Recovery Scenarios from the ESRI

The ESRI has released a scenario analysis by which the path of economic recovery is primarily driven by recovery in the world economy: you can find the paper here.

15 replies on “Recovery Scenarios from the ESRI”

Using the assumption that the world economy may recover significant momentum by 2011, is foolish.

What is key for Ireland, is US economic health and a protracted recovery is in prospect.

Nearly half of the 52 economists polled in the Wall Street Journal’s monthly survey on the US economy, published today, said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years.

This week the White House budget office issued revised deficit projections, which bring the expected shortfall this fiscal year, that ends Sept. 30th, to $1.84 trillion, from a February projection of $1.75 trillion. For the 2010 fiscal year, the new estimate is $1.26 trillion, up from $1.17 trillion.

Measured against the economy, this year’s shortfall will be 12.9 percent of GDP (gross domestic product). Next year’s deficit would be 8.5 percent of GDP. Even before the revisions, the deficit projections were the highest in more than 60 years, since the end of World War II.

Thanks to John Fitzgerald and colleagues for putting this out. I would like to discuss two of the conclusions.

(i) Firstly, the quote below. Whatever our view of the political expediency of reducing public sector pay is there anybody who reads this blog who believes that pay in the public sector is currently at appropriate levels given the size and composition of the budget deficit? This may be semantics as I doubt the authors fully meant that further pay cuts are not necessary. There is a growing sense that we are hanging young private sector workers out to dry in this recession in a way that I am finding increasingly difficult to see happening. Even with the levy, given deflation, public sector positions are largely untouched despite the fact that our salaries are based on 2007 levels of economic activity, a large chunk of which now appears to have been spurious. The real value increases in social welfare makes things worse as now there is whole cohort of young hard-working people who are probably worse off (after home value reductions) than if they had dropped out of college and gone on the dole in the last five years.

“The effective cut in pay rates implemented in February 2009 (through the introduction of the Public Sector Pension Levy) was appropriate given the fact that public service wage rates were significantly higher than those in the private sector when allowance is made for the structure of employment in the two sectors (Kelly, McGuinness and O’Connell, 2008).”

(ii) With regard to quote below, the nature and structure of the current global recession is far different from the 1980s and early 1990’s as the authors are well aware. The absence of a migration channel is something that needs to be factored in. The cohort who migrated from Ireland in the 1980’s have largely done well relative to the ones who stayed, in particular compared to the migrants that had left in the decades before. Without this channel now, there is a large degree of unpredictability about what will happen, particularly given the heavily demobilising debt levels that many current lay-offs will take with them.

Also, we did not have a mass graduate cohort at that period. Immediate gains could be made by ensuring that we do not develop a stock of graduate unemployed or partly employed people crowding out jobs in semi-skilled services jobs. We are graduating approximately 60,000 people as we speak and there is currently no functioning graduate labour market. Looking back to past knowledge is very limited for the current situation – we need to have new thinking about this issue. Having said that, “Tackling the skills deficit” is always and everywhere a priority for open economies like Ireland and thinking about this throughout the lifecycle is of course something that we should prioritise.

“The Irish economy faces a period of very high unemployment. It will be
very important that public policy learns from past research in Ireland and
elsewhere on how best to prevent the unemployed of today becoming the
long-term unemployed of tomorrow (O’Connell, 2009). This problem will
be particularly acute for those losing their jobs who have only limited
education. The Irish experience of the 1990s was that by raising the skill
level in the work force, the supply of unskilled labour was sufficiently
reduced to substantially eliminate long-term unemployment (Bergin and
Kearney, 2007). This suggests that priority needs to be given to labour
market initiatives that will effectively tackle this skills deficit among many
of the unemployed.”

Hi Liam, good points. In particular, it’s difficult to argue that a 7/8% cut through the levy will suffice to redress a 23% pay difference between public and private sectors that the authors identified.

The difference between the sectors is not the important difference and benchmarking as a process should be consigned to the flames in whatever direction the economy is going. The important difference is the difference between what we are spending (largely pay) and what we are getting in taxation. There is much less to debate about this difference.

There is very little evidence to support the claim made in the money.cnn article that: “Ireland is suffering the deepest plunge of virtually any country outside of Iceland”. Its an urban myth.

The latest y-o-y figure for Ireland’s GNP (a better measure than GDP) is a fall of 6.7%. But, that was in 2008 Q4. Ireland’s 2009 Q1 figure isn’t out yet.

Meantime, there has been a rush of countries in the past week reporting GDP/GNP figures for 2009 Q1. Finfacts gives them here:

http://www.finfacts.ie/irishfinancenews/article_1016694.shtml

As can be seen, in 2009 Q1 the y-o-y falls in GDP were:

latvia -18.6%
estonia -15.6%
lithuania -10.9%
germany -6.9%
italy -5.9%

sweden was down -4.1% between 2008 Q1 and 2008 Q4 – it looks like its y-o-y fall in 2009 Q1 (not published yet) will be around -8% to -9%

denmark was down -2.4% between 2008 Q1 and 2008 Q4 – it looks like its y-o-y fall in 2009 Q1 (not published yet) will be around -6%

Not in the Finfacts table, but reported elsewhere, Singapore was down 11% y-o-y in 2009 Q1. Judging by its manufacturing and export collapse, Japan’s 2009 Q1 figure may well be worse than Singapore’s when its published.

Between the early 90s and 2008 the Irish economy doubled in size relative to (repeat: relative to) the EU15 economy. It now looks as though, again relative to the EU15, Ireland is only going to lose probably 2% to 3%, or at worst, 4% to 5% of that relative growth by 2010. Then, according to this morning’s ESRI report, Ireland will resume growing at 5.6% annually from 2011 on, compared with 2.1% in the EU15. That would mean all (relative) ground lost in the global recession would have been regained by 2012. And, by 2015 Ireland’s GNP per capita would be over 20% above the EU15 average compared with 14.5% above in 2007 (the previous high-point) and 8% to 9% above in 2010 (the low-point).

Hi John,

While I think you may have made your mind up already, I took a look at the latest IMF figures and tried to see where exactly the IMF think Ireland will come in the “World’s Worst” for 2009: http://ronanlyons.wordpress.com/2009/04/29/are-more-open-countries-being-hit-harder-in-the-recession/

We’re not the worst, but we’re certainly in the top 10 – I would be less worried if our contraction was being driven by falling exports, but as you’re always quick to point out, exports are holding up, making our fall somewhat unusual compared to other fallers and with a potential further downward revision of exports don’t hold up (not the case for the other countries on the list, where exports are already contracting very sharply).

The full data on 2009 growth, 2001-2007 trend growth, openness, etc., if you want to have a look yourself, is here: http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/openness-growth-and-contraction-by-c

@Ronan

I think your blog post is a great start to the discussion. I agree with your point that open-economies are most likely to have been impaired by the collapse in global trade. However, I think this only tells half the tale. As Phil Mullan in the UK has pointed out, it is not surprising that economies that are more integrated in the global economy are likely to suffer most. However, he has also pointed out that it is important to consider the structural breakdown of exports.

I have written on the importance of this wrt to China here.

I think the major question we need to ask in Ireland is: why has investment in the Irish private sector failed so miserably to expand indigenous productive capacity for export growth?

Not so long ago the unions were crying out that wages should follow inflation up, back when inflation was around 3%. Now, when prices are falling substantially, they are silent. It seems only prices that aren’t falling are government controlled services, they’re going up with record increases, e.g. bus fares.

Even if there was no budget deficit problem, how can the cost of the public pay bill relative to the private (wealth earning sector) ever be justified?

Hi Ronan,

Your excellent analysis is very plausible indeed. I think it makes sense that countries most exposed to global trade are the most likely to receive a severe hit when global trade collapses.

The corollary, of course, is that, when global trade rebounds, those same countries are likely to grow fastest. This seems to be at the heart of ESRI’s forecasts. They forecast Ireland growing at 5.6% annually from 2011 on, based on the assumption that the global economy also is growing agin by then. This is a very realistic forecast. Since 1958, in those years when the global economy was growing at a reasonable rate, the Irish economy has nearly always achieved a 4% to 5% growth rate, well in excess of almost all other EU15 countries. I see nothing to indicate that this won’t be repeated once global growth resumes.

Regarding how bad the hit will be that Ireland receives during the global recession, I don’t profess to know. I don’t really go in for prediction (mug’s game). I content myself with analysing as best I can published data for what’s allready occurred. All I’m doing is pointing out that, so far in this global recession, a considerable number of developed countries have recorded falls in GDP that are at least as great as Ireland. A lot of them are clearly doing worse than the IMF forecast. For example, Germany, and, I suspect, Sweden and Finland as well. Before he departed us, Gorgeous George Lee repeatedly told us that Ireland was having the biggest fall in output of any developed country. Based on the GDP figures other countries are publishing, there seems a very reasonable chance that Ireland won’t have that distinction after al, although, as I say, I don’t make that claim with any degree of certainty. But, as of now, your estimate that we’ll merely make the top ten, for falls in GDP over the course of the recession, seems a good bet.

My economics text says that PAE = C+I+G+NX. C is decreasing. I is decreasing – thousands of savers have been wiped out. G is out of control and T is decreasing also. NX seems to have stalled. Now please explain how the ERSI or anyone else can predict that PAE will halt its decline any time soon, (Real Interest rate is 6% by the way), and start to increase. Money is like matter – Debt is like anti-matter. When these two ‘collide’ – pooff! Money is destroyed. Please explain how it is intended to clear all the accumulated debt, without a severe downturn. Oh I know, lets borrow some more, only this time its virtual borrowing from the income streams of the future. Now if future income streams are impaired due to excessive taxation to pay back the massive debt we are piling up – please explain how the Irish economy will recover. There is a significant logic deficit somewhere. Mention was made in one of the contributions about the developing problems in the domestic housing market. Very serious matter indeed. Slight diversion. You may have noticed that although the GDP figure was -3%, food prices only decreased by 1% – this is ominous. The other bit of gossip is that there is a developing problem with electricity generation in Saudi – they use vast quantities of nat gas for desalination and electricity generation. Nat gas is also the principal feed-stock for chemical fertilizer. Connect the dots yourselves. See if you can locate The Export-Land Model for supply of fossil fuels: its in the archives over on theOildrum.

Brian P

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