Significant growth would fundamentally alter budgetary arithmetic for the better
Economic growth of 3 per cent would have dramatic consequences
After an economic contraction that was possibly worse than the Great Depression, GNP could grow next year
John Fitzgerald is to be congratulated on his 42nd year of forecasting and commended for his honesty: “The one thing that is sure about this latest forecast is that it is wrong.”
That doesn’t mean that the numbers contained in the latest ESRI Quarterly Review are useless: quite the contrary. But it does tell us to use them in context. Forecasts are, indeed, invariably wrong but planners cannot function without them; next week’s budget could not take place without a set of assumptions about the future.
One (relatively) old hand at yesterday’s ESRI media briefing told me that it was the most upbeat event of its kind that he had ever attended. That almost certainly dates his first ESRI forecast meeting at around the start of the crisis but the practitioners of the dismal science were, by their recent standards, positively cheerful.
A lot of the charts on view had a “peak-to-trough” look about them. That is, they typically are graphs of something – some representation of the economy – that fell off a cliff five or so years ago and have now reached a plateau or, say it quietly, a turning point.
Given how violent has been the economic experience of the past half decade, I asked Prof Fitzgerald how it compared to the 1930s Great Depression. He correctly pointed out that Irish economic data is pretty thin for that period and we typically grew food rather than made things back then, so comparisons are tricky. But his impression is that our most recent recession was possibly worse than the Great Depression.
If the future is uncertain there is the added complication that we don’t know where we have been: the behaviour of the multinationals has always caused headaches for the statisticians but new oddities are complicating any assessment of just what the economy has been doing recently. The main problem relates to the pharmaceutical “patent cliff”: the drop in profitability of such drugs as Lipitor, as they move off patent, is having an impact on the growth numbers. The upshot of all this is that the ESRI wants us to focus on GNP, as opposed to GDP (unless we are looking at the key budget ratios).
John McManus and I, among others, have repeatedly argued in this newspaper that next year’s economic growth rate will be the biggest determinant of the budgetary arithmetic – with clear political ramifications. The ESRI is quite clear about what will determine the growth of the Irish economy in 2014: it all depends on how everybody else does. Our destiny is not in our hands, and we need to say a silent prayer that the recent trends in the UK and US are maintained. And that Europe doesn’t blow up again.
The UK economy, in particular, has been surprising on the upside. That’s mostly because fiscal austerity was never tried in earnest and the central bank has been pursuing extremely aggressive expansionary policies. To the surprise of just about every forecaster, this macroeconomic policy mix has worked. We need all of this to continue.
According to the ESRI, if the behaviour of the world economy is friendly, Ireland could grow by close to 3 per cent next year. This, if achieved, will have dramatic consequences. Most importantly, unemployment will continue to fall – not by a lot, although here (as elsewhere) I suspect the ESRI may be erring on the side of caution.
Prof Fitzgerald was at pains to emphasise the risks to these near-rosy forecasts. If we are dependent on events overseas, there are plenty of ways that things can go pear-shaped. The IMF has just published its most recent outlook where the tone is decidedly downbeat – let’s hope the IMF’s rather poor forecasting record is maintained.
The ESRI is naturally cautious, if not conservative – but there is a hint in their numbers that if the growth targets are met, next week really could see the last of the austerity budgets. Economic buoyancy may well be a phrase on Michael Noonan’s lips in the coming days.