The glassy offices of Grand Canal Square in Dublin sit empty as Covid-19 restrictions keep workers at home — but the buildings lie at the heart of the country’s economic outperformance.

Irish gross domestic product is projected to shrink 2.3 per cent this year, well below the 7.4 per cent average contraction across the EU, and recent European Commission forecasts suggested Ireland would be one of just two EU economies to return to their pre-pandemic size by the end of next year.

That is in part because of the strong performance of the occupants of Grand Canal Square and the surrounding area — a hub for the international tech sector, with Google and Facebook located nearby. Another big factor is the surge in pharmaceutical exports from Ireland, where many large global groups carry out manufacturing.

Around 245,000 people in Ireland are employed by global companies that have made the country a European hub for multinationals. Local expenditure by multinationals reached €21.5bn in 2019, according to IDA Ireland, the state agency responsible for attracting foreign direct investment into one of the world’s most open economies.

In ordinary times such activity constitutes a huge boost to the country, with big spin-off benefits in the domestic economy. But these companies’ presence inflates Ireland’s GDP figure, obscuring the impact of the pandemic on the domestic economy, where severe coronavirus restrictions have led to the loss of hundreds of thousands of jobs. In July IDA Ireland said existing investment in Ireland was “resilient but not immune” to the impact of the pandemic. 

Bar chart of Forecast change in GDP by end of 2021 from pre-pandemic level (%) showing Ireland's forecast rebound is rare

Seamus Coffey, economist at University College Cork and former chairman of the Irish Fiscal Advisory Council, a statutory budget oversight body, said the GDP figures result from activity in Ireland but “don’t necessarily reflect the Irish economy” itself.

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“The GDP number is real. It does reflect stuff that happens but it’s not an indication of the changes in living standards of Irish people,” he said.

Large parts of the domestic economy have been locked down for months and as a result the public finances are under acute pressure. 

“Ireland saw some of the sharpest declines in consumer spending and output in hard-hit sectors like tourism and retail because our Covid-19 restrictions were more strict and longer than other European countries,” said Conall Mac Coille, economist at Davy stockbrokers in Dublin. 

“Labour market data looked particularly poor during the first round of the pandemic which led to extraordinarily high spending on employment and welfare support.” 

Such is the size of the multinational sector that Dublin has developed a bespoke measure, modified gross national income, in an attempt to capture what is really going on in the domestic economy by stripping out the impact of foreign investment. 

Michael McGrath, public expenditure minister in Micheál Martin’s government, said the true extent of the downturn is more than twice the rate suggested by the GDP data.

Line chart of €bn showing The growing effect of multinational corporations on the Irish economy

“It is undoubtedly the case that the hardest-hit sectors of the Irish economy are domestic in nature — including tourism, hospitality and retail — and this is borne out by the overall numbers,” he told the Financial Times. 

“While the economy is expected to contract by over 2 per cent in GDP terms this year, modified domestic demand, which is a much more accurate barometer of domestic activity, is expected to shrink by around 6 per cent. The challenge for us lies in the fact that the domestic sectors are jobs-rich, and therefore there has been a disproportionate negative impact on employment in our country as a result of Covid-19.” 

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Loretta O’Sullivan, chief economist at Bank of Ireland, noted falling consumer and business sentiment just before the latest restrictions took force, adding that the lack of a post-Brexit trade deal between the EU and UK was a further source of anxiety.

“Firms in all sectors — that’s retail, industry, services and construction — did pare their expectations for near-term activity, particularly over the coming three months,” she said. “Households are very worried about what it all means for the economy and they’re very worried about what it means for unemployment.” 

The toll on jobs is severe. Ireland entered the pandemic at close to full employment with a 4.8 per cent jobless rate in February. Unemployment, taking into account people receiving pandemic-related out-of-work benefits, peaked at a record 28 per cent in April and it was at 20.2 per cent in October as a new six-week lockdown was imposed.

Line chart of Unemployment rate (%) showing Pandemic pushes Irish joblessness to historic levels

Some 350,072 people are on special pandemic unemployment payments, the Irish government said on Monday, at a weekly cost of €103.8m. Almost 103,000 people are jobless in the accommodation and food service sectors, 57,000 are jobless in wholesale and retail and another 31,000 are without work in hair and beauty salons.

A further 203,172 people are claiming other, non-Covid-related unemployment benefits.

This month the government has separately paid out €80m in wage subsidies to 19,200 employers, helping to sustain 170,800 jobs. 

The GDP question has a bearing on Ireland’s budget deficit, a crucial gauge of its performance under EU fiscal rules. The deficit is projected by the European Commission to come in at 6.8 per cent of GDP this year, a level “near the bottom” of the range across the eurozone, according to Mr Coffey. 

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But the deficit as a proportion of modified GNI comes in at around 12 per cent, comparable with the highest deficits in the single currency bloc.

“To suggest that [the pandemic] is only having a modest impact on the deficit, using GDP, doesn’t give a true reflection,” Mr Coffey said. “It’s looking like a modest deficit in an economy that’s been shut down for months.” 

Via Financial Times