The clockwork mouse economy is not quite as evocative as the Celtic Tiger, but it is now the appropriate metaphor for the Republic, according to ESRI economists. Out with tedious tiger talk, in with mechanical mice metaphors. Hello, Noddy's Toyland, bye bye the jungle.
The ESRI Medium-Term Review, published yesterday, has other stylistic gems, including a footnote excusing the sexist fairy godmother complex which, it says, afflicts some external commentators on the economy. "More properly a fairy godparent complex," comment the economists, "but mythology has appropriated to fairy godmothers the role of bringers of desirable gifts." Wry, light relief.
The serious business of providing a medium-term forecast and policy recommendations is the substance of the report. As reported yesterday, it is a comprehensive and valuable analysis. However, there are areas which I found a bit perplexing.
The ESRI sets out a central forecast of average economic growth of 5 per cent annually for the next five years and 4 per cent thereafter to 2010. This forecast, if it is borne out, is very positive for the economy. It means that GNP will have grown by nearly 70 per cent by the end of the decade. If this level of growth materialises, we have an opportunity to solve a lot of economic and social problems which have dogged the State. It also means, startlingly, that there will be virtually no government debt in 10 years.
The economists then ask, what would happen if a big wobbly man hit the clockwork mouse, that is, if there were a US stock market crash or a sudden rise in euro interest rates?
"Such a shock could see GNP reduced by 3 per cent or more for a limited period, giving rise to a severe but temporary recession" with some "very unpleasant shortterm consequences", the review says. In the main part of the report, this fall of 3 per cent in GNP is clarified as a fall from the central case of more than 5 per cent, not negative 3 per cent. It still leaves 2 per cent positive growth in GNP.
That would be a serious setback, but not a recession as economists normally mean it. A recession is where growth is negative, where the economy contracts. I could see no suggestion in the ESRI's scenario building that the difficult external events which it has modelled would cause substantial, negative GNP growth.
Well, so what? The economists might be forgiven a little exaggeration about a "severe recession". The point is that some of the policy recommendations are made to enable the economy to cope with possible external shocks. One such recommendation is that there should be fiscal tightening now - more taxes - to enable the economy to loosen up to offset the negative effects of such shocks. But if there is no recession even in the bad scenarios, why should we plan for one? Why not make tax plans for the central case?
Granted, the effects on the Government's finances of a loss in employment due to a crash in the US equity market will be the same, whether the result is properly called a recession or not.
Another area where style clouds substance is where the review deals with house prices. Like the Central Bank economists, the ESRI economists are not quite sure if they want to say that there is a bubble in house prices or not.
"For Ireland, the existence of a potential bubble in the housing market leaves a special vulnerability . . . a sudden rise in interest rates could well burst the bubble," they comment, adding, "of its nature, the effects of a bursting bubble are extremely uncertain". Well, is there a bubble or not? The language certainly suggests there is.
The review also says, the "sharp rise" in house prices in recent years shows "a supply constrained economy". In other words, house price increases reflect the lack of adequate supply, not a bubble.
The review accepts that "the probability of a drastic collapse in house prices may not be very high" but recommends tax policies designed to cushion against the effects of this low probability scenario anyway. It is concluded, but not well argued, that taxes should not be cut so as to restrain house price increases.
From its style and language in particular places, the review seems to frighten policy-makers away from a low-tax stance, at least at present. Of course, the medium-term review is worthless without a point of view. It should be remembered, though, that the conclusions of the ESRI economists, like those of any mortal, necessarily contain some subjective judgments, as well as the objective analysis of hard data.
Oliver O'Connor is managing editor, Fintel Publications Ltd
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