Tuesday, 29 June 2010

More of the same

Michael Burke: There has been much discussion about the ESRI's view that Ireland will eventually recover to have a stronger growth rate than most other EU economies. The interest was sparked because some took it to be a vindication of government policy. But the ESRI forcasts are not exceptional; they're very much in line with those of the OECD, IMF and, in the short-run, the EU Commission.

But neither are they a vindication of government policy.

To take just one of the assessments, that of the IMF, in its recent annual assessmnent of the economy there were lots of encouraging words on policy. 'Assertive', 'credibility', 'resolve', 'appropriately ambitious fiscal consolidation' all get an airing in the first two paragraphs, so you get the picture.

But, just as you wouldn't ask Seamus Heaney for a inflation forecast, no-one ever reads the IMF publications for the beauty of their writing. It's the numbers we care about. Here is a summary of some the key numbers

* GDP falling by 0.5% this year
* A gradual rise in GDP growth to 3.5% in 2015
* Unemployment peaking at 13.5% this year
* But structural unemployment keeping the rate at 9% in 2015

There's one more shocking number to come, but let's deal with these first. The recession here began at the start of 2008, for the Euro Area as a whole it began one year later. The Euro Area began to recover in mid-2009 while all the official foreasts have the economy here contracting again in the first half of this year. Therefore the Irish recession will be precisely two-and-a-half years long, compared to 6 months for the Euro Area as a whole.

The forecast increase in GDP growth to 3.5% provides little cause for celebration. The last time this economy had a lower growth rate than that was in 1993, recovering from the strait-jacket of the European Exchange Rate Mechanism and an overvalued punt. In addtion, as all the forecasts agree, the recovery will be a statistical one only as net exports pick-up on the back of rising global demand (but, incidentally, nailing the nonsense about 'lack of competitiveness').

But, since the export sector relies heavily on foreign imports, because it is not especially labour-intensive and, above all, because it is so lowly-taxed, none of this statistical improvement will be reflected in domestic ativity or create jobs (or narrow the deficit). So, shockingly, unemployment is still expected to be 9% in 2015. And although the IMF does not state it, given that employment prospects are so poor, the declining unemployment rate must arise overwhelmingly from continued mass emigration.

This might be of little concern to the IMF, which states that "[Government] actions have reassured the global policy community and international financial markets." We won't dwell on the fact that Irish 10yr government bond yields were 5.6% yesterday, having started the crisis at 4.1%, nor that most other yields have fallen since that time. But at least the 'global policy community' is reassured, by which the IMF means, well, the IMF and others.

Yet the only other number of significance is the most shocking of all. The IMF arguments that prior measures are on a track 'leading towards' deficit-reduction. But not on the track itself, as they argue for further fiscal consolidation measures equivalent to 4.5% of GDP. And, if growth is not as robust as the government foecasts 'a clear possibility' the IMF says, the measures will need to be even larger.

To put this in context, the €3bn in further measures the government is talking about is 1.8% of GDP, on top of the 2008 ad 2009 budgets, emergency budget and measures which amounted to 8.9% of GDP. So, rather than the government's €3bn measures, the IMF reckons they should be at least €7.35bn, probably more. That's at least half the fiscal tightening already seen to date.

It is to repeat a fiscal tightening which led to wider, not norrower deficits (7.3% of GDP to 14.3%),and the longest, deepest recession in the Euro Area, as well as a surge in both unemployment and emigration. Repeating the same experiment and expecting a different outcome is madness.

1 comment:

Michael Taft said...

It might have helped if the IMF gave a breakdown of their 3.5 percent GDP growth projection by 2015 - espcailly since only a few weeks ago they were projecting a GDP growth rate of 2.5 percent by 2015 (Spring World Economic Outlook). The revision is significant. In any event, even the DoF accepts that GDP growth will not be 'tax-rich'. The Ernst & Young/Oxford Economics used a 3.5 percent GDP growth rate for the rest of the decade and still found deflationary fiscal policy a failure (i.e. won't reach the Maastricht target until 2018 - 2019). Clearly, the deflationary impact on our domestic economy - GNP - is taking quite a toll. It's what a lot of people on this blog predicted. And we shouldn't be surprised that the only prescription coming forward is more of the same; not surprised but still depressed.