Economic Life and COVID-19 in Ireland, 2020-2021

GDP, GNP, and Modified Total Domestic Demand

This report illustrated in earlier chapters that the economic effects of the COVID-19 pandemic have not been uniform in Ireland. Several sectors contracted but others expanded. Employment income grew for some people but declined for others. These uneven effects of the pandemic are visible in changes to Gross Domestic Product (GDP), Gross National Product (GNP) and Modified Total Domestic Demand (MTDD). These are important economic indicators which measure the health and size of the national economy.

Gross Domestic Product (GDP) at constant market prices is a measure of the size of the total economy. Based on GDP, the economy expanded by 5.9% in 2020, increasing from €356.5bn in 2019, to €377.4bn. Although personal consumption expenditure (PCE) decreased by 10.4% in 2020 (see What we consumed), and gross fixed capital formation fell by 23.0% (see Table 5.6), increases in net expenditure by central and local government on current goods and services (10.9%) and in the trade surplus contributed to a rise in GDP of €20.9bn in 2020. See Table 5.1.

GNP also grew in 2020, rising from €275.6bn to €284.9bn, (in constant prices), between 2019 and 2020, an increase of 3.4%. GNP removes net factor income from the rest of the world and therefore provides the value of all finished goods and services owned by the residents of Ireland. See Table 5.1.

Modified Total Domestic Demand (MTDD) is designed to exclude large transactions of foreign corporations that do not have a big impact on the domestic economy, i.e. to remove the distorting effects of globalisation. MTDD is therefore smaller than GNP but is more representative of what is happening with the domestic economy in Ireland.

While GDP and GNP both grew between 2019 and 2020, MTTD (in constant market prices) contracted by 4.2%, falling from €189.8bn to €181.8bn. The main contributors to the change in MTTD were decreases of 10.4% in PCE and 3.6% in modified gross domestic fixed capital formation, which were partly offset by a 10.9% rise in net expenditure by central and local government on current goods and services. See Table 5.2.

GDP and GNP at constant market prices have continued to increase in 2021, with GDP rising by 11.7% in Q1 and by 21.1% in Q2 compared with the same periods in 2020, while GNP over the same timeframe rose by 2.9% in Q1 and by 15.4% in Q2. The domestic economy, however, as measured by MTDD, contracted by 6.3% in Q1 2021 compared with Q1 2020, before showing signs of recovery in the second quarter, with growth of 13.2% compared with one year earlier.

The total economy, (as measured by GDP), expanded by 22.7% in the second quarter of 2021 compared with Q2 2019, but the domestic economy, (as measured by MTDD), only grew by 5.2% over the same period.

 Gross Value Added

Earlier sections in this report on employment and household expenditure have shown that the pandemic has not affected all sectors of the economy equally. In this section, Gross Value Added (GVA) will be examined at a detailed sector level. GVA is equal to GDP less taxes and subsidies on products and shows the value that producers have added to the goods and services they have bought.

GVA at basic constant market prices rose by 7.1% between 2019 and 2020, from €333.3bn to €357.0bn. This rise in GVA occurred during a period of overall reduced hours worked per week and lower levels of employment (see How we worked). See Table 5.3 and Table 5.4.

Industry (excluding construction) was the largest contributor to total GVA in 2020 at €145.8bn, most of which (€140.4bn) came from manufacturing industry.

Industry (excluding construction) had the largest percentage increase in GVA in 2020 at 22.1%, followed by Information and communication at 13.8%. Both the Industry (excluding construction) and the Information and communication sector experienced generally higher levels of employment in 2020 than 2019 (see How we worked). See Figure 5.1.

In contrast, the Arts, entertainment and other services sector had the largest percentage fall in GVA in 2020 of 25.5%. This was followed by the Distribution, transport, hotels and restaurants sector (down 19.3%), and the Construction sector (down 10.2%). See Table 5.3. These sectors generally recorded lower employment numbers throughout 2020 in comparison to 2019.

When the statistical discrepancy included in Table 5.3 is removed (see Background Notes), GVA rose by 5.6% in 2020. This increase was mainly attributed to value added by foreign-owned multinational enterprise (MNE) dominated sectors, which rose in every quarter by at least 18% compared with 2019, while GVA by other sectors, not dominated by foreign-owned MNEs, fell in every quarter of 2020. See Table 5.5.

GVA for the non-MNE dominated sectors fell by 6.9% in Q1 2021 compared with one year earlier but rose in the second quarter by 15.8%. GVA in Q2 2021 for these sectors was 4.1% below the same period in 2019, before the pandemic.

For sectors where foreign-owned MNEs were dominant, GVA continued to grow in the first two quarters of 2021 compared with one year previous, rising by 22.5% in Q1 and 25.1% in Q2. See Table 5.5. GVA in Q2 2021 for these sectors was 47.8% above the same quarter in 2019.

 Gross Domestic Physical Capital Formation

Gross Domestic Physical Capital Formation, (GDPCF), at constant market prices, more than doubled between 2018 and 2019, rising from €96.6bn to €195.0bn, but then fell back to €152.0bn in 2020. GDPCF is closely related to GVA and illustrates how much of the new value added in the economy is invested rather than consumed. See Figure 5.2.

The main contributor to the €43.0bn fall in GDPCF between 2019 and 2020 was a €36.4bn decline in fixed capital formation of Research and development assets, which fell from €137.2bn in 2019 to €100.8bn in 2020. Fixed capital formation of Transport equipment also fell over this period, dropping from €19.9bn in 2019 to €12.3bn in 2020. See Table 5.6 and Figure 5.3.

Gross domestic fixed capital formation of Other building and construction (including land rehabilitation etc) dropped by €0.7bn between 2019 and 2020, from €15.7bn to €15.0bn. This decline corresponds with a fall in employment levels and total hours worked in the Construction sector during 2020, (see How we worked). See Table 5.6 and Figure 5.3.

There was a decrease in the number of new dwelling completions in 2020, (see What we produced), and a corresponding €0.4bn fall in fixed capital formation of Dwellings from €7.3bn in 2019 to €6.9bn in 2020. Fixed capital formation of Costs associated with transfer of land and buildings also fell by €0.4bn when compared with 2019. See Table 5.6.

 

Government Revenue and Expenditure

The changes to the economy as a result of the pandemic, as detailed in the chapters How we worked, What we consumed and What we produced, all have knock-on effects to government finances. Between 2019 and 2020, government revenue fell from €88.1bn to €83.6bn. This fall of €4.5bn in revenue was mainly due to a drop in tax revenues of €2.4bn and lower revenue from the sales of goods and services of €0.9bn. Government revenue fell in each quarter of 2020 compared with the same quarter of 2019. See Figure 5.4 and Table 5.7.

Government expenditure rose sharply between 2019 and 2020, up from €86.3bn to €102.0bn. This extra €15.7bn was almost all due to the impact of the COVID-19 pandemic. Hundreds of thousands of people availed of COVID-19 income supports during 2020, (see How we worked). These income supports led to a rise of €4.4bn in expenditure on subsidies (including the Temporary/Employment Wage Subsidy Scheme (TWSS/EWSS)) and of €7.5bn on social transfers, (including the Pandemic Unemployment Payment (PUP)). See Table 5.7.

This increased expenditure by government, coupled with the fall in revenue, led to government deficits in each quarter of 2020, with deficits of €3.6bn in Q1, €6.2bn in Q2, €6.5bn in Q3 and €2.1bn in Q4. The total government deficit was €18.4bn in 2020, compared a surplus of €1.8bn in 2019.

A wide range of government income supports and additional COVID-19 spending resources were introduced in 2020 which cost €14.8bn. The main components were €5.1bn for the PUP, €4.2bn for the TWSS/EWSS and €2.5bn for COVID-19 health expenditure. See Table 5.8.

As the pandemic continued into 2021, the deficit was €6.4bn in Q1, compared with €3.6bn in the first quarter of 2020 and €1.9bn in Q1 2019. The first quarter position is generally a deficit due to the timing of revenue and expenditure flows during a year, but the scale of the deficit in Q1 2021 illustrates the impact of the pandemic. The deficit in Q2 2021 was €2.5bn, compared with €6.2bn in Q2 2020 and a surplus of €0.9bn in Q2 2019.

Government revenue in Q1 2021 was €19.9bn compared with €17.7bn one year earlier, mainly due to an extra €1.9bn in tax revenue. Government expenditure was €26.4bn in Q1 2021, €5.1bn higher than Q1 2020. Most of this increase was due to an additional €3.8bn spent on subsidies and social transfers, (which include the EWSS and PUP).

Q2 2021 had signs of recovery in the Government finances. Revenue rose to €23.7bn compared with €20.9bn in Q2 2020, while expenditure fell by €1.0bn to €26.2bn. However, government expenditure in Q2 2021 was €5.4bn higher than the same quarter pre-pandemic (2019).

Macro-Economics

The finances of the State came under pressure during 2020 because of additional spending due to the pandemic, (See Table 5.7 and Table 5.8). The Government used surplus budget resources and additional borrowing to finance this extra expenditure. It is therefore interesting to ask – what was the impact of the pandemic on the debt ratio in Ireland?

General Government (GG) gross debt, or the level of Government borrowing, rose by almost €14bn between 2019 and 2020, from €204.0bn to €217.9bn. Despite this increase, the debt to GDP ratio only rose from 57.2% in 2019 to 58.4% in 2020 and therefore remained below the Stability and Growth Pact (SGP) threshold of 60%. This was because of a 4.6% rise in GDP at current market prices from €356.5bn to €372.9bn between 2019 and 2020. GG net debt, (which takes account of the assets corresponding to Excessive Deficit Procedure (EDP) debt instruments), increased between 2019 and 2020 by €11.3bn to €185.9bn, (49.9% of GDP). See Table 5.9.

While Gross Domestic Product (GDP) and Gross National Product (GNP) accurately capture and highlight the open and globalised nature of the Irish economy, Modified Gross National Income (GNI*) is designed to be a supplementary measure which is more representative of the domestic economy. GNI* excludes globalisation effects related to highly mobile economic activities that disproportionately impact upon the measurement of the size of the Irish economy. The difference between Modified Total Domestic Demand (MTDD) and GNI* is that MTDD is calculated based on the expenditure approach to GDP, while GNI* is calculated based on the income approach. The removal of the globalisation effects resulted in GNI* of €208.2bn for 2020, well below GDP of €372.9bn. See Table 5.9.