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The economic impact of Level 5 restrictions

Jan 29, 2021

It's hard not to feel gloomy about 2021's economic outlook, what with tight restrictions in place and a slow vaccine roll-out. Andrew Park encourages us not to lose hope, however, as estimates indicate that GDP will grow despite the setbacks.

2021 was the year we had all hoped would allow us to return to some ‘normality’ following the COVID-19 pandemic, thanks to the development and roll-out of multiple vaccines.

However, with infection rates rising at a rapid rate prior to Christmas, the Irish Government introduced tougher Level 5 restrictions. Under these restrictions, the Irish Government enacted a de facto national lockdown, reinforcing the work from home message, restricting non-essential travel, as well as the closure of schools and a move to remote learning in addition to the closure of ‘non-essential’ retail.

Each round of ‘stop-go’ that easing and raising restrictions delivers is worsening the economic damage. These current Level 5 restrictions, which may ease in early March, will have a profound impact on the economy. Where optimism was emerging, as evidenced via sentiment surveys, restrictions caused that to ebb away. Q1 2021’s outlook is seeming more downbeat than previously expected. The immediate impact will be felt through the labour market and, more specifically, the live register.

Using data from December 2020, when the introduction of the Level 5 restrictions began, we can see the initial introduction caused the COVID-19 adjusted unemployment rate – which includes both the live register and Pandemic Unemployment Payment (PUP) recipients – to reach 20.4%, up from 15.9% in September 2020 prior to the Level 5 introduction.

A similar trend can be seen through the number of PUP recipients. 219,913 people were in receipt of PUP for the week ending 6 September. Following the introduction of increased restrictions, the number of PUP recipients increased to 335,599 PUP for the week ending the 3 January, representing 13.6% of the total labour force.

These adverse labour market impacts, in conjunction with business restrictions, will result in a lower level of economic growth in Q1 2021. Although, estimates for Q1 2021 economic growth have yet to be published, we can say with some certainty that it will be significantly down on the bounce back growth Ireland was seeing at the back-end of last year when Q3 2020 recorded growth of 11.1%.

While the immediate economic outlook looks ‘gloomy’, the outlook for 2021 as a whole looks more promising, with the roll-out of the COVID-19 vaccine and agreement on a free-trade deal between the UK and EU impacting on prospects.

Initial estimates, produced by the ESRI’s Quarterly Economic Commentary, suggest GDP will grow by 4.9% in 2021, underpinned by a free-trade deal between the EU and UK as well as Level 5 lockdown lasting only six weeks. Although restrictions and slower than hoped vaccine roll-out is hampering the economy now, the overriding sense is one of hope. If we can navigate the next few months successfully, there is significant pent-up demand ready to be unleashed into the economy.

Andrew Park is a Manager in the Economic Advisory team at Grant Thornton.