Tentative signs of recovery in Ireland’s economy means it is likely to shrink by 9% this year if further stringent measures to contain the coronavirus are avoided but almost 14% if they are reimposed, the country’s central bank said on Friday.

Ireland, which has had the fastest growing economy in Europe in recent years, mostly completed a careful exit from lockdown this week but much of its services industry is operating at limited capacity and travel from abroad is severely restricted.

The central bank’s baseline outcome was similar to the 8.3% drop in gross domestic product (GDP) it forecast in April and would see unemployment fall to 12.5% by the end of the year from 22.5% last month and an average of 7% in 2022 when output would recover to its pre-crisis level.

However in the severe scenario of a resurgence of the virus at some point over the next year, unemployment would average almost 17% in 2020 and GDP would still be about 5% below its pre-crisis level in 2022.

“While the magnitude of output losses would be lower in a second phase of containment than during the first, such losses would likely be more persistent and thus more damaging to the long run potential growth rate of the economy,” the central bank said in its quarterly economic bulletin.

Both scenarios assume neighbouring Britain agrees a free trade agreement with the European Union with no tariffs and quotas on goods applying from January 2021.

Such an outcome would knock just under 1 percentage point off the growth rate of the economy in 2021 whereas a move to World Trade Organisation terms on January 1 could cause significant economic disruption and a hit of almost 3 percentage points next year, the central bank predicted.

Central Bank Director of Economics Mark Cassidy warned that the crisis could widen the rural and urban economic divide and that while more stimulus may be required to boost the recovery, the new government would also have to lay out a credible return to much lower and sustainable deficit and debt positions.