Green Shoots

Ireland rejects another full lockdown as growth projections are sharply upgraded

Jonathan Keane
Key Points
  • The economy is now projected to contract by just 0.4% in 2020 if another full lockdown can be avoided, a significant upgrade from July's prediction for a 9% fall. 
  • Ireland may end 2020 with one of the lowest falls in GDP in the euro area but on the flipside the country has seen one of the largest drops in consumption in Europe.
A man wearing a face mask or covering due to the COVID-19 pandemic, walks past the closed Donelon's Bar in the rural village of Dunmore, west of Ireland, on September 3, 2020.
PAUL FAITH/AFP via Getty Images

DUBLIN — After the Irish government rejected expert recommendations to return to another full lockdown, the governor of the country's central bank said the economy's recovery has been uneven with Brexit still on the horizon.

The Central of Bank of Ireland published its quarterly bulletin Tuesday morning where it substantially adjusted its full-year forecast for GDP. The economy is now projected to contract by just 0.4% in 2020 if another full lockdown can be avoided, a significant upgrade from July's prediction for a 9% fall. 

"We've seen a rebound from the low points we reached in April but the recovery that we have seen is also uneven, it's incomplete and it's certainly uncertain," Governor Gabriel Makhlouf told CNBC.

Strong exports, buoyed by the country's pharmaceutical sector, helped mitigate some of the pandemic's hit.

"It's proved resilient through the hardest bit of the lockdown so we're certainly optimistic that it can continue, but actually one of the things that's characterized all economic analysis over the last six months is the word uncertainty," Makhlouf said.

Ireland may end 2020 with one of the lowest falls in GDP in the euro area but on the flipside the country has seen one of the largest drops in consumption in Europe.

VIDEO5:0805:08
Average inflation targeting is an option to look at, says Governor Gabriel Makhlouf of the Central Bank of Ireland.

He added that any projections and forecasts still need to be cautious and will "depend on the path of the virus, it will depend on the decisions that governments make."

On Monday, the Irish government announced that the entire country would move up to level three of its coronavirus plan at midnight on Tuesday. This is in disagreement with Covid-19 health advisors that said the country needed to move to the highest level of five, which would mean a strict lockdown in place with most businesses closing.

Prime Minister Micheál Martin said moving to the strictest level would cause massive economic damage but the chief medical officer, Tony Holohan, said this was the "only opportunity to get this disease back under control." This is the first time the government has eschewed its experts' advice.

"We're certainly all still learning how to manage a pandemic in a way that's sustainable, not just in health terms but in economic terms," Makhlouf said. "At the end of the day, a healthy economy requires healthy consumers and a healthy workforce so the two are interrelated." 

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A digital tax is still possible this year, Ireland's finance minister says

Brexit

The unevenness in Ireland's economic recovery is expected to be exacerbated as the end of the U.K.'s transition period looms and if no trade deal is struck with Britain. The Central Bank of Ireland has now shifted its preparations to the assumption that there will be no deal.

"We have assumed until the publication today that there would be a deal, but we decided that it was wiser to change our assumption and assume that there would be no deal," Makhlouf said.

He said that any scenario is damaging for the Irish, British and European economies but it is working under the assumption that WTO trade terms will soon apply.

This would have an impact across many sectors but particularly food and agriculture where tariffs may be imposed.

"But I think again this is hugely uncertain, the precise combination of Brexit and the pandemic. The most significant thing I think that all businesses can do right now is plan for change," Makhlouf said. "I've been saying this for a while, we have to plan for change. Even if there is a deal, there will be more friction in EU-U.K. trade and we need to be ready for it."