Economic forecasts

Fri, Feb 24, 2012, 00:00

THE ECONOMIC and Social Research Institute (ESRI) forecasts, in its latest quarterly commentary, a moderate rate of growth (0.9 per cent of GDP) for the Irish economy this year – but does so with some hesitation. The estimate is predicated on no serious downturn occurring in the global economy, and in the euro zone in particular. Otherwise, this would “seriously reduce the Irish growth rate”. Economic uncertainty abroad, which depresses exports, when combined with fiscal austerity at home, which depresses domestic demand, is a lethal mix. However, the ESRI’s growth rate estimate for 2012 will - if achieved - be a modest improvement on last year, with a further upturn in growth (to 2.3 per cent of GDP) forecast for 2013.

The ESRI’s assessment of the economic outlook is more optimistic than the European Commission’s downbeat view. The commission yesterday sharply revised its growth targets for 2012 for the euro zone economies, changing an earlier forecast of 0.5 per cent growth for the region to a 0.3 per cent contraction instead. In the words of economic and monetary affairs commissioner, Ollie Rehn: “The euro area has entered into a mild recession.” One relative consolation is the major growth differential apparent between the commission’s forecasts for Ireland – 0.5 per cent growth - and the other countries, Greece and Portugal, that are in receipt of an international bailout. Their economies are projected to shrink this year by 4.4 per cent and 3.3 per cent respectively.

As the ESRI commentary points out, economic activity in Ireland is back at levels last seen almost a decade ago, but this time accompanied by far higher unemployment, and by major imbalances in the public finances. Indeed, the ESRI also notes that without the EU/IMF bailout, Ireland could not maintain the present level of reduced spending. And the necessary forced adjustment would have been “much more sudden and serious”, while the adverse impact on growth, employment and incomes would have been far greater.

The European Commission’s bleak forecast, that the euro zone economy will shrink this year and experience the second recession in three years, when allied to European finance ministers’ singular reliance on austerity measures to resolve a sovereign debt crisis and to achieve fiscal consolidation, is not encouraging.

An over reliance on austerity, without a growth programme, risks turning Mr Rehn’s “mild recession” into something worse.