The Many-Legged Irish Recession: The Recession Diaries – October 28th

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Professor Terry McDonough made an interesting point at the recent TASC conference when he pointed out, using the US experience during the Great Depression, that a statistical end to economic decline doesn’t mean an end to the recession. Let’s chart this and see what it might mean for the Irish economy. But first, let’s nail down the nomenclature. While there are no international agreed definitions, the rule of thumb is that:

(a) You have a recession when an economy’s GDP is negative for two consecutive two quarters (six months). This is a very narrow definition and others would include unemployment, consumer spending, income, industrial production, etc. But let’s run with the narrow definition.

(b) A depression, however (and remember, this is a rule-of-thumb) is when an economy falls by either 10% or for three years or longer.

The Irish economy certainly is in a recession and, by the rule-of-thumb definition, we’re in a depression. The economy will fall by more than 10% from peak to trough. However, it is understandable that we don’t use the word ‘depression’ – as that word conjures up scenes of mass deprivation and extreme poverty in a time before a modern welfare state.

The issue of when the economy returns to quarterly growth will be more than just a statistical fact – it will be highly politicised. Optimistic forecasters predict the economy – on a quarter-by-quarter basis – will go into the black as early as the first quarter of next year. Others suggest it will occur later. Whoever is right, we will probably see GNP increase on quarter-by-quarter basis sometime next year.

No doubt the Government will make great play of this – pointing out that their ‘policies’ have worked, how they have stabilised the situation, the clouds dissipating and we can all look forward to blue skies. [I love that phrase – stabilised; at dinner a man and woman discuss the fact they have lost their jobs; but then the man pipes up: ‘Well, at least the situation has stabilised’. Yes, of course – they have no more jobs to lose].

However, this is where Terry’s point becomes relevant. Let’s examine the US depression experience.

US Depression

In 1933 the depression had troughed – after losing nearly half of its GDP in nominal terms. With the New Deal activist polices, the GDP started rising, continuing up to 1937 (in 1938 the economy took a dip following a premature budgetary contraction – what has been called a recession within a depression; Irish budget fundamentalists, take note).

The point here is that American economy started growing in 1934: GDP, consumer spending, private investment, exports – all boosted by a massive increase in state expenditure. But no one says that the US’s Depression ended in 1934 even though the economy was in growth. GDP, while growing, remained well below 1929 levels. It wouldn’t exceed those levels until the eve of war – so calamitous was the decline during the years of Hoover’s fiscal conservatism. That’s why we say the Great Depression lasted for years – even though for most of that period the economy was in growth.

The Irish economy, while not suffering the same level of collapse, has managed to fall more than any other EU-15 country – by a wide margin. GNP topped out at €161.2 billion in 2007 when it started to fall. The Government projects the GNP won’t return to this level until 2013, when GNP is projected to be at €163.7 billion. In other words, the Irish economy won’t pull out of the recession for another four years. But even this speed of return is debatable:

  • For 2009, the Government projected GNP to be €144 billion; the ESRI’s recent projection is €136.2 billion
  • For 2010, the Government projected GNP to be €140.3 billion; the ESRI’s recent projection is €133.1 billion

If the Government is to make it’s 2013 target, the economy will have to grow much faster after next year then the Government has projected – a daunting prospect when they got this year and next so wrong

However, if nominal GNP growth after next year is consistent with the Government’s April projections – then we will not return to 2007 levels until 2014 at the earliest; if growth is below those projections, then it won’t be until 2015.

Therefore, we will not emerge from the recession for another four to five years. No wonder that Davy Stockbrokers – predicting an early return to quarterly growth – qualified this by saying:

‘It may not feel like the economy is recovering as strongly as the bottom-line numbers.’

So, sometime next year, when the quarterly economic numbers come out positive, when both GDP and GNP growth don’t have a minus sign in front of the numbers – just remember, this represents a bounce from the trough; that’s all. No way will it constitute an ‘end to the recession’, no matter how much the Government Ministers and their allies among commentators may spin it.

The Irish recession has a lot of legs and a lot of ground to run on.

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