Confidence that we won’t be left with the dim prospect of sifting through the wreckage of the Irish economy appears to be high. Last week brought a flurry of indicators suggesting the potential is there for the country to emerge from the troubles of Covid-19 and flourish.

Bank of Ireland’s Economic Pulse, a joint indicator of sentiment among businesses and consumers, came in at 89.5 in May – back above its pre-pandemic level. The financial institution also revised its GDP growth forecast for 2021 to 5.8pc, up from 5pc in February.

The bank wasn’t alone in upgrading its economic forecasts. In its latest Economic Outlook, the Organisation for Economic Cooperation and Development (OECD) said pent-up consumer demand and the unwinding of excess savings could see the Irish economy grow by a further 5.1pc next year.

It also predicts the economy will grow by 4.2pc in GDP terms this year.

While the signs are good, some challenges will emerge as Ireland’s economy works its way out of the Covid-19 quagmire. As it prepares to do so, the Sunday Independent has listed six reasons to be optimistic about the economic recovery.

The big wall of savings

For many people, working from home hasn’t only been a period of longer lie-ins, extended lunchtime walks, or never-ending Zoom calls – it has also meant increased savings, to unimaginable levels compared to pre-Covid times. Not buying those morning coffees or lunchtime treats has had unintended consequences.

Irish households saved an extra €2.2bn in April with overall deposits now standing at a record €131bn – and it is fair to assume this figure will continue to grow. Retailers and those who profit from big-money items, rejoice.

“As the economy moves towards reopening, consumer sentiment is tracking upwards,” says Andrew Webb, chief economist for Grant Thornton Ireland. “While there is evidence of building confidence, further encouragement about a consumer bounce-back can be drawn from the scale of savings generated over the pandemic.”

Dr Loretta O’Sullivan, the group chief economist from Bank of Ireland, says consumers’ piggy banks are ripe for raiding.

“Savings soared during the pandemic as opportunities to consume were curtailed and households put money aside for precautionary reasons,” she says. “But with virus-related anxieties receding, the labour market beginning to mend, and spending avenues opening up, some of these excess savings will be unleashed, boosting the economic recovery.”

O’Sullivan believes some will want to maintain a buffer for the next rainy day, which could deter some of the spending.

Some already seem to be smashing into their piggy banks. VAT receipts surged back to pre-pandemic levels last month, with the sales tax generating €2.3bn in May.

Government to maintain its support for the hardest-hit sectors

Unlike past economic doom and gloom periods, the Government has stood up to the plate and (largely) delivered financial support to the sectors worst affected by the pandemic.

The Central Bank put the cost of all measures deployed to fight the pandemic in 2020 at €24.6bn – an unprecedented amount of capital unleashed to put out the economic blaze the pandemic could have caused.

Last week, the Government signalled it would continue to support the economy through its €3.6bn economic stimulus package, and not simply cut off supports which have been a lifeline for some.

O’Sullivan believes the endgame remains getting people back into jobs, and getting sustainable businesses back on their feet.

“The intention is to taper rather than pull the plug on these [supports],” she says. “They will provide breathing room as the economy moves onto a surer footing over the coming months.”

Webb also praised the scale of government support throughout the pandemic. “[The supports have] protected many parts of the economy from more permanent scarring,” he says.

He added: “Linked to that, there should be no rush to pay back the borrowings – interest rates are low, there is cheap money across long time periods. A gentle unwinding of the pandemic borrowing position is all that is required, and that is best achieved through a growing economy.”

Gerard Brady, chief economist at Ibec, believes the country can afford the extra Covid debt.

“While there are a lot of uncertainties out there, we needn’t overly worry about how to pay our Covid bill,” he says. “What will matter, however, is that new day-to-day spending programmes after Covid will need to be matched by new revenues. Paying for new spending through taxes isn’t austerity though, it’s just normality.”

O’Sullivan added that the ECB had upped the size of its monthly bond purchases recently, an essential step as its intervention in the market allows governments here and in other Euro area countries to borrow cheaply.

Confidence has made a comeback

It has taken a pounding over the year and had been sluggish to recover, but economic confidence is now above levels seen since the pandemic.

The Bank of Ireland Economic Pulse index, which measures business and consumer confidence, soared to 89.5 for May, up 4.1 on April and up 45.6 on a year earlier. It was the latest gain for the index – a sign that the moods of both consumers and businesses are growing ever brighter.

So what’s driving this? O’Sullivan, an author of the Economic Pulse report, says the vaccine roll-out and the easing of public health restrictions play a role. Three in five firms expect business activity to increase in the near term, while a third of households are reporting that now is a good time to buy big-ticket items and more people are planning holidays.

“This is a good bit higher than the pre-pandemic average, and points to pent-up demand – some of which will be unlocked in the coming days and weeks as accommodation services and hospitality reopen.”

According to the Bank of Ireland Business Pulse index, the confidence boost is set to manifest itself in the labour market. Across the four sectoral pulses (business, industry, services and retail), respondents report that they are more likely to increase the number of people they employ over the next three months, rather than cut.

The global economy is in recovery mode

Ireland’s economic well-being is closely linked to that of the rest of the world. Our internationally focussed, export-driven economy has always punched well above its weight in agriculture, food, technology and pharmaceuticals.

O’Sullivan believes that sectors such as pharma and technology have mainly proven resilient. Ireland is set to benefit as the global economy recovers and substantial fiscal stimulus is unleashed across the world’s largest economies.

“The Covid shock pushed our main trading partners into deep recession in 2020, but all are expanding again now,” she says.

“The OECD has just raised its forecast for world GDP growth this year, helped by the huge US fiscal stimulus, which is good news given how important trade is for Ireland.”

Tom McDonnell, a co-director of the Nevin Economic Research Institute (NERI), also believes business investment is growing very strongly in the US and in other parts of the world, which may give Ireland’s productivity a shot in the arm.

“The surge in private investment in the US will be replicated in Europe and Ireland,” he says. “This will boost demand in the short run, and will boost productivity in the long run.

“Finally, exporters will benefit from the supportive fiscal and monetary policy in the US and in Europe.”

Brady said the benefits of Ireland’s sectoral mix can already be seen in FDI jobs numbers, up 5pc in 2020, strong tax receipts and trade dynamics which provided export growth and a current account balance of over 6pc.

“The key to our growth model is getting that money spent in local economies around the country to bring down record savings levels and reduce unemployment – as society begins to re-open there is a strong momentum on that front.”

Necessity is the mother of invention

We’ve all been there. Even a year into the pandemic, nearly every Zoom call starts with a conversation about the “new normal” and how life has changed utterly.

Working from home, hybrid-working, virtual catch-ups – the list of newish ways of working goes on, and is set to continue for the foreseeable future.

For Webb, this is another reason for economic optimism, real proof of how different the economy can be, and of how Ireland can sustain these positives.

“The environmental and quality of life benefits from reduced commuting, for example, point towards a way of doing things differently, and better,” he says.

O’Sullivan believes economic activity has become less sensitive to public health restrictions as consumers and businesses have adapted and innovated.

“As the saying goes ‘necessity is the mother of invention’ – and while the post-Covid and post-Brexit environment will in some cases bring challenges, there will be opportunities in others.”

Last but not least – employment

As reported by the Sunday Independent last week, the global job-hunting website Indeed is showing that job postings have recovered to within 0.6pc of pre-pandemic levels.

While these numbers are being driven by various sectors reopening, and there have been reports of challenges in getting staff back to work, it is an indication that Ireland can get back on its feet in the months ahead.

McDonnell is more optimistic about the labour market , compared to previous economic crises that befell Ireland.

“There should be no significant labour-market scarring,” he says confidently. “No sector has experienced the structural decline that characterised the construction sector in the wake of the great financial crash.

"These factors should enable a much faster and more robust recovery than last time.”

It’s not over yet – a watchlist of economic concerns ahead

While Tánaiste Leo Varadkar’s economic rocket has a good chance of succeeding in its mission to reach the land of economic growth, there is still a flurry of concerns to consider that could hamper its progress.

As the many reasons for economic optimism work their way through, there is no denying one simple fact that could put us firmly back to square one. We are still at the mercy of an unpredictable and volatile health pandemic.

“All it takes is another outbreak to send us back to restrictions,” says Andrew Webb, chief economist for Grant Thornton Ireland.

Webb believes there are some key challenges facing the Irish economy that need to be addressed. Some have been affecting us for a while, and there is a need for us to get a handle on them as we recover.

“While the pandemic has seized society and the economy for the past year, the fundamental challenges haven’t gone away,” he says. “For example, our local small businesses are typically less productive than our multinationals. That is an enduring challenge that is still to be addressed.

“Likewise, the housing crisis appears to be gathering renewed momentum in recent weeks. Transaction numbers were up in Q1, and prices are buoyant.

"This is grand if you own a house, but affordability is an increasing concern for many and directly impacts on our economic competitiveness.”

Tom McDonnell, a co-director of the Nevin Economic Research Institute (NERI), is concerned that the scale of business closures as we recover from Covid is just too difficult to predict at this time.

Linked to this, McDonnell also believes unemployment levels will remain elevated in the short-to-medium term.

NERI anticipates an unemployment rate of around 200,000 or 8pc by the middle of next year and doesn’t think the labour market will recover until the end of 2023. “More positive is that we don’t anticipate significant labour market scarring and that employment and unemployment levels will be able to return to pre-pandemic levels,” he adds.

Global reforms to corporation tax are also a key issue for Ireland in the future.

While McDonnell welcomes these from a tax justice perspective, it could have long-term consequences for an economy that has benefitted from its low 12.5pc corporation tax rate.

“They do pose challenges for Ireland’s public finances and our industrial strategy,” he says.

“The annual loss of €3bn to €6bn in taxes will necessitate tax rises increases elsewhere or smaller year-on-year increases in public spending.

“Given we already have existing shortfalls in education, housing and childcare, just to name three areas, the likelihood is that we can expect taxes to go up.”

Another concern for McDonnell is how the disruption to education will play out, which may negatively impact learning outcomes and, therefore, on the economy’s future productive capacity.

Growing inflationary pressure is also becoming a concern for businesses.

In Bank of Ireland’s Business Pulse, May’s data showed that 78pc of construction businesses, 67pc of firms in industry and 48pc of retailers had reported an increase in non-labour input costs over the past three months.

The results were all series highs and owed much to post-Brexit red tape and rising commodity prices driven by shortages.

As with all inflationary pressures, it’s the consumers’ wallet that will end up taking the hit. Two-thirds of builders and nearly half of retailers indicated in the Pulse that they expect to raise selling prices soon.

Let’s just hope the ‘big wall of savings’ has strong enough foundations to take the hits.