Scenarios for Irish economy

 

WHERE WILL the Irish economy be by mid-decade? The range of possible outcomes is wide. But in an attempt to frame thinking about the challenges ahead, a team at the Economic and Social Research Institute has constructed two separate scenarios for Ireland’s economy in the period up to 2020. In a thought-provoking excercise, published today, the ESRI sketches both a “high growth” rebound and a more plodding “low growth” pace of recovery.

Employment, joblessness, output per head and the budget deficit will all be much improved on the current position in five years time under the more optimistic scenario. But under the low growth scenario, all the lost ground of recent times will not have been recovered and unemployment will remain uncomfortably high into the middle of the next decade, at 7.1 per cent in 2015.

Today’s report updates the institute’s first exercise in scenario-building, completed 14 months ago. Then, the developed world was still sliding towards depression. Now, the ESRI is considerably more upbeat about the global recovery. Stronger international demand for Irish-made goods and services will act as an engine of growth, hauling the economy back to sustainable prosperity.

But the positive effect on the overall economic outlook of its upward revision for exports is more than offset by its more downbeat analysis of the costs of the banking crisis. These are far greater than it believed just 14 months ago.

So the ESRI foresees a less rosy overall outlook for the medium term than it did a year ago. But it remains more positive than either the International Monetary Fund, which published its five-year forecast on the Irish economy just last week, or the European Commission. It is confident that its assessment is the most accurate of any major forecaster.

Yet much is uncertain, domestically and internationally. The ESRI recognises this explicitly. Of the policy challenges to be confronted, the report gives most attention to the Government’s budgetary position. It acknowledges the achievements to date, with much of the “heavy lifting” of the adjustment process already completed, it believes.

Despite this, the ESRI concludes that even in its best- case scenario, the Government will need to introduce further budgetary consolidation measures, on top of those to which it has already committed, if it is to bring its budget deficit below 3 per cent of GDP by 2014, as it has targeted.

At a time when kites of many kinds are being launched in anticipation of the forthcoming budget, the ESRI flies its own. It suggests that there may be real benefits, in the short term and long, of a more front-loaded fiscal adjustment.

Specifically, the report’s lead author, Prof John FitzGerald, calls for the Government to consider a reduction in the deficit next year of €4 billion, rather than the planned €3 billion. This additional pain could yield gains in terms of lower debt servicing costs and higher investment. The Cabinet will begin its consideration of all these matters today.