Thursday, 7 January 2010

A long time in the hole

Michael Taft: I’ve touched on this subject before but given the New Year and the apparent ‘green shoots’ that are emerging (or the alleged sightings of green shoots), it seems timely to return to this theme; namely, how long will we be in recession?

The economy, barring something unforeseen, will trough sometime this year. This will be given statistical spin (‘we’re out of recession and back on the growth path’). This will also be given a political spin (‘due to the tough, courageous decisions of the Government, the economy is starting to recover’ – or something like that), There will be so much spinning we will be in danger of getting dizzy, stumbling around drunken-like at the post-recession party.

So let’s ground ourselves. Measured in terms of GDP this recession will, on the Government’s own optimistic growth figures, last until 2013. Measured in terms of GNP this recession will last until 2015. The post-recession party will have to be put on hold.

The issue is very simple. The economy will be ‘recessed’ until it reaches the level at which it entered the recession. In 2007 the economy peaked at €189.8 billion. Such was the severity of the decline, the economy will not return to that level until sometime in 2013.

But strip out the multi-national element, and the time-scale for the GNP will be even longer. In 2007, GNP peaked at €161.2 billion. GNP, in percentage terms, collapsed even more. Therefore, we won’t return to pre-recession levels until much later.

Government projections only go up to 2014 – the new target date for Maastricht compliance. Even so, we will not have returned to pre-recession levels. It won’t be until 2015 that the domestic economy emerges from recession.

We shouldn’t confuse growth with ‘the end of the recession’. Two examples will illustrate this. First, starting in 1933 the US economy grew every quarter for the next three to four years. Yet no one would say that in 1935 the US – after two years of positive growth - was ‘out of the depression’. Indeed, officials at the time made the mistake of thinking the economy was and took their foot off the monetary and fiscal pedal in 1937. The result was a ‘recession in a depression’ – as Paul Krugman warns may be happening today.

On a more everyday level, if you fall into a hole you will eventually hit the bottom. Just because you start climbing back up doesn’t mean you are out of the hole. You’re out of the hole when you return back to ground level – the point at which you fell into the hole.

So – 2013 or 2015, depending on which measure you use: there is one caveat. These ‘out of the recession’ dates are dependent upon the Government’s growth figures which could come true or may not. The Government is projecting a return to GDP growth in 2011 of 3.3 percent, peaking in the following year at 4.5 percent before settling back to 4 percent by 2014 (GNP growth is slightly less as the domestic economy trails further behind the multi-national sector). However, if these figures are even 1 percentage point off, the recession will last another year – well into 2014 by GDP measurement.

Even if the Government projections hold – unemployment and poverty will be hanging around for a while. In 2014, just as the economy is returning to 2007 levels, unemployment is still estimated to be 9.5 percent. That’s after emigration has hollowed out significant sections of our skill and knowledge labour base. Yet, that will still be more than twice the level as of 2007.

We are in a hole – a deep hole. Hopefully, we’ll start to climb out sometime this year. But it will be a slow climb. We won’t get back to ground level for a few years yet. And all the while, the economy will be carrying a heavy burden – the effects of the government’s deflationary measures.

The climb may be longer than we think.


Anonymous said...

Thank you for this informative post

Proposition Joe said...

To continue with hole metaphor, imagine walking up a gentle incline before encountering a hole with the displaced earth steeply piled up on one side.

If the hole is approached from that side, you've higher to climb and then further to fall. But you also have a smaller distance to climb out before getting back to ground-level on the opposite side.

For the heap of displaced earth, think bubble-froth. Ground-level on the other side is like the long-term sustainable trend level of growth.