Rating agency S&P Global has revised upwards its growth forecast for the underlying Irish economy to 5% on average for this year and next year as domestic demand will benefit from pent-up savings and investments as a result of Covid-19.

S&P said the country's "diversified economy, flexible labour market and timely countercyclical policy measures" underpin its recovery prospects.

But it added that the effect that Covid has had on the domestic and foreign-controlled sectors of the Irish economy implies a two-speed recovery for the economy

It predicted that the underlying economy, measured by modified gross national income (GNI*), will grow by 5% on average in 2021-2022.

But GDP is set to grow much faster, as foreign-owned high-tech sectors like computer services and pharmaceuticals keep performing strongly.

"The stable outlook indicates that we do not expect the Covid-19 pandemic or its potential long-term effects to cause any lasting structural damage to Ireland's credit metrics," the credit rating agency said.

But it added that, in its view, implementing the OECD corporate tax agreement is likely to hit Government revenue.

"Over the past 10 years, Ireland has become increasingly reliant on corporation tax receipts. The increased profitability of some big multinationals, mainly in the computer services and pharmaceuticals sectors, has helped Ireland outperform its budgetary targets, even during the pandemic," it said.

"Corporate tax receipts in euros tripled between 2010 and 2020, and their share of total tax revenue surged to 20.7% from 12.4% during this period," it added.

The Government has said the proposed changes in the international tax policy will cost Ireland about €2 billion a year in lost revenue.

In today's review, S&P also said it expects tensions with respect to the Northern Ireland protocol will persist.

It noted that the Free Trade Agreement signed between the European Union and the UK last year, allowing for tariff-free trade, reduced the adverse effects of Brexit on Ireland.

"Nevertheless, Brexit has increased trade barriers between Ireland and the UK, and we expect the NI protocol to continue to cause tensions between the different parties. We do not expect these to materially alter our view of Ireland's creditworthiness," it added.

On the banks, S&P said they had entered the Covid pandemic with good capital buffers and liquidity cushions, which allowed them to be proactive in recognising expected losses over 2020.

It stated that their actual losses to date have been "muted" and banks have cautiously started to release some provisions on the back of the reopening economy and improving macroeconomic forecast.

But the rating agency said it still expects to see some increase in non-performing loans as borrowers' cash flows remain under pressure and the Government starts to taper support measures.

Noting the withdrawal from the Irish market by KBC Bank Ireland and Ulster Bank, it said it believes the Irish banking sector's profitability prospects remain constrained because it lacks revenue diversification and stability of top-line results.