall if the new Omicron variant of Covid-19 triggers further health restrictions, the Economic and Social Research Institute (ESRI) has warned.

Despite a robust recovery and an optimistic outlook for 2022, there are still a number of issues that threaten “the return to a complete recovery”, the think tank said in its latest quarterly assessment.

“The current and perhaps most concerning issue is the risk that new variants of Covid-19 will prove to be highly contagious and severe, perhaps including the existing Omicron variant, and the potential need for increased restrictions to curb their spread,” it said.

The Omicron variant is likely be the dominant strain of Covid-19 in Ireland by next week, Tánaiste Leo Varadkar said yesterday, after it jumped from 1 per cent of Covid cases a week ago to now accounting for 14 per cent of cases.

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The ESRI said that if further restrictions include limitations on travel or partial closures of the hospitality sector, forecast growth would have to be revised down while employment would fail to recover as quickly as expected.

It also noted that pressure on the public finances would increase if an extension to supports such as the Pandemic Unemployment Payment (PUP) were required.

In its report, the ESRI also warned that the current elevated level of inflation and the cost-of-living squeeze would continue for several months, peaking at over 6 per cent in March 2022 before easing to 2 per cent in the final quarter of the year. Price growth in the Irish economy accelerated to a 20-year high of 5.3 per cent last month on the back of soaring energy costs and supply chain disruption linked to Covid.

“While the present increase in inflation is most likely attributable to temporary or transitory factors, mainly due to the pandemic, price increases over the next year may be greater than previously expected,” it said, while noting these risks increase if there is a more rapid domestic recovery.

Despite the uncertainty, the ESRI expects the economy to grow by 13.6 per cent this year and 7 per cent next year, which it described as “exceptional” in the circumstances of the global pandemic.

The double-digit growth rate was largely due to multinational-related activities, in particular strong exports, it said.

Government’s year-end budget deficit is also expected to be under €10 billion this year compared to the expectation of €20 billion at the start of the year.

The domestic economy as measured by modified domestic demand, which weeds out much of the multinational activity, is expected to grow by 6.2 per cent this year and by 7 per cent in 2022.

Strong economic growth is expected to see unemployment fall further in 2022, averaging just under 6 per cent for the year, “assuming no major deterioration in the epidemiological situation for a protracted period”, the ESRI said.

A further risk to the economic outlook was the possibility of disruptions in the trade agreement between the EU and the UK that could present challenges for Irish trade with the UK.

The UK government said yesterday that the planned introduction of additional post-Brexit checks, including those on Irish exports to the UK, on January 1st has been delayed, averting another Brexit-related deadline in the run-up to Christmas.

Commenting on the report, the ESRI’s Conor O’Toole said: “The reopening of the economy through 2021 has led to a sharp rebound in the domestic economy as households have increased spending.

“While the outlook remains positive in 2022, significant challenges may arise due to the ongoing presence of Covid-19, inflation and uncertainty around EU-UK trade relations,” he added.