At present we are experiencing simultaneously two quite distinct shifts in our economic situation - both of them significant. One is short-term, arising from the current down-turn in the world economy. The other is a major long-term shift from the very rapid economic growth of the past eight years to a more modest rate of economic expansion - albeit one that, for at least a decade ahead, is likely to yield a rate of growth still somewhat higher than in neighbouring European economies.
Understandably, most people are currently more concerned about the immediate short-term prospects for our economy than with any underlying change in our long-term growth rate. However, ultimately the latter is more important, and so, having discussed the current down-turn in this article, I shall return next week to the longer-term prospect.
For the current year, 2002, we have recently been offered wildly different forecasts - ranging from a 7 per cent growth rate to virtual stagnation. Now, it is understandable that during a global down-turn of indeterminate duration an open economy such as ours should be subject to some uncertainty with respect to its short-term growth prospects. But not on the scale of what we are currently being offered by some commentators. That wide range of possibilities can be narrowed down considerably by looking at recent quarterly data.
Until about four years age we did not have the benefit of quarterly data on economic growth and employment: we had to content ourselves with annual growth figures.
It is, of course, true that in the absence, as yet, of seasonal adjustments to these quarterly figures, which would facilitate detection of the underlying trends of output and employment, these new economic series have to be handled with care. Nevertheless, they do provide valuable raw material upon which to base analysis of likely short-term developments.
Thus we know that in the third quarter of last year both industrial output and overall national output, measured in terms of gross domestic product, were running 3 per cent above the level of the same quarter a year earlier.
We don't yet have overall output figures for the fourth quarter of last year, but we know from other data that during this period manufacturing output was running 4 per cent below the level of the last quarter of 2000. And with employment in construction 2 per cent below the previous year's level in that quarter, output in that part of the industrial sector was clearly also well below its level of a year earlier.
So it is evident that when we eventually receive overall industrial output figures, including both manufacturing and construction, for the end of last year, these will show a significant fall in output by comparison with the latter months of 2000.
By comparison with the same period in 2000, agricultural output in the third quarter of 2000 was also down. And as industry and agriculture between them account for half of our GDP, it would require a quite significant boost in services to offset this decline sufficiently to produce an overall level of GDP in the last quarter of 2001 higher than that of the same period in the year 2000.
Now, while in the six months ended September last the increase in the output of services was still running about 6 per cent above the previous year's level, it seems unlikely that growth in these sectors in the last quarter could have been at a rate sufficient to have more than offset the lower level of industrial and agricultural output, and thus to have yielded anything beyond a marginal increase, at most, in overall output in the fourth quarter of last year as against the final quarter of the year 2000.
In other words, it seems clear that we must have ended last year with national output running at a level no higher than a year earlier. It would, therefore, clearly require a very significant recovery in output during the course of the current year to yield a year-on-year rise of any great magnitude in national output.
Are there any signs of such a recovery?
What some might interpret as having been such a sign was the sudden jump of 9 per cent in retail sales in December last - but much of that may have been accounted for by tax-avoiding hoarders of cash getting rid of their pounds at Christmas before the advent of the euro.
Again, there has been a marked improvement in the residential property market since the start of the year. This was sparked off by the reaction of first-time buyers to an expected re-entry of investors to the housing market following the Budget moves to restore interest relief to investors in house property, and to reduce the stamp duty payable by such investors.
More significantly, this week has seen reports of signs of economic recovery both in Europe and in the United States. If these are confirmed in due course, then it is possible that the industrialised economies will grow this year by more than the 1 per cent hitherto forecast.
But, given the likely lag between a global recovery and a return to growth here, it would seem optimistic to expect Irish output to rise during the course of this year by more than 5 per cent. And, arithmetically, such an increase in output during the remainder of 2002 could not yield a year-on-year growth rate of more than 2.5 per cent to 3 per cent - which is in fact the rate projected by the Central Bank. Projections of a 7 per cent year-on-year growth rate in 2002 just do not seem to me to be credible.
What is impossible to predict at this stage is the growth rate in the following year, 2003. That will clearly depend upon the timing and pace of a recovery in the world economy. The ESRI medium-term projection published last September, just after the terrorist attacks on New York and Washington, projected a "benchmark" growth under stable conditions of just under 5.5 per cent this year, and just under 4.5 per cent in 2003. However, that report also recognised that a sharp slow-down of the world economy, such as seemed then to be under way, could cut this year's growth rate to less than 2 per cent, with, however, the possibility of the economy recovering in 2003 and achieving a growth rate of over 4 per cent in 2003.
In those circumstances the Institute also foresaw a "bounce-back" in the following years, with growth at 5 per cent-5.5 per cent between 2004 to 2007, slowing to 4 per cent-5 per cent thereafter. That still remains a strong possibility, but we must accept that recovery from the shock of recent events may yet prove to be slower than the ESRI down-turn scenario allowed for.