The lead headline in the Irish Times today must have depressed many: “Economy to shrink 11% over the next 18 months, says Central Bank.” Things feel bad now, how bad would they feel if output fell by another 11% over the next 18 months. Well, this is not at all what was forecasted by the Central Bank and their forecast is actually not that gloomy at all.
First, the bank’s forecast is that the average level of GDP in 2009 will be 8.3% lower than the average level of GDP in 2008, and then that the average level of GDP in 2010 will be 3% lower than in 2009. The Bank did not release a forecast about what will happen over the next 18 months.
Second, while the Bank (like the ESRI) do not release quarterly assumptions underlying their forecast, one can back out roughly what they might look like. Seasonally adjusted real GDP in 2009:Q1 is already 5.8% below last year’s average level. So, if GDP was flat for the remaining three quarters of the year, then the Bank’s figure for the year average over year average for 2009 would be -5.8%. One way to get their figure of -8.3% is to assume a decline of -1.8% over each of the last three quarters of the year.
However, if that were to occur, then even a flat level of GDP in 2010 would produce a year average over year average figure for 2010 of -2.7%. So, in fact, rather than an 11% decline over the next 18 months, the banks figures are actually consistent with a decline in GDP from the end of June to December this year of 3.6%, followed by a very small decline in the first quarter of 2010 and flat GDP after. A more likely scenario that would produce the Central Bank’s forecasted outcome would see a larger fall in 2010:Q1 and perhaps 2010:Q2 followed by a recovery in the subsequent quarters. In light of the severe fiscal contraction being inflicted on the economy over this period, this would not represent such a bad outcome.
Beyond the question of what the Central Bank forecast actually implies, there is the more general issue, which I have referred to before, of the difficulty in mapping forecasts based on year-average over year-average into commentary about what is actually happening now in the economy.
Rossa White of Davy’s has also written on this issue. See here.