Encouraging figures not enough for optimism

If new projects keep emerging from the IDA’s investment pipeline, export growth into next year and beyond is likely to continue.

But while there have been positive developments at home and abroad, there are no shortages of weaknesses. Risks are many and large.

The euro crisis may be in a period of calm, but it is a very long chalk from being over. The bloc as a whole is in recession and growth prospects for next year are poor. This will not only crimp demand for Irish exports, but weakness in Europe’s real economy is one reason why the crisis might well flare up again in the first half of next year.

Another possible trigger for more euro woes is political dithering.

Europe’s leaders are dragging their feet again on addressing the fundamental flaws in the design of the euro project. The usual minimalism has been in evidence on creating the banking union they agreed to construct in mid-year. At the rate they are going, there may be no monetary union by the time they have got round to putting the banking union in place.

Market participants’ faith in Ireland would be shaken by any deterioration in the wider euro zone. It could be shattered if a deal to make the burden of the State’s debts more manageable were to be definitively ruled out or proved less significant than they had assumed.

The statement by the German and French finance ministers downplaying the prospects of debt relief was among the most negative yet from an Irish perspective.

And it is not only developments in the wider world that could scupper recovery. Domestic weaknesses are manifold. Yesterday’s tax revenue figures show that the poor performance recorded in the second half of the year continued in November. Tax returns provide one of the best indicators of the state of the economy. They are certainly not pointing to imminent recovery.

Nor are the latest employment numbers. They show that the economy continued to shed jobs into the third quarter of the year. Given that recovery in the labour market always lags an upturn in the wider economy, a virtuous cycle of output and employment growth is still over the horizon.

And then there is debt – of households, companies and banks. The aggregate balance sheets of all these sectors are very weak. Boulders of debt on these balance sheets continue to pin the economy down. These are being chipped away slowly, but they are so big it will take time to grind them down to the point that they are not preventing recovery.

For all these reasons, those who forecast the trajectory of the Irish economy have been revising their projections for next year. So has the Government. Its budgetary arithmetic is predicated on 1.5 per cent growth of gross domestic product, another year of contraction in the domestic economy, and a halt to the fall in the numbers at work.

These forecasts are plausible, but so were the forecasts last year and the year before. Those projections proved too optimistic. It remains more likely that the assumptions on the economy underpinning today’s budget turn out to be overly optimistic than overly pessimistic.