ECONOMIES IN MIDST OF STRONG REBOUND

Optimism regarding the outlook for the global economy has increased in recent months. This is on the back of the relatively successful vaccine rollout programmes, economies proving better able to adapt to the restrictions that were in place earlier in the year than previously  envisaged, and additional fiscal supports. This more upbeat perspective is evident in the raft of international agencies revising higher their economic growth forecasts over the summer.
 
The OECD is now forecasting that the global economy will grow by 5.8% this year and 4.4% in 2022, following a 3.5% contraction in 2020. This compares to its previous projections made at the end of 2020 for growth of 4.2% and 3.7% in 2021 and 2022, respectively. The IMF is forecasting similar strong growth rates for the world economy. Meanwhile, world trade is recovering strongly, after contracting by 8.5% last year. A rise of 8% is being pencilled in for this year, followed by growth of 6% in 2022. However, both the OECD and IMF point to marked differences in the economic recovery across countries. 

​They note that in many emerging-market economies, the slow deployment of vaccinations, further Covid infection outbreaks, associated containment measures and reduced capacity for policy supports will continue to act as a headwind on activity for quite some time. There is one notable exception to this, China, where output is expected to remain on a robust growth path in the second half of 2021 and into 2022, after a strong rebound over the past year. Meanwhile, in the advanced economies, the on-going progress in the various vaccination rollouts has allowed many of the sectors that were severely curtailed by containment measures to re-open. At the same time, additional fiscal stimulus this year is helping to boost demand, reduce spare capacity and lower the risks of the long-term scarring from the pandemic restrictions. A large accumulation of private sector savings over the past year, combined with improved confidence and fewer public health restrictions should encourage strong growth in consumer spending. GDP in the OECD area is forecast to rise by 5.3% in 2021, led by a strong upturn in the US economy. Growth is seen easing to a still strong 3.8% in 2022.
 
The OECD and IMF note that a significant downside risk to their upbeat forecasts relates to the vaccine rollout not being fast enough to stop the spread of the virus or prevent the emergence of new variants. In such instances, confidence and private sector spending would fall, especially if restrictions need to be introduced, impeding the recovery in economic activity.
 
On inflation, the OECD acknowledges that signs of higher input costs have emerged in recent months. However, similar to the IMF and a raft of central banks, it believes that sizeable spare capacity in the global economy should prevent a sustained marked pick-up in underlying inflation. The recent upturn in inflation rates reflects the recovery of oil and other commodity prices, a surge in shipping costs, the normalisation of prices in hard-hit sectors and an unwinding of indirect tax cuts. These factors are expected to prove temporary. The OECD sees inflation in advanced economies rising to 3.1% by late 2021, before easing back to 2.4% by end 2022. The biggest inflation risk could be the labour market, if a shortage of workers emerges, putting upward pressure on wages. US data are being closely watched in this regard, as employment growth there has been below expectations in recent months despite very high levels of job vacancies.
 
This summer has also seen updated forecasts published by the Central Bank, Dept. of Finance and the ESRI on the prospects for the Irish economy. All strike very upbeat notes for a broad based, strong recovery in activity, with significant upgrades to their previous forecasts published earlier in the year. The ESRI sees GDP growth at 11% this year, with the Central Bank at 8.3% and the Dept. of Finance at 8.8%.
 
Robust growth is forecast to continue next year, with GDP predicted to rise by 6.9% and 5.4% by the ESRI and CBI, respectively. Further strong growth is expected in 2023, with the Central Bank forecasting GDP will rise by 4.8%. Exports are expected to continue performing strongly, with the domestic economy rebounding also. The Central Bank is projecting that underlying annual domestic demand will grow by 4.5% on average over 2021-2023.
 
There are a number of reasons for these forecast upgrades. As elsewhere, the Irish economy performed better than expected in the opening quarter of the year, most notably in terms of exports. Meanwhile the highly successful vaccination programme has laid the basis for a sustained and robust recovery in activity.
 
Economic activity rebounded strongly in the second quarter in Ireland as restrictions were lifted, as can be gauged from a broad range of survey and official data. By June, the PMIs for the manufacturing, services and construction sectors had hit record or near record highs. Core retail sales in May rose by 9% as the sector re-opened. New car sales were up by 21.6% in the first half of 2021. Meantime, consumer confidence hit a two year high in June, while government tax receipts were up by almost 10% at mid-year, well ahead of target. Unemployment is also now in decline.
 
The external environment is also improving, with the aforementioned upgrades to global growth forecasts in both 2021 and 2022 auguring well for Ireland’s large export base. Additional fiscal measures have also been announced by the government in recent months, with supports for both households and businesses staying in place well after the economy has re-opened. The enormous build-up of household savings in Ireland since early 2020 points to considerable firepower to fuel a strong rebound in the domestic economy.
 
In summary, then, Ireland is finally emerging from the Covid-19 pandemic, which has cast a long shadow over everyday life across the world for the past 18 months. The rapid roll out of highly effective vaccines has allowed the restrictions imposed to control the spread of Covid-19 to be lifted gradually, both here and elsewhere. This has laid the groundwork for a robust recovery in economic activity over the next couple of years. However, as both the IMF and OECD highlight, Covid still poses some downside risks to the positive outlook for the global economy.
 
Oliver Mangan
Chief Economist, AIB