Another lap for hare

ESRI forecasts for 2010 allow me to update the internal/external balance plot first used  by Brendan Walsh and myself to describe the lengthy cycle 1975-2001. 

The first chart, with data up to 2006, shows the previous big counterclockwise cycle: first the balance of payments goes into deficit (1975-1979); then the correction begins and unemployment rises (1980-85), the balance of payments deficit contracts (1981-87) and moves into surplus (1991-93); finally unemployment comes down again (1993-2000).

Looks like the Irish hare is taking a shorter and sharper curve this time.  The balance of payments blow-out (2003-2008) has been much smaller in amplitude and shorter in duration than in the 1970s and 1980s.  The rise in unemployment (2007-2010) is much faster than in 1981-86.  Sooner or later we’ll get back to the bottom centre of the graph with low unemployment and zero balance of payments. 

The first chart shows data up to 2006, the second one joins the dots for 2007-2010 according the the ESRI forecasts published this morning.

Internal and external balance to 2010

(PS: For those who like two-dimensional business cycle graphs, there is a very nice one (plotting rate of change of GDP against its level) for the US in a recent issue of the New York Times. Wish I had a copy of their animation software!)

Central Banks Forecasts Not So Grim

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.

Dorgan on the Smart Economy

Former IDA chief executive Seán Dorgan has an interesting article on the Smart Economy in today’s Irish Times, partly rebutting some of the points made in Declan Jordan’s recent piece.  One of the arguments made by Dorgan that I found interesting was the following:

The Technology Foresight reviews were undertaken a decade ago with the realisation that a production model based on low costs and labour surpluses had run its course.

Instead, Ireland had to move to higher value activities and create a new dynamic for growth. The competitive power of knowledge and innovation was identified, for indigenous development and winning international investments.

One of the points I made when last discussing this issue was that the Smart Economy strategy seemed more appropriate for the later days of the Celtic Tiger, when the economy was at full employment after years of attracting FDI.  Dorgan’s article further enforces that impression: With unemployment already at almost 12% and going higher, should we really be talking about moving beyond industrial policy strategies based on the availability of labour surpluses?

Public Sector Pay Differentials: Regressions Can Actually Be Useful

Last week, the CSO released the latest results from the National Employment Survey, which reports detailed information on earnings across all sectors of the economy.  The data from the survey relate to October 2007.

The first media treatment of the story that I saw was the Sunday Independent’s lead story saying the public sector is “now earning 50 per cent more the private sector.”  My reaction was that while the headline might be true, this wasn’t a very useful way to think about the issue of public sector pay. 

The report also details a host of other well-known patterns: Those with more education earn more, older workers earn more, those in professional occupations earn more.  With the possible exception of Vincent Browne, I’m not sure there is anyone out there who would draw the implication from these figures that the government should intervene to eliminate all these gaps.

Continue reading “Public Sector Pay Differentials: Regressions Can Actually Be Useful”

Three Cheers for NAMA?

One interesting aspect of the government’s current approach to promoting its NAMA plan for dealing with the banking crisis is their tendency to interpret everything said by authority figures as being in full support of their chosen approach.

As an example of this, on RTE’s The Week in Politics, Minister Eamon Ryan said the following (about 15.40 in):

The difficult and unpopular decisions that were excoriated by the Labour Party endlessly—you’re bailing out the banks, you’re bailing out the banks—have been described by the International Monetary Fund as the right way forward; has been described by the ESRI as the first time the government is getting it right, as they see it; has been described by the Swedish finance minister who was over last week, who got them through a similar crisis, as exactly the right thing to do.

Continue reading “Three Cheers for NAMA?”