Thursday, 20 January 2011

Recovery? What recovery?

Michael Taft: The ESRI’s new quarterly analysis is out (though not available on-line for 30 days). Though its forecasts are more pessimistic than the Government’s projections, they state:

‘ . . . we would not place too great an emphasis on the difference. Instead, we take it as being an on-going indicator of the challenges which are faced in restoring the public finances to a sustainable path.’

Maybe so, but the challenges, then, are getting even challengier. Let’s summarise.

Economic Growth

The ESRI is projecting sluggish growth coming off the recession. Whereas the Government is hoping for 4.9 percent GDP growth over the next two years, the ESRI suggests it will be only 3.7 percent.

The gap between the two is even larger with GNP – 3.6 percent compared to 1.7 percent. The domestic economy, according to the ESRI, will grow by less than half the rate the Government projects.

That considerable gap is more understandable when we see that the ESRI projects that the economy will still be in a domestic-demand recession by 2012 – the fifth year running.


The Government is hoping that net job creation over the two years will be positive – 21,000. The ESRI, reflecting their pessimism on the domestic economy, sees employment falling – by 20,000. Industry will continue to slide despite the increase in merchandise exports, falling by over 4 percent, with the service sector registering a smaller percentage fall.

Emigration, which is rightfully getting big headlines, is projected to be 100,000 over the next two years. The Government projected emigration to be 100,000 as well – but over the four year period up to 2014. Even with this higher emigration, the ESRI projects that the unemployment rate will still be higher than the Government’s estimates by 2012: 13 percent compared to 12 percent.


The fall in investment has been the driver in the Irish recession. According to the ESRI it will be some time before it is a driver in the recovery (at least under current policy). Investment is expected to fall, in nominal terms, from €18 billion to €17.6 billion by 2012.

Let’s put that in some perspective. In 2007, capital formation stood at €46 billion. Of course, much of this was part of the boom which was always going to melt away. But the Government hasn’t helped – cutting public investment by half since 2008, from €9 billion to €4.7 billion this year (and €3.5 billion by 2014). The even greater reliance on private sector investment will mean minimal growth over the years ahead.


This is the one category going from strength to strength. The ESRI is even more optimistic than the Government, projecting exports to grow by 11 percent over the next two years, after a strong performance last year (estimated at over 8 percent). But while the ESRI predicts growth in all sectors (goods, services, tourism), they are most bullish on what is essentially the modern sectors which are dominated by multi-nationals. As pointed out here, growth in the multi-national sectors will have a far less impact on the domestic economy than growth in indigenous exports. So the headline rate looks positive, but we will need more details on the composition of exports (which the ESRI doesn’t have) to assess its final impact on economic growth.

Consumer Spending

Another category of negative growth. The Government is hoping that consumer spending will grow, though only marginally (0.9 percent over the next two years); the ESRI is projecting a further fall of – 1.5 percent. This is due to income tax increases, cuts in social transfers, falling employment and emigration, etc. We can also throw in rising interest rates – the ESRI projects that the ECB main rate will rise from 1.0 to 2.5 by 2012. Higher payments on mortgages and other debt, means less spending on goods and services. All in all, consumer sentiment is expected to be cautious with the savings ratio remaining high.

Public Finances

Domestic demand, investment, consumer spending, employment – all down from Government projections. Yet, the ESRI is still hopeful that Government deficit targets can be met. In 2012, they are projecting a deficit of -7.7 percent, only fractionally worse than the Government’s own -7.4 percent projection. They explain it this way.

On the revenue side, the ESRI estimates that tax revenue will be €1.6 billion lower than Government estimates by 2012 – reflecting low economic and employment growth.

On the expenditure side, the ESRI estimates that net current spending will be €900 million less. This is made up mostly of declining interest payments (€800 million) arising from the reduction of the Exchequer cash balances as part of the IMF/EU bail-out.

If interest payments fall at the rate ESRI projects, the Government might hope to reach their target. But with revenue slipping and more demand on expenditure arising from higher unemployment and low incomes, the ESRI may be too optimistic on this score.

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