Belfast Telegraph

Sunday 20 April 2014

An ill wind blowing but they may yet do us some good

It’s not so much what the volcano is doing, we are told, but which way the wind is blowing. A bit like the economy, really. Not that the Irish economy in its current state could be likened to a volcano.

The word ‘dormant’ implies far more activity than has actually been going on. But the winds have changed significantly.

They blow now from the Continent. Ill winds they are too, but you know what they say. Ireland may be the one the ill wind does some good to. A very great deal will depend on whether that hope turns out to be correct.

There are plenty of risks — and, in their current mood, people are more inclined to look for them than for green shoots.

In the US, the main concern is the effect of the withdrawal of the huge fiscal and monetary stimulus, as the Administration tries to get borrowing under control, and the Fed tries to get interest rates back towards something like normality.

Closer to home, the new British government is moving fast on the huge budget deficit. The Bank of England may also have to take more action on inflation than it would like, if the rapid rise in prices does not slow soon.

And then there is Europe. There is disagreement on how much difference the austerity programmes being forced on the peripheral euro state will make to eurozone growth. But the growth forecasts were poor anyway, and have certainly not been improved by |recent developments.

So the euro is falling. The hope is that this will benefit Ireland through higher exports more than a reduction in growth in the major economies will harm it. This is certainly possible and, combined with the natural cyclical turn in the economy, it might give |Ireland some encouraging growth figures, just when others are back-sliding a bit.

That could do wonders for perceptions, at home and abroad.

It might make people at home save a bit less and spend a bit more. Some such change is desperately needed. Some recent analyses show why.

Not surprisingly, the prediction by Prof Morgan Kelly of UCD that the banking losses could sink the national finances — although not the only such warning — received enormous attention. But, as he himself pointed out, the banks can be cut loose if the burden proves insupportable.

Not so the national finances themselves.

A recent analysis by NCB Stockbrokers calculated that both the praise and odium heaped on Ireland's budgetary correction plans could be premature. The austerity may not go far enough.

Similar calculations might explain why EU financial commissioner Olli Rehn is looking again at Ireland's plans, even though they were signed off by the previous Commission.

Greece has concentrated minds across the EU. Indeed, Ireland’s contribution to the Greek bailout is expected to be €1.3bn.

Meanwhile, NCB suggests the programme imposed on the Greeks is a deal more credible than the one being implemented by Ireland. Of course, the Greeks may fail in the implementation. But that is beside the point.

Even if Ireland succeeds in implementing the current programme, and the economy does grow as hoped, the figures suggest the national finances will remain on a knife-edge.