Belfast Telegraph

Friday 19 September 2014

ESRI finds positive signs amid deep economic gloom

Bing Crosby used to sing that you have to accentuate the positive — a lesson which the Republic is learning

You've got to accentuate the positive, Bing Crosby sang. That's not easy when you're in the middle of what looks like the worst recession in any developed economy since the 1930s. But the Economic and Social Research Institute (ESRI) is doing its best.

There may, for instance, have been worse recessions in developing economies, or just plain undeveloped ones. Zimbabwe came to mind for Alan Barrett, senior researcher at the ESRI. But, as he said, such thoughts are perhaps a sign of how much trouble the Republic is in.

The previous worst recession was that of Finland, from 1990-1993. The reason then was plain to see. The country enjoyed unique access to the vast market of the Soviet Union, with its manufactured exports often paid for in kind with oil, timber or ore. The collapse of communism collapsed that market.

It is all the more puzzling, then, that Ireland should beat that record, with no apparent disastrous change of circumstances.

Our disasters are there, though, even if they are less obvious than the fall of the Soviet Union. There is the 20% fall in sterling; the currency in which Irish-owned firms do 80% of their foreign business.

Above all, there is the 75% fall in house building from its peak in 2007, when this country was building almost half as many houses as the whole UK, with its population of 60 million.

Houses were our ‘Soviet Union’. And, while the Finns' problems were exacerbated by a nasty global recession at the same time, Ireland's are magnified by the worst global downturn since the 1930s.

The fingertip search among the wreckage for Irish positives includes the point that the construction crash is a once-off event, however self-inflicted.

With even the German economy expected to contract by 6% this year, the Irish economy, outside construction, does not look much different from other EU ones. Ignore building, and the 14% estimated contraction over three years would be more like 8%.

The trick is to ensure that the rest of the economy stays in line with the rest of the world, so as to ensure that it joins in the recovery. The ESRI itself has noted that, in the 40 years from 1960 to 2000, the Irish economy averaged 4%-a-year growth — but in a series of booms and busts.

Add the bubble and burst from 2002 to 2010, and the average will be back to 4% a year. A mathematical coincidence? Perhaps, but there is reason to think the relatively high growth rate of 4% could resume, if Ireland is in good shape when global conditions get better.

There are some signs things are improving. There was more encouraging news from the US yesterday where house prices may have begun to rise.

As the ESRI says, there can be no recovery until asset prices stop falling. It is not yet prepared to say when that might happen.

For the ESRI, competitiveness is the key to joining in whatever global recovery takes place. Along with most economists, it finds itself in a peculiar position: advocating higher taxes and cuts in spending and wages in the middle of a recession.

But it sees no alternative to making the downturn worse, in the hope of making the recovery stronger.

The Institute gives the Government one cheer at least for starting the process of fixing the public finances with the two Budgets since October.

It thinks borrowing this year will be €3bn more than Mr Lenihan's €20bn estimate, but does not advocate any further corrections in 2009.

It welcomes the start of a process to clean up the banks. It is no good complaining about the lack of credit for business, as highlighted again in a survey yesterday, while the banks continue to nurse huge, unknown losses.

Like other economists, the ESRI worries about the difficulty of calculating those losses when the proposed NAMA agency comes to purchase the banks' property loans.

But any figure may be better than continued uncertainty, it says.

The Government's next task — to switch from tax rises to spending cuts — may be even more difficult politically. The cuts will damage competitiveness, if they exclude pay and concentrate on the easier option of further reductions in services already inadequate for a developed economy.

The ESRI approves of the hated pension levy on Government workers, and clearly thinks there should be actual pay cuts. The Dublin bus strike, which is unofficial and only about new rosters, shows the scale of the task in imposing any such cuts.

Yet the country clearly cannot fund the €60bn-a-year cost of the public services, never mind more increases.

Yesterday, Friends First economist Jim Power said the best chance the Government might bite this huge bullet is the threat of a budget crisis and “rescue” from the IMF or some EU body.

Turning the IMF into a positive — now that is ingenious.

Brendan Keenan writes in the Irish Independent

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