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Economy is set for sharp rebound as consumers spend pandemic savings 


Shoppers on Dublin's Grafton Street. Photo: Gareth Chaney/Collins

Shoppers on Dublin's Grafton Street. Photo: Gareth Chaney/Collins

Shoppers on Dublin's Grafton Street. Photo: Gareth Chaney/Collins

The going-out economy is set for a sharp rebound as consumers spend unprecedented pent-up pandemic savings on food, shoes and booze over the rest of the year.

The Economic and Social Research Institute (ESRI) is forecasting a massive 7.5pc increase in consumption this year – and another 8.5pc increase in 2022 – as people head out on reopening shopping sprees.

“We expect a very strong increase in expenditure by households,” the ESRI said in its latest quarterly economic commentary.

“The recovery… is set to be focused on those goods and services which households have been constrained from consuming. It is therefore likely that many of the retail sales areas which are currently operating well below pre-pandemic levels (bars, restaurants, clothing and footwear, department stores) are likely to experience notable increases in expenditure.”

The Institute is expecting GDP growth of 11.1pc in 2021 – a number somewhat flattered by the contribution of multinational corporations – and the replacement of €24bn in lost output by the end of next year.

Domestic demand – a better indicator of the indigenous economy – was set to rebound 6.4pc, the ESRI said. ESRI economist Conor O’Toole said Irish people were likely to spend a higher proportion of their savings than people in other countries and money would be channelled into the worst-affected sectors.

His forecast echoes research by the Central Bank, which estimated about half of the surplus €15bn saved during the pandemic would flow back into the economy via spending on personal care and entertainment.

The boom in personal consumption will have several reinforcing positive effects, spurring re-employment, boosting tax receipts and reducing Government spending on pandemic payments.

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Combined with a surge in pharma and tech exports and resilient growth, the recovery of domestic demand would help restore Ireland to its pre-pandemic economic path sometime next year – as if Covid never happened, the ESRI said.

One measure of spending in the economy – the amount collected in Vat – is already showing signs that a spending boom is underway.

Between January and May, Vat receipts increased by almost 20pc compared to last year, returning nearly to the levels of 2019. The Revenue’s tax take is up 4pc overall year-on-year, supported by strong income tax growth and Vat. But Vat is expected to skyrocket in the second half as the full impact of reopening is felt across all sectors of the economy.

The ESRI has pencilled in a 25pc increase in VAT receipts for 2021, putting the year well ahead of 2019.

As a result of all that money sloshing around, those businesses that had to lay off workers due to coronavirus lockdowns will be in a position to rehire workers.

The ESRI expects the jobless rate to fall from an average of 16.3pc this year to just 7.1pc in 2021.

More business activity and fewer unemployed means fewer pandemic unemployment payments (PUP) and wage subsidies, which will reduce pressure on the public finances. There are, however, a few possible kinks in this virtuous circle.

First of all, the spending might not materialise as predicted. The course of the virus is still difficult to plot with new variants and an incomplete vaccination programme.

Furthermore, nobody really knows how much people are prepared to spend and how much precautionary savings they will hold on to.

Double-digit GDP growth will get Ireland back on track quickly, but the ‘real economy’ will feel battered for a couple of years at least as consumption recovers more slowly.

Finally, young people are unvaccinated, unemployed and unimpressed.

The extent to which Millennials and Gen Z can meaningfully participate in the recovery will tell us a lot about the path we are really on.

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