Belfast Telegraph

Sunday 23 November 2014

Facing up to the hard facts of life

The property market is still sinking
The property market is still sinking

When the facts change, I change my mind, the economist John Maynard Keynes said; before asking the critic who had accused him of inconsistency, "What do you do?"

What are they going to do? The facts have changed dramatically, and are changing by the day. Can official and political minds, so set in their ways, change fast enough and far enough?

The question applies both at home and abroad. The new foreign fact that must be faced is the threat of imminent recession in Europe and the USA. Official forecasts of recessions may be rare - despite the joke about economists predicting five of the last three - but markets have a good record in signalling their arrival.

This is not just a matter of prediction - market behaviour is a proximate cause of recession. The near-zero yields on government bonds deemed to be safe, alongside falling share prices, indicate that there is no appetite for the risk that comes with investing in real economic activity.

With household debt so high in the US, recovery - when it does come - will be led by investment. The time is not yet. We in Ireland are well placed to understand the difficulties in the USA. As one of their analysts put it last week; the property market is sinking, unemployment is rising - how can you have recovery?

It also makes one wonder whether it is correct to blame the feared double-dip entirely on the eurozone crisis, as many have done. The underlying problems transcend the eurozone.

This is all most unfortunate from an Irish point of view. Things were beginning to fall into shape, albeit in unexpected ways, but a new bout of global weakness could derail, at least partially, the puffing Irish train.

That, in itself, might have global consequences. The eurozone badly needs a success story to give some credence to its derided policy of combining austerity and full repayment of debt. It may fail in Greece, but it had better succeed somewhere. Ireland was beginning to look like a possible candidate.

The international banks need a success, too. Their needs probably explain the remarkable reductions in the interest rates on Ireland's bailout loans, as it dawned on them that our problems are their problem, too.

Some economists now think that, with a favourable international wind, the interest rate cuts mean Ireland can meet the troika targets - perhaps even earlier than 2015. Unfortunately, the wind is no longer favourable. A second recession would probably snuff out that opportunity.

What should we do? The facts are changing so fast it is impossible to make up one's mind. In these circumstances the balance of wisdom may have changed in favour of further tightening to keep to the original deficit targets, which were based on what now seem optimistic forecasts of growth close to 3pc from next year. We are talking only about next year's Budget. 2013 is a different world.

It may be better to keep the 2012 deficit on track until we see better how the land lies. Another €400m or so in the December Budget seems the right next bite, before having another look at the menu.

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