Good news on the economy should be treated with caution

ECONOMICS:It is too early too call an end to the recession and when recovery comes it will be slow

NIGEL LAWSON, who was British chancellor of the exchequer in the late 1980s, once famously dismissed financial sector analysts as “teenage scribblers”. He was moved to coin the insult at a time when economists in the City of London were broadcasting a rather more downbeat view of the British economy than that being promulgated by the treasury, with unwelcome consequences for sterling and UK government bonds.

It is unlikely that Brian Lenihan will be tempted to resort to such disparaging name- calling in relation to Dublin’s stockbroker economists any time soon. Over the past week or so, the latter have been busy upgrading their Irish economic forecasts to the point where the more optimistic of them have become a good deal more upbeat in their assessment of prospects than the Department of Finance.

Davy now expects the economy to return to growth in just three months’ time and is now looking for annual average gross domestic product (GDP) growth of 1.2 per cent next year in place of the 2.6 per cent decline they were previously forecasting. NCB is almost as bullish. It now sees growth resuming this quarter and GDP contracting on an annual average basis by just 0.3 per cent in 2010, compared with its earlier forecast of a 2 per cent fall.

Goodbody has also adjusted its forecasts upwards, even if it remains decidedly more cautious than the others. If we had our own currency it would almost certainly have risen in response to this effusion of good cheer.

The upgrading of Irish economic forecasts comes against the background of upward revisions to forecasts for the global economy.

In its latest World Economic Outlook, published yesterday, for example, the International Monetary Fund (IMF) raised its projected growth rate for world output next year from 2.5 per cent to 3.1 per cent and its projected growth rate for GDP in the euro zone from -0.3 per cent to 0.3 per cent.

This positive reassessment from the IMF follows similar exercises over the past month by other international forecasting agencies, such as the Organisation for Economic Co-operation and Development and the European Commission.

The upgrading of the Irish forecasts has also been prompted by the most recent batch of domestic economic indicators, in particular last Thursday’s national accounts data for Q2, which showed GDP flat-lining rather than falling further in that period, and Wednesday’s live register figures which indicated that the dole queues had virtually stopped lengthening in September.

Other recently published data have also been supportive of the view that the economy, if not already at its cyclical trough, is getting close to it. Among them is NCB’s manufacturing purchasing managers index for September, also published yesterday, which recorded a reading of 46.6, the highest since early 2008 and not far off the 50-plus level that would signal expansion.

At the risk of raining too heavily on this parade of good news, let me sound a few cautionary notes. The first is that it is too soon to be confident that the bottom of the cycle has been reached and that a near-term recovery is assured. There is still an amount of bad news coming through and analysts may have leaned too heavily on the positive aspects of recent indicator data for their forecasts.

A case in point is the live register: taken at face value, the sharply downward trend here is hugely encouraging, but taken in conjunction with the continuing high rate of redundancies, the message is much more ambiguous. The economy is still haemorrhaging jobs and the likeliest reason for this being obscured by the live register data is that the rate of net outward migration has picked up considerably, a phenomenon that will not help recovery, at least in domestic demand.

Another cautionary point which, in fairness, is made by the forecasters themselves, is that the recovery that they envisage will not much feel like recovery to ordinary folk.

First of all, it will be slow. Second, it will be a long time before the pre-recession peaks in output, employment and living standards are attained again. Judging by NCB’s forecast trajectory, for example, it will be 2014 before GDP has returned to its level of 2007.

Third, the dynamics of recovery will be such that the dimensions of economic activity that impinge most directly on ordinary people’s lives – employment and consumer spending, for example – will be among the last to show clear signs of improvement.

A final cautionary point has to do with the conditionality of forecasts and the potential feedback from forecasts into decision-making.

According to the forecasters, Ireland’s economic prospects have brightened appreciably. The extent to which this is conditional on the adoption of certain policies (for example, in relation to the public finances) and/or the achievement of certain outcomes in wage negotiations, is not entirely clear.

This is a little problematical. There may well be a temptation in some quarters to conscript the latest forecasts into their campaign of resistance to measures designed to cut the budget deficit. Even among the policy-making establishment, a belief that economic recovery is imminent may dissipate the urgent need for these measures.

This would be hugely mistaken. We cannot expect a strong and durable recovery to occur without the conditions for such recovery being put in place. Among the most important of those conditions are sound public finances and the restoration of international competitiveness. These conditions cannot be created out of the latest set of Central Statistics Office (CSO) statistics.

jim.oleary@nuim.ie