The unleashing of €13 billion in household savings and significant pent-up demand will lead to a surge in consumer spending that will fuel a 5% growth in core domestic demand this year, new research from stockbroker Goodbody says.
In his latest economic forecast, chief economist Dermot O’Leary predicts that domestic demand will fall between January and March.
But he said a recovery will begin as the Covid-19 vaccine rollout leads to the easing of restrictions, probably sometime in the second quarter.
Today’s report anticipates that this strong recovery will moderate a little next year, growing 3.5% in 2022.
“Due to significant government transfers, disposable incomes have held up well. Indeed, Irish households experienced the fastest growth in disposable incomes in the EU in 2020,” Mr O’Leary says.
“As a result, savings have soared among Irish households, evidenced by a savings ratio of 36% in Q2 2020 and a record €13 billion increase in bank deposits over the past 12 months.”
“As evidenced by the partial reopening in December, there is significant pent-up consumer demand which will be unlocked once restrictions are eased,” he said.
A normalisation of the savings ratio will on its own lead to a large rebound in consumer spending, with some unleashing of savings adding extra impetus to this trend,” he added.
The report says it could be September before the 70% of the population required to achieve herd immunity is vaccinate, but mortality risks will begin to fall earlier as vulnerable groups are immunised, allowing a gradual reopening of the economy from April on.
But Mr O’Leary also outlines the stark challenge facing employment, estimating that 880,000 people or 36% of the workforce is on some form of Government supports right now.
As a result, he suggests that wage supports should only be removed carefully and that incentives for rehiring and retraining will be important in the overall economic recovery.
Mr O’Leary says it is still unclear how many jobs will return once restrictions are eased and that estimates for unemployment carry a large margin of error, ranging from 7% to 20%.
“In Budget 2021, the Irish Government included contingencies for the continuation of social distancing measures and a hard Brexit of €5.5 billion,” Mr O’Leary says.
“Given that a no-deal Brexit has been avoided, the Government should use these resources to continue to support businesses and individuals until restrictions are removed and should also direct resources towards supporting reopening when it is appropriate to do so.”
“Deficit reduction as a priority is for 2022 and beyond.”
Mr O’Leary says the €38 billion response of the Government in providing supports has been among the largest in the world and another budget deficit this year is the correct course of action.
These have played a vital role, he says, in reducing cash flow concerns, and keeping insolvencies low.
But he adds that further grant support may be needed to resuscitate businesses and minimise the long-term scarring from the crisis.
On housing, the report describes the market as surprisingly resilient in both prices and demand, despite completions falling 8% last year to 19,500.
“With the supply of properties for sale at a record low and robust demand, we now expect prices to grow this year by 4%, a significant change from our previous estimate of -2%,” Mr O’Leary says.
Article Source: Big consumer rebound expected after Q1 lockdown – Goodbody – RTE – Will Goodbody