The new FSR from the Bank of England makes for fascinating reading: you can obtain it from this location.
I’d say this little piece by Paul Krugman, and the associated note, will end up on lots of undergraduate syllabi. Liquidity traps are boring to teach, until you find yourself in the middle of one. From an Irish point of view, however, the key section is the following:
if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.
The point is that the Irish are just a subset of the Eurozone workforce, and that our GDP is the equivalent of Krugman’s widgets, whose relative price can be reduced. Krugman makes the same point in a follow-up post here. Of course, devaluation would be preferable to wage (and price) cuts: it would avoid the debt deflation and rising real interest rates which Krugman talks about. But it is not an option.
The CSO today released the Quarterly National Accounts for 2009:Q3. Consistent with other indicators such as a stabilising unemployment rate, the release is consistent with a bottoming out of the economy. Though the year over year patterns still show sharp declines (7.4 percent for GDP and a whopping 11.4 for GNP) the best read we have on what happened during the latest quarter—seasonally adjusted quarter-over-quarter changes—point to stabilisation. GNP was down 1.4 percent on a seasonally adjusted basis over the quarter and GDP was up 0.3 percent. So technically, one could argue that this release confirms commenter John the Optimist’s call in September that Ireland was already out of recession.
There are, of course, caveats to this. The seasonal factors are based on limited data and so not particularly reliable. And the increase in GDP occurred despite declines in consumption, investment, government spending and exports (this was offset by the decline in imports). But still, one has to welcome anything that looks like good news.
How do these figures square up with the government’s projections in the budget? One point to note is that the bottoming out means that next year won’t have the same negative carry-over that this year did. In other words, if quarterly GDP remains flat at its 2009:Q3 level up to the end of 2010, then the year average for 2010 will be essentially the same as the year average for 2009. This assumption also implies a year-over-year projection for GDP in 2009 of minus 6.8 percent.
Against this background, one could argue that the budget’s projection of a 1.3 percent decline in GDP next year is perhaps too negative. Alternatively, with €4 billion of fiscal adjustment to be applied and a banking system that will still be restricting credit, perhaps the government have it about right.
Yesterday’s QNHS (Q3 2009) release provides a timely update on trends in the immigrant workforce. In the period from the third quarter of 2008 the number of non-Irish nationals in employment fell by 61,600. This is equals half the fall in the employment of Irish nationals (123,200), even though non-nationals represented only 13.6 percent of the workforce in Q3 2008.
It is also evident that many immigrants are returning home, with the total population of non-nationals (15 and over) falling by 41,000 over the year. This might be welcomed in the short run if it limits the rise in unemployment. But returnees also ease the downward pressure on wages. Over the medium term, it is not a bad rule of thumb to view a country’s equilibrium unemployment rate as independent of the size of its labour force.
Looking to the longer term, the return to net emigration is a worrying development. As is often observed, Ireland’s high degree of factor mobility makes the economy operate more like a regional than a typical national economy. An expanding skilled workforce gives the economy the scale, diversity and connections to support innovation-intensive growth. Indeed, the empirical regional/city growth literature points to initial human capital as a strong predictor of subsequent growth (see here). A truly smart “smart economy strategy” will recognise the value of getting–and keeping—talented people here.
For faithful members of the 46-ers*, the new government budget proposal creates cognitive dissonance. How could a government so wasteful in its bank-bailout policies produce a general government budget proposal that seems so carefully and sensibly crafted to address current fiscal and competitiveness problems? In contrast to bank-bailout policies, the new general budget seems reasonable, balanced and fair, but as stringent in difficult circumstances as could possibly be asked. Does the Department of Finance (DoF) suffer from bipolar syndrome? How can we understand its behaviour?