TAOISEACH BRIAN Cowen has described 2009 as the most difficult period of his political life. The Economic and Social Research Institute (ESRI) echoes his sentiments, describing the year as “enormously difficult” for the economy. However, in its quarterly commentary, it suggests the worst of the recession is virtually over and concurs with the outlook of the Minister for Finance in his Budget statement.
For 2010, the ESRI forecasts the pace of economic contraction will slow sharply. An estimated decline of 10 per cent in Gross National Product this year will drop to a 1.5 per cent decline next year. Ireland was the first EU country to enter recession and the downturn here has been deeper and lasted much longer than elsewhere. Unsurprisingly in these circumstances, Ireland’s rate of economic recovery will also be slower and less certain than most. But the ESRI does expect “a reasonable pace of economic growth in 2011”.
This year has seen stabilisation of the public finances. Next year will mark a transition period for the economy with the ESRI forecasting an end to recession by midyear and a return to modest growth by year-end. However necessarily economic forecasts are based on a range of assumptions about future developments. The ESRI is assuming that the international economic recovery, which has seen all major economies emerge from recession, will be sustained. But it acknowledges that some doubt and uncertainty remain about the underlying strength of the global economy.
In reviewing the Budget, the ESRI finds relatively little to criticise. That is scarcely surprising as the Government broadly followed the institute’s advice; in particular, by adjusting the imbalance in the public finances through spending cuts rather than tax rises. It does take issue with some Government decisions, such as exclusion of all pensions from any reductions “regardless of the wealth of the individuals concerned”, which is questionable on the grounds of equity. And it is critical of the car scrappage scheme, arguing that it “may simply lead to a substitution in spending as opposed to generating new spending”.
The ESRI again raises the issue of competitiveness and questions whether enough is being done in order to exploit fully the anticipated economic upturn in 2011. As euro membership means devaluation is no longer possible, it suggests that Ireland needs to generate an internal devaluation through falling prices and wages.
There is some evidence this is happening. Prices have fallen faster here in 2009 than in the rest of the euro-zone and the UK and they are expected to do so again next year. Against this the ESRI, in its quarterly report, takes the view that the anticipated 5 per cent fall in wages has failed to materialise. However, the institute signalled that there might be grounds for more optimism in this regard based on wages data published by the CSO yesterday.
It is be hoped this optimism proves grounded for without wage reductions, the ESRI warns competitiveness gains will not be realised and the prospects for economic recovery will be significantly weakened.