May 18th Morning: The Recession Diaries

, , Comment closed

0 Flares Twitter 0 Facebook 0 0 Flares ×
Print pagePDF pageEmail page

The ESRI’s recent ‘Recovery Scenarios for Ireland’ offers us a glimpse of the ‘nirvana of the return to normal’ – a set of projections that could see the economy, if not flying high, then at least gliding well above ground level within a couple of years. It assumes that ‘if-only-we-can-get-through-this-spot-of-bother’ we can resume high levels of growth and relatively low (relative to today) levels of unemployment. Is it plausible? Maybe, except that the ESRI, chasing the chimera of ‘real devaluation’ and budget fundamentalism, doesn’t tell us where all this growth is going to come from.

In short, the ESRI predicts that, if we can only bring the public finances under control and cut wages, the Irish economy, on average, will grow by 5.5 percent annually between 2010-2015 if the world economy recovers next year (short recession). If the world economy suffers a prolonged recession (recovers in 2011), our economy will still grow by nearly 5 percent. In addition, in both scenarios, unemployment will fall from a high of over 17 percent to an average 6 to 7 percent between 2010-2015 – more than halving.

ESRI 1 This seems too good to be true. In 2010, they are projecting the economy will still be losing ground (-1 percent). But in the succeeding five years, it will suddenly turn around and average something like 5 percent. This compares favourably with recent periods of growth.

While not reaching the dizzying heights of the mid-90s – when foreign investment fuelled the economic boom – the ESRI is projecting the economy will clearly match the run-in to first Celtic Tiger boom and the years of the property boom.

Their projections regarding unemployment also compare favourably. Between 1995 and 2000, unemployment fell from 12.2 percent to 4.3 percent – a decline of 7.9 percent. The ESRI projects that unemployment will fall by an even higher rate – over 10 percent in a five-year period.

No doubt Fianna Fail Ministers will be taking great comfort from all this. If only they can survive the upcoming democratic exercise (i.e. the elections) and the Greens tetchiness over the Programme for Government; if they can just get to 2012, the economy will not only have turned the corner but will starting to grow rapidly. They can go to the electorate and say – yes, it was tough, but it was worth it. It’s all coming right.

Yet, there is this nagging question – where is the growth, where are the jobs going to come from?

In the mid-90s, one out of every eight jobs created were due to multi-nationals – as foreign direct investment flooded into the country. Is the ESRI suggesting that we will experience a similar FDI renaissance? This is not likely. Not just because we are facing into more competition from other low-tax countries, not just because we should expect FDI expansion to be more risk-averse in the years ahead; but also because the character of FDI is changing – to more capital-intensive, high value-added employment. While this is a good and inevitable development, it will not be as labour-intensive as the mid-90s; better paying but fewer new jobs.

We cannot – and wouldn’t want to – return to the property-based job creation starting in the early 2000s, when nearly one-in-six people were employed in construction/property-related sectors.

The ESRI takes some solace in the reduction of the savings ratio and, so, an increase in consumer spending, we should be more cautious. However, in the years ahead, with disposable incomes being reduced by increased taxation – people will be trying to get out under a mountain of debt. The ESRI doesn’t address this problem of household deleveraging.

In addition, public sector job creation contributed to employment growth. If anything, this is going to be reversed under current policy (a policy that the ESRI enthusiastically supports).

There is a serious question  over where our growth – economic and employment – will come from.  If we can’t return to the halcyon days of FDI, don’t want to return to a property bubble, if there is little likelihood of future credit-fuelled consumer spending, and with public sector employment likely to contract – that leaves us relying primarily on the indigenous sector.  Yet, only 10 percent of jobs growth in our traded services sectors came from this sector.  Our indigenous sector has always been reliant on the downstream of FDI, property and retail, and the public sector (either direct or through public procurement).

The ESRI has taken into account none of these developments. They have relied on textbook models. But we don’t have a textbook economy (no country does, by the way). They claim, again without any substantiation, that wage cuts will give our export base a boost – even though we are a relatively low-wage economy.  They call for drastic adjustments (read: cuts) in public expenditure – even though this is the only sector capable of undertaking the economic investment to give our indigenous sector a boost.

In short, I don’t get it.

This doesn’t make the ESRI’s report a worthless exercise. We may still learn from it. And one of the main lessons is to be sceptical, very sceptical of models that project a return to normal.

For the sad reality is that, when examining the real economy sector by sector, there is no normal to return to.

The following two tabs change content below.

Latest posts by Michael Taft (see all)