The European Commission has revised upwards the country's GDP growth projections to 7.2% for this year after a stronger than expected economic performance in the first quarter of 2021.
This is well ahead of the 4.6% growth the Commission was predicting as recently as May and marks the second highest growth level in the EU, coming after Romania's expected growth of 7.4%.
Overall, the EU Commission has predicted the euro zone will grow by 4.8% this year, much faster than the 4.3% growth it had forecast in May.
The Commission said that GDP in Ireland grew by 7.8% in the first quarter of 2021, driven by strong export volumes from multinational companies.
But it noted that the performance of the domestic economy was much weaker due to strict Covid-19 restrictions, with private consumption declining by 5%.
It noted that the construction industry contracted by nearly a fifth from the fourth quarter of 2020 as most building sites were closed due to Covid restrictions.
The Commission said that progress in vaccinations in the second quarter resulted in a gradual relaxation of the restrictions in contact-intensive sectors, paving the way for an expected pick-up in domestic demand.
Early indicators including retail sales, industrial production and construction volumes jumped in April.
Most confidence indicators also improved in May, with particular optimism in services with regard to both the current situation and demand expectations.
The domestic sectors of the economy here are expected to perform even better in the second half of the year, it added.
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For next year, the Commission said that more moderate, though still strong GDP growth of 5.1% is expected, on the back of the partial unwinding of the "very large household savings" accumulated during the "long and very strict lockdowns" and the continuously improving external environment.
The European economy is making a strong comeback.— European Commission ???? (@EU_Commission) July 7, 2021
Growth #ECForecast for 2021:
Meanwhile, the Commission said the labour market recovery is expected to gather momentum once labour-intensive services sectors fully reopen - a trend already well visible in the observable weeks of June.
It noted that the Government has extended income support schemes until the end of the year, though their take-up is likely to be smaller than during the height of pandemic.
"Ireland's economic outlook is subject to downside risks related to potential changes in the international taxation environment and the impact on trade of developments in the implementation of the Protocol on Ireland/Northern Ireland," the Commission said.
"On the upside, the performance of multinational corporations could again exceed expectations," it added.