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Quarterly Economic
Commentary – Autumn 2020
DATE
AUTHORS
Kieran McQuinn, Conor O’
Toole, Matthew Allen-
Coghlan, Cathal Coffey.

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Overview
• Irish economy continuing to struggle with the impact of Covid-19
• Unemployment rate 14.7% in September
• Significant variation in impact of pandemic on different sectors of the economy in Q2
• Manufacturing: +16.5 %
• Distribution and Transport: -32.0%
• Arts & Entertainment: -67.8%
• Overall impact on GDP less than expected
• Exports robust over Q2 (+0.1% y-on-y)
• Consumption and modified investment fall significantly (-22.3% and -24.4%)
• Real GDP growth forecast to decline by 1.8% in 2020
• Two scenarios for 2021
• Free trade agreement: 6.3% growth
• No deal Brexit: 3.3% growth

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Summary
2019 2020 2021
Output (Real Annual Growth %)
Private Consumer Expenditure 3.2 -9.2 5.0
Public Net Current Expenditure 6.3 10.0 2.5
Investment 74.8 -17 8.0
Exports 10.5 1.7 6.1
Imports 32.4 -6.1 6.5
Gross Domestic Product (GDP) 5.6 -1.8 6.3
Gross National Product (GNP) 3.4 -2.3 5.2
Labour Market
Employment Levels (‘000) 2,322 2,013 2,239
Unemployment Levels (‘000) 121 405 246
Unemployment Rate (as % of Labour Force) 5.0 16.8 9.9
Public Finances
General Government Balance (€bn) 1.3 -25.4 -15.0
General Government Balance (% of GDP) 0.4 -7.3 -3.9

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Sectoral Impact on Irish economy very different
FIGURE 2 ANNUAL CHANGES (%) IN SECTORAL OUTPUT VOLUMES: Q2 2019-Q2 2020:
IRELAND VS EU27
Source: Eurostat.
Note: W,R,T,A,F is Wholesale, retail, transport, accommodation and food services; RE is Real estate; P,S,T,A,S is Professional, scientific,
technical, administration and support services; PA is Public administration; A,E,R, is Arts entertainment and recreation.

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Consumption
• 2020: -9.2% 2021: 5.0%
• Consumption expenditure fell by 19.6 per cent
between Q1 and Q2
• Third largest amongst 23 European countries
• Real time indicators of expenditure such as
retail sales data point to a sustained and
strong recovery as the economy was
reopened
• Bottom up approach to forecast consumption
over second half of the year
• Following a similar approach to that
developed in Coffey et al. (2020)
• Utilising microdata from Household Budget
Survey 2015/2016
• Consumption expected to drop back in Q4 as
result of lockdown restrictions
-28%
-26%
-23%-23%
-19%
-18%-18%-18%-17%-17%
-16%
-13%-13%-13%
-12%
-11%-11%
-9%
-9% -8%
-6%
-3%
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
ES UK IE LT BE IT RO SI FR PT AT DE NE PO GR DK SW EE CZ FI LI BG
Cumulative Change in Consumption for selected European Economies
Source: ESRI Analysis of Eurostat data. Consumption is the cumulative quarter on quarter changes for Q1 2020 and Q2 2020.
Series: Final consumption expenditure of households, chain linked volumes (2010), seasonally and calendar adjusted data.

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CONSUMER SENTIMENT INDICATORS – IRELAND, UK AND REST OF EU (JANUARY 2020 = 100)
70
75
80
85
90
95
100
105
Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
Ireland EU (excl UK) UK
Source: European Commission data and ESRI calculation. Note: the positive/negative balances from the EU COF series are transformed by adding 100. We then set the base to 100 in January 2020 with growth relative to this
point i.e ((Yt/YJan2010) -1)*100.

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Investment
• 2020: -17.0% 2021: 8.0%
• Modified GDFCF formation decreased by 24.4% y-on-y in Q2
• Buildings & Construction investment decreased by 35 %
• 17,000 housing completions forecast for 2020
• Historical data shows a strong contemporaneous relationship
between investment in Machinery and Equipment and
business sentiment
• O’Toole (2019)
• Weak investor sentiment implies significant decline in
Machinery & Equipment in Q2
• Some positive news with latest CSO ‘Business Impact of
Covid Survey’ in August showing 96% of firms currently
trading
• Up from around 75% in April
MODIFIED GROSS DOMESTIC FIXED CAPITAL FORMATION
Source: Central Statistics Office
-30
-25
-20
-15
-10
-5
0
5
10
15
-
2,000
4,000
6,000
8,000
10,000
12,000
SA Volume (€) Y-on-Y growth rate (%, RHS)

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Trade
Exports
• 2020: 1.7% 2021: 6.1%
• Robust performance of Exports significantly dampened decline in GDP in Q2
• Largest components of goods and services performed very strongly
• Medicinal and pharmaceutical products (+30.5%)
• Computer services (+4.3%)
• Most other components declined over the same period
• Organic Chemicals (-11.2%)
• Machinery and Equipment (-16.8%)
• Business Services (-13.2%)
• Tourism and Travel (-89.6%)
Imports
• 2020: -6.1% 2021: 6.5%
• Related to decline in consumption and investment
• Strong performance of some export groups should boost the imports of goods and services used in the production
process

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Exports by Component/Commodity Group
0 2000 4000 6000 8000 10000 12000 14000 16000 18000
Food and live animals
Miscellaneous manufactured articles
Machinery and transport equipment
Organic chemicals
Medicinal and pharmaceutical products
2020Q2 2019Q2
0 5000 10000 15000 20000 25000 30000 35000
Computer services
All business services
Financial services
Insurance
Royalties/licences
2020Q2 2019Q2
Source: Central Statistics Office
SERVICE EXPORTS BY COMPONENT (VALUE, €000,000) MERCHANDISE EXPORTS BY COMMODITY GROUP (VALUE, €000,000)

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Research Note: Lockdown Tale of Two Economies
• Note aims to explain why GDP fall was relatively benign, given extremely large economic shock to domestic economy
• Demonstrates the impact of lockdown resistant sectors (computer services, pharmaceuticals)
• Shows exports are more important for Ireland than other countries and our main export sectors bucked the international
trend of slower activity
• Increase in exports (y-on-y) in pharma for example outweighed fall in tourism, travel, transport related export service
revenues.
FIGURE 4 SCATTER PLOT OF GDP FALL AND CHANGE IN CONSUMPTION AND EXPORTS
Cumulative Change in GDP Q1 + Q2 2020 Cumulative Change in GDP Q1 + Q2 2020
Versus Change in Consumption (Y Axis) Versus Change in Exports (Y Axis)
Source: ESRI Analysis of Eurostat data.
Note: Orange dot indicates Ireland.
FIGURE 15 SCATTERPLOT OF EXPORT SHARE (2019) (X-AXIS) AGAINST Q2 2020 YEAR-ON-YEAR
CHANGE (Y-AXIS)
Source: ESRI Analysis of CSO data.

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Labour Market
Unemployment
• 2020: 16.8% 2021: 9.9%
• Adjusted unemployment rate decreased to 14.7% in September
• Down from over 30% in April
• Over 340k people now receiving unemployment benefits
• Significant variation in impact of pandemic across sectors
• Percentage of employees on PUP or TWSS by end of July
• Accommodation and food service activities (84%)
• Construction (36%)
• ICT (15%)
• Despite positive GDP growth forecast for 2021 unemployment will remain elevated

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Unemployment rate
0
5
10
15
20
25
30
1998M01
1998M05
1998M09
1999M01
1999M05
1999M09
2000M01
2000M05
2000M09
2001M01
2001M05
2001M09
2002M01
2002M05
2002M09
2003M01
2003M05
2003M09
2004M01
2004M05
2004M09
2005M01
2005M05
2005M09
2006M01
2006M05
2006M09
2007M01
2007M05
2007M09
2008M01
2008M05
2008M09
2009M01
2009M05
2009M09
2010M01
2010M05
2010M09
2011M01
2011M05
2011M09
2012M01
2012M05
2012M09
2013M01
2013M05
2013M09
2014M01
2014M05
2014M09
2015M01
2015M05
2015M09
2016M01
2016M05
2016M09
2017M01
2017M05
2017M09
2018M01
2018M05
2018M09
2019M01
2019M05
2019M09
2020M01
2020M05
2020M09
Monthly Unemployment Rate (SA)

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NUMBER OF PEOPLE CLAIMING THE PUP AND BEING SUPPORTED BY THE TWSS BY WEEK
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
PUP Supported by TWSS Live Register
Source: Central Statistics Office and Revenue Commissioners
Note: The 18th of May (red line) was the beginning of Phase 1 of ‘The Roadmap for Reopening Society and Business’, while Phase 2 and Phase 3 began on the 8th of June (green line) and 29th of June (blue line) respectively.

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Public Finances - Baseline
• GGB (% of GDP) 2020: -7.3% GGB (% of GDP) 2021: -3.9%
Debt to GDP 2020: 63.5% Debt to GDP 2021: 61.0%
• Significant decline in revenue expected for 2020 but less severe than originally anticipated
• Decline in income tax (-2.1%) muted as result of low tax liability of those who have lost their jobs
• Corporation taxes (+25%) increased significantly above expectation
• Most tax headings to register positive growth in 2021 as they recover from the declines in 2020
• Corporation tax is the exception
• Windfall nature of returns in recent years
• Ending of ‘Double Irish’
• Expenditure to remain elevated through 2021
• Health Expenditure
• Social supports
• Revenue to decline by 14%, Expenditure to increase by 16%
• Debt to GDP will decline in 2021 as recovery in output exceeds the increase in national debt

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Box 1: Exploring the Impacts of Covid-19, a Hard Brexit and Recovery Paths for
the Economy
COVID-19 & NO-DEAL BREXIT: IMPACT ON GDP
• Range of alternative scenarios for the Irish economy using
structural macro-econometric model COSMO
• Recovery (- 7.0 % deviation from baseline )
• Delayed Recovery (- 9.5 % deviation from baseline )
• 2nd Wave (- 8.0 % deviation from baseline )
• Recovery scenario coupled with a range of alternative
scenarios for Brexit
• Recovery
• Recovery & No Deal Brexit
• Recovery & Disorderly Brexit
• Limited overlap in the sectors exposed to Brexit and Covid-19
• Daly and Lawless (2020)
• No-deal Brexit will cause long term economic loss close to 2%
after 10 years relative to the no-pandemic baseline
• Disorderly exit would also lead to significant short term losses
Source: Authors Calculations.
-14
-12
-10
-8
-6
-4
-2
0
2
2019Q1
2019Q3
2020Q1
2020Q3
2021Q1
2021Q3
2022Q1
2022Q3
2023Q1
2023Q3
2024Q1
2024Q3
2025Q1
2025Q3
2026Q1
2026Q3
2027Q1
2027Q3
2028Q1
2028Q3
2029Q1
2029Q3
2030Q1
2030Q3
Real GDP, deviation from baseline (%)
Recovery Recovery & Disorderly Brexit Recovery + No Deal Brexit

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Box 2: The Treatment of Intellectual Property (IP): How Euro Area Data is Now Being
Distorted
• Recent analysis from Setser (2020) suggests that the
treatment of investment in intellectual property (IP) by
certain large firms operating in the Irish and Dutch
jurisdictions have non-trivial implications for Euro area data
• Certain large transactions in the Dutch economy in 2015
and in Ireland in 2017 caused the ratio of investment in IP
to Euro Area GDP to increase substantially.
• These transactions are to do with certain subsidiaries of
multinationals based in these countries acquiring the
intellectual property of a non-resident company.
• Euro area data looks very different with Irish and Dutch net
trade data excluded
• Implications
• May be necessary for new macroeconomic indicators to be provided
by Eurostat
• Information revealed in national accounts reveals evidence of profit-
shifting by multi-national firms.
• In a post Brexit European Union, it is important that Irish authorities
avoid any tax arrangements that multinationals can use to significantly
reduce their global tax liabilities.
YEAR ON YEAR CONTRIBUTION OF NET TRADE TO EURO AREA GDP WITH IRISH
AND DUTCH NET TRADE EXCLUDED (%) GDP
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2010Q1 2011Q2 2012Q3 2013Q4 2015Q1 2016Q2 2017Q3 2018Q4
Total EA EA without IRL and NL
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2010Q1 2011Q2 2012Q3 2013Q4 2015Q1 2016Q2 2017Q3 2018Q4
IE NL
IRISH AND DUTCH INVESTMENT IN IP AS A % OF EURO AREA GDP

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Impact of Second Lockdown in Q4
Based on previous analysis:
Baseline Second Lockdown
(April Style)
Consumption -9% -16%
Investment -17% -28%
Government Spending 10% 14%
• Consumption and Investment decline significantly
• Likely to result in an increase in government supports
• Impact on trade less clear
• Again will largely depend on international demand and the performance of a small
number of sectors

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Assessment
• While the decline in GDP is much less severe than we previously expected, the economic
shock has been substantial for particular sectors and for many households
• Certain characteristics of the Irish economy have been brought to the fore by the pandemic
• Strong performance of export sector
• High levels of corporation tax receipts
• Muted decline in income taxes
• Support measures should be kept in place into 2021
• There will come a point where the tapering of policy measures will be necessary especially
for firms
• Given the underlying strength of the Irish economy, should grow robustly when uncertainty
around the virus passes