Who would be an economic forecaster? The Economic and Social Research Institute (ESRI) has taken a relatively optimistic view of the economic outlook, but acknowledges in its latest quarterly commentary the extent of the risks ahead. This is underlined by the spread of Omicron and the uncertainty relating to the path of the pandemic.
The economy performed better than expected this year. While headline GDP figures are distorted by multinational accounting, the ESRI predicts that key measure of the domestic economy will expand by a healthy 6.2 per cent this year and could rise by seven per cent next year.
Against the backdrop of the pandemic, this is a strong performance and the exchequer deficit this year is likely to be less than half of what was expected at the start of the year. It underlines the resilience of much of the economy and the success of the massive Government support programmes. However, as the report highlights, some sectors have been hit hard and remain under pressure and reliant on supports.
Phasing out these supports, particularly the wage subsidy scheme, will be a delicate task and the ESRI refers to the risk of moving too quickly and putting some viable companies out of business. In this context the Government decision to extend the wage subsidy scheme at current rates until the end of January was correct. Unless some more targeted measures can be developed quickly, a further extension may well be in prospect then.
The ESRI report paints a picture of how the economy has adapted to the pandemic, with spending patterns rising and falling as restrictions are tightened and eased, the domestic sector operating similarly but exports continuing largely unaffected. The net impact has led to a strong rise in tax revenues ahead of forecast – boosted by corporation tax – and a continued fall in unemployment. By the end of next year, the unemployment rate could be back to its pre-pandemic level of 5 per cent. That said, the fallout in the domestic sectors remains unpredictable and sectors like travel and hospitality look set to remain under pressure,
The better-than-expected performance is good news for the Government, but challenges await. The immediate one is dealing with Omicron. But the strategic challenge is how to deal with the endemic nature of Covid-19; hopes of an exit from pandemic restrictions in October are now long forgotten and are replaced by significant uncertainties. Booster vaccines may help and so may anti-viral drugs, but questions lie ahead on how we will live with this virus which, as well as having major health and social implications, is central to the economic outlook. Nonetheless, it is at least positive that we head into 2022 in a stronger economic position than had been expected.