First chance of growth amid struggle to avoid going under
Irish exports to grow and employment to shrink as Europe faces possible apocalypse.
WHITHER THE economy in 2011? Will more people be back at work by next Christmas? Can a new government do any better than the floundering outgoing administration? And – most importantly for everyone – can the euro survive the next 12 months?
The answers to these questions respectively are: nobody knows; no; probably, and hopefully.
Although 2011 offers the first real possibility of growth in the Irish economy since the property bubble burst, things could just as easily turn out to be a lot grimmer.
Having spent 12 years in the economic forecasting business, I could not stress enough that predicting the economic future is more art than science. The forecasting business is made even more difficult when current risks are so many and their impact, if some or all come to pass, scarcely calculable.
That is where Ireland stands at the turn of the year, hence the big differences in how forecasters see 2011 unfolding. According to a December survey of forecasters by the Reuters news agency (see table), the most bullish among them anticipates a strong rebound in 2011 – with growth in gross domestic product (GDP) of 2.25 per cent, well above the Government’s forecast of 1.75 per cent. If the economy were to grow as solidly as that, prospects of a virtuous cycle taking hold would be good.
At the other extreme, the most downbeat forecaster is calling yet another year of deep recession, with GDP contracting by 2.3 per cent – a far worse outcome than 2010. If the economy were to be this feeble, the effects on meeting the bailout terms and restoring confidence, among many others, would be very serious.
If economists disagree on most things, there is general agreement that the strengthening export sector will keep growing in 2011.
The consensus among forecasters is that aggregate economic growth in Ireland’s main markets – Europe and the United States – will be only marginally down on 2010. This should ensure that global demand for Irish-produced goods and services remains solid. With further domestic competitiveness gains, owing to lower operating costs, the chance to grab a larger slice of these markets appears good.
However, reputational damage, owing to the bailout, and concerns over corporate creditworthiness may exert a drag. Many Irish businesses say they have encountered a negative reaction from foreign customers (and suppliers) since November, when the bailout was being put in place. This, they say, has made doing business abroad harder. Finding new business may be even harder in 2011.
Measuring the effects of outsiders’ perceptions of a state and its businesses is inherently difficult, but being lumped in with basket cases such as Greece and having endless reports in the international media about dodgy banks can only be negative.
Reputational damage may have an even more serious effect on Ireland’s allure as a place in which to invest and from which to do business. Convincing foreign companies to locate in an economy overhung with uncertainty will not be easy. Hanging on to the foreign companies already here may become more difficult.
If there are risks to the continued internationalisation of the Irish economy in 2011, realistically the best that can be hoped for in the home-focused economy is a year of treading water. The struggle to avoid going under is likely to be as desperate as in 2010, given the many undercurrents that are dragging businesses down.
These include, to name but a few, lower incomes, very weak household balance sheets, shrinking credit, growth-damping austerity and a disappearing construction industry.
If there is cause for relief, it is that ultra-low interest rates can be expected to last for the full year and into 2012. Given underlying weaknesses across the euro area and the almost complete absence of underlying inflationary pressures, the hand of the central bankers in Frankfurt will be stayed.
However, even if the economy manages growth as measured by GDP and GNP, the employment outlook is bleak. Although the rate of job destruction slowed considerably in 2010 when compared to late 2008 and most of 2009, it was still large and, as the most recent figures for the third quarter of the year show, it has not bottomed out.
With further net employment declines all but certain in the public sector, the banks and the construction industry, the numbers at work in this economy by next Christmas will fewer than now. That is among the surest bets one can make about the economy in 2011.
A new government is likely to be in place by April, if not sooner. Whichever parties form the new administration, its freedom of economic policy manoeuvre will be limited severely by the terms of the EU-IMF bailout.
The first quarterly review of whether commitments are being kept will take place at the end of March, just as full year GDP/GNP figures for 2010 are published. If the measures slated for implementation in the first quarter have not been put in place and/or the GDP figures are lower than anticipated, pressure may be brought to bear from Frankfurt and Brussels to introduce additional measures on top of those already contained in the 2011 Budget.
If that happens, relations between the new government and the overseers of the bailout might easily be strained. They could deteriorate quickly if Fine Gael and Labour, either alone or together, push for some of the changes to the bailout terms that they have trumpeted so loudly in opposition. Naive talk of Ireland getting tough with the rescuing institutions will be exposed for what it is if a very weak hand is overplayed.
Important in the performance of a new coalition will be who does what. How the ministerial spoils are divvied out between new coalition partners will, as always, depend greatly on electoral performance. As a considerable shake-up of departmental configurations is to be expected, predicting who will do what in the new government is even more difficult than usual. That said, I will stick my neck out: expect Ruairí Quinn to be top dog in a restructured Department of Finance by the spring.
How Fine Gael’s most economically literate triumvirate – the resurgent Michael Noonan, the chastened Richard Bruton and the ebullient Leo Varadkar – will be deployed is far harder to predict. One suspects that even Enda Kenny does not know as he enters the year in which he will almost certainly become taoiseach.
Both Fine Gaelers and Labourites will be champing at the bit, though, having been out of power for so long. This alone should make for more decisive, pro-active, purposeful and reform-minded government than the incumbents have managed in recent years.
Next year the greatest threat to Ireland – and almost everyone else – comes from an intensification of the international financial crisis in its most serious current manifestation.
In 2011 there are, broadly, three possible outcomes for the euro crisis: decisive resolution leading to a restoration of calm; continued crisis with regular flare-ups and concerns about the currency’s future viability heightening, and a breaking apart of the euro.
The first outcome appears the least likely of the three in 2011. The problems are so deep and the record of euro area governments and institutions in dealing with them so poor that it is difficult to envisage a calming of the crisis.
By far the most likely outcome is a continued muddling through, with more ad-hoc measures put in place to deal with the crisis. Those measures will become more radical if the situation deteriorates.
A bailing out of Spain (Portugal’s rescue can be taken as a given) would bring the crisis to a new level. The €750 billion available under the current rescue mechanism, in whose embrace Ireland will be gripped until the end of 2013, would be exhausted.
Italy would then be next in the firing line. Its government is the third most indebted in the world in absolute terms, after the US and Japan. In 2011 alone, it will need to borrow €350 billion, mostly to pay back (or “roll over”) existing debt. If it cannot do so, the extension of the bailout mechanism would be unlikely. More radical steps would be necessary. Even if a massive money-printing programme, of the kind undertaken in the US, were to be given the all-clear by Germany (something that is very unlikely), it would probably not be enough at that point to break the vicious circle.
The choice facing Europe in that eventuality would be to allow the euro (and the European banking system) to collapse or to take a large leap towards further political integration in the form of fiscal union.
Europe may well find itself in 2011 having to choose between a meltdown of apocalyptic proportions and taking a very large step towards European statehood. It is unthinkable that the former would be permitted, so the chances of the latter are not inconsiderable.
Euro federalists may have their hearts’ desire in 2011, but hardly in circumstances for which they would have wished.