ECONOMICS: It is not unusual that economists cannot agree on an answer. It is surprising when there is little or no agreement as to what the question should be, writes Austin Hughes.
Because economics is not called the dismal science for nothing, there is now intense competition to provide ever gloomier answers to questions as to how severe and how long-lasting the current downturn might be. However, it seems the key question in regard to the Irish economic outlook should ask what type of recovery we will see during 2002.
There are several grounds for believing that the downturn will soon be yesterday's news. Many of these relate to the prospects for the US economy, because it was a sharp weakening in activity in the US that sparked the downturn in the Republic and elsewhere.
First of all, the worst fears of an extreme dislocation of economic life in the wake of the September 11th attacks have not been realised. As a result, the intensity of this shock was significantly less than most forecasters predicted and, more importantly, than policymakers and businesses around the world might have envisaged.
Critically, this "error" meant that central banks and corporates took immediate, substantial and possibly excessive action. In the US, official interest rates were cut to their lowest level in more than 40 years and a sequence of supportive budgetary measures was implemented. Such actions were mimicked in looser interest-rate and budget policy worldwide.
Importantly, the tragedy of September 11th means US economic policy has not been attempting to strike a balance as it would in normal times.
In the current climate, the risks of adding too much of a stimulus appear negligible compared to the risks of not doing enough and facing defeat in the economic war against terrorism. Thus, it is still possible that official rates will be cut again when the Federal Reserve meets at the end of this month.
A number of recent economic reports suggest corporate America may also have overreacted in the immediate aftermath of September 11th. Between October and November 819,000 jobs were cut as US business prepared for a collapse in demand.
Although a further 124,000 jobs were lost last month, this much smaller drop tentatively suggests that the most savage period of job-shedding is behind us.
Indeed, with several other US reports suggesting an improvement in order books, it may be that the major adjustment process is close to completion. Unfortunately, this provides little guidance as to how long the "bottoming" process could take or how strong a subsequent upturn may be. In the past, upturns tended to be boosted by the release of pent-up demand, as consumers previously constrained by high interest rates or job worries began to spend freely.
Because US consumer spending has been exceptionally buoyant in recent years there is little likelihood of an acceleration in the coming 12 months.
The key to the speed and strength of the US rebound is likely to lie with corporate America. As noted above, some recent evidence is very encouraging but business investment spending will probably be far less buoyant than in previous recovery periods. There are still widespread concerns that a significant bubble in investment spending in recent years must be worked off.
The "if you build it, they will come" field of dreams approach to capital spending that typified the US in the late 1990s is unlikely to reappear anytime soon. US businesses may also find it more difficult to compete on weak global markets, particularly with a tumbling Japanese yen adding to competitiveness problems.
While it may reveal a jagged edge, I still expect the US economy to have moved clearly to recovery by late spring. Because the Federal Reserve and the Bush administration stand ready to ease policy further, I would be confident that this will prove a sustained upturn rather than the "double dip" scenario favoured by some forecasters.
In light of a modestly improving outlook for the US, lower European interest rates and remarkably robust domestic spending in Britain, there are grounds for restrained optimism in regard to Irish economic prospects. This particular combination of external influences also lessens the risk that Irish business will face a sharp loss of competitiveness because of a strengthening euro.
It may well be that the coming Irish upturn will be similar to that in the US in several respects. Certainly, in the next couple of months volatile data could make the outlook seem unclear. Retail sales, for example, are likely to show that last year ended on a very strong note as "mattress money" was spent. As this partly reflects a bringing forward of buying, less lumpy mattresses could cause consumers to hibernate, leading to fairly weak spending data for the spring months.
The looming VAT hike and closing date for participation in the Government's saving scheme could further soften spending data. Hopefully, solid income growth, improving sentiment in the run-up to the World Cup and a lesser exodus than to previous finals could spark stronger spending as summer approaches.
As in the US, corporate Ireland may not see an explosive recovery. This may not be entirely unwelcome as "field of dreams" expectations threatened to become a lasting problem in some sectors of the Irish economy.
To answer the question posed at the start, I would expect mixed evidence in the next couple of months to give way to a clear improvement in the Republic's economic fortunes by summer. While recovery will become established, it may also be good news that its pace is likely to be far less frenetic than that of the recent boom.
Austin Hughes is chief economist with IIB Bank
