ANALYSIS:Economic forecasters' belief in an economic recovery in 2010 is predicated on several unpredictable factors, writes JIM O'LEARY.
AS ITS authors say, the most striking point to emerge from yesterday’s Economic and Social Research Institute (ESRI) Quarterly Commentary is that they have stopped revising their forecasts downwards. The institute’s latest forecasts for the Irish economy are virtually unchanged from those published in April. There may be something bizarre in the notion that the most significant thing one has to say is that one has nothing new to say, but in this case I guess it’s a variation on the old cliché that no news is good news.
Generally speaking, Irish economic forecasts, after a protracted period of chasing each other down a steep slope, have for the past several months stabilised around the expectation that GDP will drop by 8 per cent to 9 per cent this year and by a further 2-3 per cent in 2010. While this may be considered something of a relief, it does not mean that the economy has hit bottom, much less that green shoots have started to emerge.
The ESRI, for example, envisages overall activity continuing to contract through the remainder of 2009 and into the first quarter of next year before commencing a shallow recovery in the second quarter. No, what the latest batch of prognostications signifies is that the forecasters now have a clearer picture than hitherto of where the bottom might be, or at least think that they have.
Of course, the very gentle upward trajectory that the ESRI has in mind for the economy in 2010 is predicated on a number of important assumptions. The first is that a global economic recovery, led by the US, will get under way before the end of 2009 and modestly gather momentum thereafter. The second is that domestic policies designed to restore order to the public finances and breathe life into the banking sector will be effective. The third is that competitiveness is sufficiently improved that the internationally trading sectors of the economy can benefit from the global upturn when it arrives.
Clearly, there can be no room for complacency on any of these fronts. The fact that forecasters think they can discern the beginnings of recovery taking shape 12 months hence does not mean that the conditions necessary to bring recovery about will simply fall into place. On the one hand, it should not be blithely assumed that the world economy is now set fair to glide unimpeded towards some sort of near-term lift-off, however shallow.
As Kevin O’Rourke pointed out in these pages last week, a fresh outbreak of seriously destabilising events could yet occur in the international arena including the detonation of what he describes as “unexploded landmines such as Latvia”. On the other hand, even with a relatively supportive international climate, there is plenty of heavy lifting to be done at home and lots of politically challenging decisions to be made.
The toughest of those decisions revolve around the public finances. Here it is worth noting, as the ESRI economists do, that the corrective measures effected to date have had an aggregate full-year impact amounting to more than €9 billion, or 5.5 per cent of GDP. This is an enormous adjustment by historical or international standards. By comparison, the further adjustments that the Government has announced its intention of making in the 2010 budget amount to not much more than half that already achieved, at €4.75 billion or 2.9 per cent of GDP. That they are significantly smaller, however, will not necessarily make them any easier to achieve: there is reason to believe that the pain inflicted by tax increases and spending cuts increases rather than diminishes at the margin.
There is a marked Hibernocentricity about our analysis of the state of the economy, the suggestion sometimes being that we are alone in our suffering or, if not alone, enduring vicissitudes of a nature and/or intensity unparalleled elsewhere. Of course, it is true that the downturn in Ireland is steeper than in the generality of our trading partners, but not by the kind of margins that popular discourse might lead one to suppose. The most recent OECD forecasts, quoted by the ESRI, see GDP contracting this year by more than 6 per cent in Germany and by almost 7 per cent in Japan. Judged in this light, Ireland’s projected 8 per cent decline does not seem dramatically out of kilter. Indeed, given the collapse in world trade that is taking place (volumes are expected to drop by 16 per cent in 2009), the surprise is that Ireland’s slump is not even deeper. In the circumstances, Irish exports are performing remarkably well, with the ESRI now forecasting a volume decline of just 4 per cent this year. This is thanks in the main to the composition of exports – the fact that the dominant elements in the mix are cyclically insensitive categories like pharmaceuticals and medical devices rather than the highly pro-cyclical investment goods in which the Germans and Japanese specialise.
It should not be taken as evidence of superior competitiveness. It is worth pointing out that while the composition of our exports may be affording us some measure of insulation in the downturn, it will act as a brake on our capacity to leverage off the global upswing when it occurs.
The one area where the ESRI has notably changed its earlier forecasts is the labour market. The April Commentary projected an unemployment rate of 16.8 per cent for next year. The revised forecast of 16.1 per cent is not much less horrifying, but the reasons for the revision are significant and may portend further welcome downward revisions in the future. In short, the new lower number arises not because of a more sanguine assessment of the prospects for employment, but because of a downward adjustment to labour force projections, due to the assumption of lower participation rates and higher rates of net outward migration than before.
This is an area where there are numerous (known) unknowns, amongst the most critical of which is how recently arrived immigrants will respond to job loss and shrinking employment opportunities. The early signs are that a high proportion of them are choosing to stay, but the likelihood is that that proportion will decline over time. The rate at which it declines will have a significant bearing on the scale of our unemployment problem in 2010 and beyond.
Jim O’Leary is an economist and lecturer at NUI Maynooth