ANALYSIS:Optimistic official growth estimates hinder any strategy to deal with the crisis, writes Jim O'Leary
THIS IS no time to be a short-term economic forecaster. The world around us is changing so rapidly and delivering such momentous increments of information, virtually on a daily basis, that a set of forecasts painstakingly constructed today may seem irrelevant or worse tomorrow.
The authors of the ESRI Quarterly Economic Commentary - there is a case for dropping the "Quarterly" from the title and getting away from the tyranny of the calendar at a time like this - acknowledge as much when they emphasise that the confidence of their latest forecasts is a good deal lower than usual, and hint at the likelihood of further downward revisions being necessary before long.
On the face of it, the picture painted by the ESRI is a sombre one. GDP, which they estimate will contract by 1.3 per cent this year, is forecast to fall by a further 0.7 per cent in 2009. Principally because of a marked deterioration in the terms of trade, the fall in average living standards will be a good deal more pronounced, amounting to 6 per cent over the two years. The numbers at work are expected to decline by a cumulative 3 per cent over the two-year period, leading to a sharp rise in unemployment from 4.5 per cent in 2007 to 8 per cent next year. Predictably, the state of the public finances is seen as deteriorating sharply too, with the ratio of debt-to-GDP rising to almost 40 per cent next year from 25 per cent last year.
Only on inflation does there appear to be a sliver of light: the forecast for 2009 is for a welcome deceleration to 2 per cent.
The ESRI's assessment of the economy's prospects is not path-breaking. As far back as July (all of three months ago, although it now seems like a different era), Davy Stockbrokers dared to forecast a 0.7 per cent fall in GDP in 2009 and a rise in the unemployment rate to 7.5 per cent. Much more recently, the Central Bank's autumn Quarterly Bulletin, published just last week, while differing a little in the finer detail, offered a broadly similar outlook to that of the ESRI. In particular, the bank's forecast of a 0.9 per cent decline in GDP next year is virtually indistinguishable from the institute's.
Amongst what might be called the official forecasters, therefore, a fairly tightly-defined consensus about the economic outlook for 2009 seems to be emerging and may well foreshadow the forecasts that underpin next week's budget. For that reason, it is more than usually interesting to assess how robust the ESRI's forecast is and how the risks might be distributed around it.
The ESRI forecasts for GDP are presented in terms of annual average growth rates. Of more interest, from the point of view of establishing when the economy might start turning around, is what is projected to happen on an intra-annual basis (eg quarterly). On this score, the ESRI forecasts are actually a lot less gloomy than the headline numbers suggest because what those headline numbers seem to imply is that overall economic activity will stop contracting soon - if not by the end of 2008, then probably by the middle of 2009.I suspect that we'll have to wait good deal longer than that for the turning point.
Another implication of the ESRI numbers is that the non-construction economy is not in recession this year; nor will it enter recession in 2009. Given GDP forecasts and forecasts for building and construction output (a 21 per cent decline in 2008, followed by a 26 per cent fall next year), output in the rest of the economy is projected to expand by 1.5-2 per cent in both years.
Granted, this performance is a pale shadow of what was recorded in 2007 and earlier years, but it is growth nonetheless.
In light of the barrage of negative shocks facing the sectors concerned (collapsing consumer confidence; adverse exchange rate movements; the spread of recession in our main trading partners; spillover effects from building and construction, and the certainty of a deflationary budget), this assessment strikes me as too good to be true.
Of course, I could be wrong. I haven't "done the math" to the extent that the ESRI and Central Bank economists have, and it's relatively easy to snipe. That said, I strongly suspect that the next set of forecasts from both institutions will feature downward revisions.
The ESRI also held its Budget Perspectives conference yesterday at which some of the most distinguished of Ireland's macroeconomists (Joe Durkan, Patrick Honohan and Philip Lane) gave their views on the shape that Budget 2009 should take. There was a considerable measure of agreement amongst them.
Predictably, they all saw retrenchment on the spending front as an essential part of the fiscal response to the crisis. Not so predictably perhaps, they all argued that tax increases would have to form part of the adjustment too. Importantly, there was also a consensus around the idea that next week's budget must be part of a medium-term strategy to restore balance to the public finances.
Any such medium-term strategy has to be credible; otherwise it will be a worthless exercise. Its credibility in turn would be helped, I think, if the economic forecasts on which it is based, especially those for next year, erred on the side of caution.
The last thing the Government needs to happen in 2009 is for the year to become another procession of ever-increasing monthly tax revenue shortfalls.