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Predicting future is a leap into unknown

By Brendan Keenan

Here's a confident prediction. This year will be better than the current forecasts suggest. Or worse.

The most unlikely scenario is that it will turn out pretty much like last year: growth of less than 1% and another, albeit smaller, reduction in personal spending.

This is the general consensus, with very narrow differences between optimists and pessimists. The optimists are led by the Department of Finance in the Budget (the ESRI is also in this camp) with a forecast that output (GDP) will grow by 1.5% and national income (GNP) by 0.9%.

The Budget is based on these forecasts, although the IMF is a bit less bullish - if one can use such a word in this context - forecasting a GDP rise of 1.1%. Other forecasts range from a 0.5% to 1%, but everyone is less optimistic than they were in late summer, because of weak data in the autumn.

The one figure which seems to appear everywhere is that personal spending will fall by 0.5% in volume this year. The unanimity is probably based on the fact that everyone knew the size of the Budget corrections - €3.5bn (£2.8bn) - and have the same formula for the impact on personal spending.

Then came Christmas and the new year sales, after the Budget and its various recriminations. This was not in the script. But apart from that surprise, too much is happening, and too much is changing, for a 12-month forecast to have much credibility.

As for personal spending, it was pretty clear in the streets of Dublin from about October (and perhaps in other towns), that it was going to be a better shopping season than 2011.

By December, it was clear that many shop, bars and restaurants did not have enough staff. And who could blame them?

After all, last year's Budget took another few billion in spending money out of customer's pockets. There were almost 4,000 fewer wage earners at the end of the year than at the start. Interest rates were going up wherever the banks were able to put them up. Not much of a recipe for a merry Christmas.

Yet retailers say it was probably the best since 2007, when purchasing power was about €20bn (£16.3bn) greater than it is now.

It looked, from a visit a few months ago, as if Belfast was going to post a similar record, until the lunacy of the flag dispute. Fleeing Northern shoppers contributed something to the Dublin spree.

Of course, it was nothing like the mania of the mid-2000s, but the result still seems surprising.

It has to be an example of what the economist Keynes called "animal spirits" - the psychological attitudes which economists find so difficult to put into their mathematical models for making forecasts.

In non-mathematical language, people get used to anything, and remarkably quickly too. The shock of the crash, which came out of a clear blue sky for most people, is beginning to wear off.

Once that happens, it matters more whether or not things are improving, rather than how they actually are. The annual Budget takeaway does not help - and there are at least a couple more to come - but other things, especially the news from Europe has been encouraging, to put it no higher.

This is the stuff which makes the economic cycle turn. Unfortunately, there is no known model which tells when it will turn. History is the only guide.

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