The details of the 2011 and 2012 forecast for Ireland are here.
The full release is here.
Category: Economic growth
It is a day for taking stock after an extraordinary week. On Wednesday, the Government unveiled its four-year plan for stabilising the debt ratio with about as much political acceptance as could be expected. Yet by the end of the week the expected probability of default on sovereign debt implied by bond yields had increased, and that was despite the imminent announcement of the details of an international rescue package. It was also a week in which those advocating sovereign default—on State guaranteed bank debt and State bonds—were advancing, while those arguing that creditworthiness could still be restored were in retreat. I think it is worthwhile to reflect on the two broad views.
You can read my view on the Four Year Plan here.
My comment included two additional paragraphs which were cut, I suppose due to space constraints:
“The current economic and financial crisis has slowed down economic growth in the advanced economies which are Ireland’s main trading partners. Against this background, the assumption of a strong export-led growth might be too optimistic. In addition, improving price competitiveness and reducing the debt burden are two conflicting objectives.
Operational measures are to be discussed at a later stage and there is little information about the measures to be taken beyond 2011. It is not clear when and how the plan will be reviewed, enforced, and monitored. There is no clear sequencing of the reforms to ensure that short term negative effects on demand are minimised.”
The four-year plan assumes that Irish GDP will grow in real terms by around 2.75% per annum over the next four years. For good measure, it throws in a little bit of assumed inflation as well (0.75%, 1%, 1.25%, 1.5% — a suspiciously smooth progression, would you not say?).
In the context of the proposed austerity package, this seems wildly over-optimistic to me, and it would appear that several market analysts hold the same view. Here’s one quote from the foreign press, but you can easily find more of the same:
Analysts questioned whether the plan was credible. Stephen Lewis, chief economist at Monument Securities, said: “It doesn’t seem all that realistic to me. It seems they’re planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely.”
Needless to say, I would love to be proved wrong, and the third quarter GDP statistics will be revealing one way or the other.
Optimists point to the growth in Irish exports as the route to our recovery. Since we can’t devalue, we will be relying on foreign income growth more than on relative price shifts to achieve this happy outcome. So it seems worth pointing out that the Dutch CPB’s September data on world trade and industrial production were released yesterday. They confirm a trend which has been there since January: the momentum of the world recovery is steadily decreasing.
How do you try to convince markets that an economy is going to grow even in the face of serious budget cuts, at a time of already high unemployment? You produce some supply side structural reforms from a hat, et voila! This is how the IMF envisages getting growth in Greece, for example, and it is now being suggested that structural reforms will be a means of getting growth in Ireland as well:
Together with the structural reforms that will be announced in the strategy, this budgetary adjustment should allow Ireland to return to a strong and sustainable growth path while safeguarding the economic and social position of its citizens.
I am a little confused by this. After all, it just a couple of months since Morgan Stanley provided a completely contrary reason for being bullish about Ireland:
Clearly, Ireland is facing major challenges in the quarters and years ahead. But, if there is one economy in the euro area that could meet such challenges, it is probably the Irish economy, in our view. Mind you, these strong preconditions are not a guarantee that Ireland will be able to overcome the challenges that lie ahead easily. But we believe that Ireland is fundamentally different from the other peripheral countries in that it is a fully deregulated, fully liberalised market economy. Hence, it should be able to adjust to the new environment and work its way out of the current situation more quickly.
The reason for my confusion is that if we are indeed fully deregulated and fully liberalised, it is hard to see where the Irish supply side rabbits are going to come from.
So: are you optimistic because Ireland is a lean green market machine, which will adjust flexibly and push our (practically vertical) aggregate supply curve out to the right at a rate of knots? Or, on the contrary, are you optimistic because we are a eurosclerotic mess, whose rigidities imply a fruitful pro-growth structural reform agenda?