This is very worrying.
Author: Kevin O’Rourke
Jim O’Leary had a piece yesterday in the Irish Times which was worth reading for a couple of reasons. First, he has a nice account of the incentives facing economic forecasters. Second, he draws attention to a truly astonishing forecast, or assumption, in the Central Bank’s recent Quarterly Bulletin: that, while domestic demand will collapse in 2009 (which makes sense: the Central Bank assumes that gross domestic expenditure will fall by 7.6%), our exports will only decline in volume by 0.7%. If true, this would obviously mute the overall fall in Irish GDP, and the Central Bank is forecasting a decline of just 4%.
Jim convincingly shows why the assumption regarding exports is implausible. Here are a few more facts. According to the CPB Netherlands Bureau for Economic Policy Analysis, the volume of world trade fell by 6% last November. That’s right: by 6%, in one month. US imports fell by 7.8%; Japanese exports fell by 10.8%.
The CPB cautions that monthly world trade figures are volatile, and that one should focus on moving averages. Of course, that becomes a less useful strategy when one has just passed the peak! More evidence of the extraordinarily rapid collapse in world trade comes from IATA, which reports that the volume of international cargo shipped by air was 22.6% lower in December 2008 than in December 2007 (HT Calculated Risk).
By way of comparison, the volume of world trade fell by a little more than a quarter over the 3 years 1929-1932.
As Jim says, it seems safe to assume that exports will contract by a lot more than the Central Bank is currently forecasting, and that the same will therefore be true of GDP and employment as well.
I found this quite depressing. He doesn’t want to cut interest rates further for fear of falling into a liquidity trap???
In addition to harming the overall Eurozone economy, this sort of attitude, if it prevails, will be particularly damaging to Ireland because of its implications for exchange rates. And it will I think set in motion serious protectionist forces in this continent, with the potential to do great damage to the international economy in the years ahead.
Here is a picture, taken from a paper by Ben Bernanke, which anyone resisting wage cuts in the Irish context today needs to take seriously. These are countries which (mistakenly) stuck to gold until the bitter end. Like ourselves, therefore, they did not have the option of devaluing. (No, I am not saying we should leave EMU.) The more wages fell, the less output declined. (And yes, the result comes through in regressions which control for other stuff.) The question today is, do we want to end up looking more like Belgium, the Netherlands or Poland, or like France and Switzerland?
This is interesting.