It will be some years before the full economic impact of the terrorist attacks in the US becomes evident. Almost two months on, it is now clear that prospects for growth in the short term have been seriously affected; what is still difficult to judge is the likely extent of the downturn. In the immediate aftermath of September 11th, the Economic and Social Research Institute warned that a serious downturn could be on the way. It has now revised that somewhat and the latest quarterly commentary, published today, argues that the economy is heading for a short, sharp, downturn but will recover rapidly in 2002.
Much will depend on the direction of the US economy. So far it has shown little sign of resilience and most indicators are now pointing in a clear downward direction. However, the ESRI's forecasters point out that the impact on the US economy could have been even worse. Its initial gloomy assessment was based on the expectation of a large falls in US stockmarkets and a sharp decline in the value of the dollar. These have not yet come to pass and the ESRI points out that a sharp turnaround in the US could be on the cards next year.
The ESRI today warns that a sharp slowdown in economic growth is already underway, with Gross National Product rising by 2.6 per cent next year, compared to 4.9 per cent this year. These average figures hide very low growth estimates for the last three months of this year and the beginning of next year , with the Institute predicting that the economy is now virtually stalled.. The margin of error involved means the economy could now actually be contracting . For an economy where growth has averaged 8.4 per cent between 1995 and 2000, this is a very sharp slowdown.
However for the Irish economy to recover later next year, it will first be necessary for the international economy to pick-up fairly quickly. Such a rapid global upturn cannot be guaranteed. Ireland, as a small open economy, is particularly vulnerable to any prolonged international downturn. Tax revenues have already collapsed with as yet no satisfactory explanation from the Revenue Commissioners about the cause. Unemployment is still low but there are worrying numbers of jobs losses across the economy.
The Government must not overreact to the worsening outlook. Continued investment in infrastructure projects is vital, if the economy is to be in a position to benefit when the global cyclical upswing does begin. The shape of the 2002 Budget will also be key. The overall package must be prudent. Large scale tax cuts being demanded in some pre-Budget submissions should not be entertained, while the Minister must ensure that the growth of day to day spending is in single digits next year. That is not the kind of Budget which the coalition would have hoped to have delivered before a general election.
