Debate on €2bn cuts might be drowned out in Europe
Our recovery outpaces that of other euro zone countries, but a wider risk remains
The European Central Bank in Frankfurt Main, Germany – weak and disappointing European growth has become one of life’s constants: one that leaves the euro area extremely vulnerable to shocks, even small ones. EPA/Boris Roessler
Hints of economic recovery are turning into solid evidence. For a while now, various short-term indicators have been suggestive of something of a pick-up; forecasters are now moving from mere hints and suggestions to something more definitive, taking their cues from two main areas: the labour market and government borrowing. Trying to parse things like the industrial production numbers is harder than usual thanks to huge swings in pharmaceutical output – but even here, the output of what is termed the “traditional” (and reasonably employment intensive) sectors of the economy looks to be healthy.
The ESRI has been leading the optimistic pack for some time now and currently believes the economy either is, or will soon be, the fastest growing in the euro area. GNP growth of 3.4 per cent this year and 3.8 per cent next are the new ESRI forecasts. Those numbers are both welcome and impressive but need to be placed in context: we are still a long, long way from the economy getting back to pre-recession levels, something that has now been achieved in both the UK and US. That said, things could be worse: this week also saw Italy slip back into its third recession since 2008. I don’t think that a major economy has ever triple dipped in this fashion before. There has now been no overall economic growth in Italy for 15 years.
This week’s release of Government spending and taxation data for July confirmed earlier numbers that indicated tax revenues are picking up faster than forecast by the Department of Finance. Crucially, with strong VAT revenues through the first seven months of the year, the long-awaited, and much-needed, return of the consumer appears to be here. For reasons that are obvious, consumer spending has actually been shrinking, in real terms, for years. During the period 2011-2013, for example, the numbers are stark: -1.2 per cent, -1.2 per cent and -0.8 per cent respectively. Consumption performance of that nature is often the same thing as outright recession: we avoided that outcome, by a whisker, thanks in large part to buoyant exports. This is why there have been many references to the “two-speed economy”, a domestic sector flat on its back but with anything connected to overseas doing relatively well. That seems to be changing. The ESRI now expects positive real consumption growth: 1.5 per cent this year and 2.0 per cent in 2015.
Under controlWith the notable exception of the health budget, Government spending seems to be under control. But we need to remind ourselves that much of the cuts in spending have fallen on the capital side of the equation. And this year we are underspending, again, on our infrastructure. The failure to distinguish between the current and capital sides of the budget is an infantile aspect of the way we do austerity.
Alongside this run of good data the government has turned the usual budgetary news management cycle on its head. In the run-up to the autumn budget we usually get softened up with various politicians warning us that things are tough. The budget itself is rarely as bad as trailed. This year, it seems, we are being set up for disappointment. It could be that a big bet is being laid, one that hopes that the underlying trends are now so strong, economic momentum will deliver a fiscal position that facilitates a budget that will keep both the electorate and the troika happy.
More subtly, it is probable that if anything does go wrong with our improving domestic picture, it won’t be our fault. Weak and disappointing European growth has become one of life’s constants: one that leaves the euro area extremely vulnerable to shocks, even small ones. Russia’s escalation this week of sanctions is most unwelcome in this regard.
An externally driven economic problem, one that spoils our improving budgetary situation, could lead to a wrap over the knuckles from Brussels and Frankfurt, particularly if Michael Noonan does not deliver a troika-friendly budget this year. But, in such circumstances, our foreign masters will have much bigger problems than the Irish fiscal situation to deal with.
Quite frankly, if Europe as a whole starts to replicate the Italian experience, the debate over our €2 billion adjustment will be drowned out by a much bigger cacophony. If, by contrast, things continue to muddle along, including our domestic recovery, the lack of a 2014 austerity budget will be quietly and quickly forgotten. It’s an interesting, if somewhat cynical, political calculus.