An export-led recovery will have to await renewed growth of demand in the EU, writes GARRET FITZGERALD.
IT IS too soon to assess when we might hope to see a recovery in our economy. There are, however, some points that can reasonably be made about aspects of that eventual recovery process.
First of all we have to accept that, assuming the world economy survives this crisis, there will be time-lags in the recovery of our economy. First of all there will be a time-lag between a renewal of growth in the US and a recovery in Europe, for our Continent is still on a downward path, with industrial output now running 20 per cent below its rate a year ago.
An export-led recovery of the Irish economy will have to await renewed growth of demand elsewhere in the EU, which takes two-thirds of our export goods. So, realistically, we cannot expect a general recovery here to start until 2011, at best.
However, when that recovery does start, the openness of our economy should ensure that growth here for some years thereafter will be a good deal more rapid than elsewhere. There will be a catch-up period for the Irish economy.
How far behind will we be when this catch-up process starts? Our national output this year will be about 12 per cent below its level of two years ago, and there could be a further – although probably much smaller – decline in output next year. So if an Irish recovery were it to start in 2011, it would be likely to begin from a level of national output some 15 per cent below that of 2007.
Furthermore, if this crisis had never happened, our national output in 2010 would probably have been at least 10 per cent above the level of 2007. So our 2010 GNP will be about 25 per cent below what we might have seen in that year if there had not been this global crisis – the impact of which on our economy has been more or less doubled by huge domestic policy errors between 2000 and 2008.
A shortfall of 25 per cent vis-a-vis where, under other circumstances, we might have been in 2010 is huge. However, part of this loss of ground may be recovered during the first half of the next decade.
Some of our loss of competitiveness earlier in this decade should be retrieved by the extensive pay cuts currently taking place in our private sector, (which do not seem to have any parallels elsewhere), and the openness of our economy should help to ensure that our rate of economic growth during the recovery period will be a good deal faster than that of most other European states.
Thus we can reasonably hope that by the middle of the next decade the shortfall vis-a-vis the level of national output that under other circumstances we might have hoped to have achieved by 2014 or 2015, could be reduced to something like 15 per cent. Moreover, we are not the only European country that will have lost ground during the crisis: so vis-a-vis our neighbours, our shortfall in terms of national output per head could end up closer to 10 per cent than 15 per cent.
And there is yet another mitigating factor, to which, so far as I am aware, no one has yet referred. This is the fact that in the years of our house-building boom, investment in dwellings here was absorbing a quite abnormal 15 per cent of national output.
In a post-crisis world this figure is unlikely to exceed 10 per cent – thus leaving at least an extra 5 per cent of our GNP available for public or private spending.
Finally, we should take some comfort from the fact that OECD data on our economy in 2006, before the crisis started, suggests that our level of national output per head was then 5 to 10 per cent above that of the major European economies: Germany, France and the UK. So we can afford to have lost a little ground vis-a-vis our neighbours, without falling short of their level of output per head in five or six years’ time.
Consequently, although the damage done to the lives of many people now and for some years ahead is appalling, the longer-term impact of the crisis upon Irish living standards is likely to be less dramatic than many currently fear. There is a strong case for believing that at the end of the day we may find ourselves still as well off as the peoples of the EU’s major economies.
Nevertheless, and with good reason, we have moved in a period of less than 12 months from having been the most optimistic people in Europe to becoming the most pessimistic. And, given the mess into which our economy has so rapidly descended, this is not surprising.
I estimate that in the first quarter of this year 175,000 or 8 per cent less people were at work than 12 months earlier: Our employment level, which had almost attained 2,150,000 in early 2008, is now back below 2,000,000 again – down by 8 per cent. About 125,000 of those who have lost their jobs have joined the ranks of the unemployed and are currently seeking other work – at a time when few new jobs are being created. The remaining 50,000 have simply left the labour force – a minority to seek work abroad, or in the case of immigrant workers to return home – but the majority to return to what are quaintly called “domestic duties”.
By any standards this is an appalling tragedy – all the more so because so much of the misery created has been totally unnecessary. While there is, of course, no way in which we could have avoided the consequences of the global credit crunch, something like half of this huge employment decline is clearly the result of huge, avoidable, economic policy errors earlier in this decade.
Before concluding, let me revert to the private sector pay reductions currently taking place. As new quarterly figures for earnings in industry, distribution, and services emerge it should be possible to measure the scale of this process. In relation to public sector pay and the pay of doctors and other professional people, it would be clearly desirable for the Government, perhaps in conjunction with its social partners, to commission an independent expert comparison of key pay rates here and in neighbouring countries.
It is not enough to “know” that in many cases our pay rates are out of line with those in nearby countries; if we are to have further reform in this area we need to be able to demonstrate this statistically.