ARE YOU LOOKING forward to Q310? That is the magic point at which the Irish economy is going to start its "gradual" recovery, two heavyweight crystal-ball-gazing institutions have declared. But don't start ditching Cava for Krug just yet: Q310 in English is "this time next year" and between now and then, to quote the latest KBC Ireland business sentiment survey, we're probably going to be "bouncing along the bottom". That's definitely not going to be as fun as it sounds, writes LAURA SLATTERY
When you’re trying to decipher what the hell it is they’re talking about, it will probably help to remember that economists are not like regular people. They don’t think about spring, summer, autumn, winter. Time passes in quarters and each quarter is celebrated by feasting upon reams of data, feeding these “indicators” into pre-heated mathematical models and churning out another batch of forecasts.
Some forecasts are ass-covering, number-plucking stabs in the dark; others are half-baked self-fulfilling prophecies. As far as pinpoint accuracy goes, however, most economic predictions probably sit somewhere in the middle of the scale that runs from broken clocks at one end to a Roger Federer forehand at the other. You maybe wouldn’t want to base all of your life decisions on them, but they’re still worth decoding.
This week, we’ve had the Central Bank’s annual report and the Economic and Social Research Institute’s (ESRI) Quarterly Economic Commentary to add to our in-trays. At the end of June, the International Monetary Fund (IMF) chipped in with its bleak assessment of just how bad things are. So what are they saying and what do they really mean?
THE BIG NUMBERS
The Central Bank says the economy will shrink by 8.3 per cent this year, the IMF plumps for 8.5 per cent and the ESRI says it will contract by 8.9 per cent. Although there is always the possibility that they’re all way off the mark, the closeness of these figures is reassuring – during last year’s rapid descent into economic chaos, forecasters were falling over themselves to make their assessments more horrendous than the last guy.
Just to confuse matters the Central Bank and the IMF were talking in terms of its Gross Domestic Product (GDP), while the ESRI prefers to emphasise Gross National Product (GNP). The latter measure takes GDP and removes the value of multinational company profits that are siphoned out of the country and make no difference to how rich or poor we really are.
So it’s not that the ESRI is less optimistic than the other two: if anything, they were comparatively cheery souls this week, declaring that an end to the recession is now “in sight”. However, after two years of underestimating the misery that awaited the Irish economy, ESRI economist Alan Barrett did admit he was “too humble to be definitive”.
THE LAGGING INDICATORS
A bevy of stockbrokers has recently stated that the “worst of this recession is over”. Again, it’s best to hold off on the celebration dance: what they really mean is that “things are still getting worse than they were before, but they’re just not getting worse as fast as they were before”. In horror movie terms, we’ve passed the gore-splattered opening sequence and are now in the lull that comes before the outright carnage. This is because unemployment in economic parlance is a “lagging indicator”. It might seem like your employer is being hatefully trigger-happy with their P45s, but it actually takes time for a plummet in economic fortunes to filter through to official job stats.
The monthly spike in new Jobseeker’s Benefit claimants – ie workers who have just been shoved out the door – has dropped back from the record 33,000 additions last January, but the dole queues are still swelling.
The ESRI and the Central Bank don’t expect the unemployment rate to peak until 2010, when it will reach 15-16 per cent. So, rather gallingly, the exact point at which you are most likely to be out of a job is scheduled to coincide with the time that the forecasting crowd will be getting feverish about the prospect of things getting better.
THE PRICE TAGS
The prevalence of massive “everything must go” signs is not an illusion: according to the CSO’s Consumer Price Index, the price of a typical basket of goods and services has fallen 5.4 per cent over the past year. But after years of complaining about “rip-off Ireland”, we may soon be praying for prices to start going up. Discounts on discounts are all very nice, but sustained periods of deflation create a very different kind of headache for cash-strapped, indebted households. Rather than suffer the pain of seeing their spending power eroded by inflation, they see the real value of their debt increase. This will “dampen the next economic cycle”, according to the IMF’s polite phrasing. Translation: “We’re all going to feel quite poor for some time.” Ominously, a debt-deflation spiral was the defining feature of the Great Depression.
Cuts in interest rates would help, but the trouble is that the European Central Bank (ECB) has already lowered rates to a historic low of 1 per cent. Both the ESRI and the Central Bank this week flagged the next painful squeeze on our bank balances: if the Irish economic recovery lags that of the euro zone, the ECB may increase interest rates at a time when we’re all still facing into steeper income levies and eroding salaries. In the alphabet soup of economic trends, this could cause a “W-shaped” or “double-dip” recession. Still, that’s better than the tentatively mentioned, “L-shaped” alternative.
THE FUNDAMENTALS
Finally, when the Central Bank or anyone else warns you that the property market is “no longer supported by fundamentals”, as governor John Hurley reminded us this week that he did in 2006, be aware that this really means: “House prices are about to undergo an almighty crash. Sell up immediately or you’ll be paying off the negative equity when you’re 90.” (Which, for me, is in Q369.)