The publicity accompanying the latest ESRI Quarterly Commentary was a triumph of spin over substance. Despite claims of ‘growth’ and ‘austerity is working’ the ESRI describes a domestic economy mired in recession and growing debt until at least 2014. Let’s go through some numbers before we try to explain why the spin gets hyped while the substance gets ignored.
The ESRI projects that Ireland’s unprecedented domestic-demand recession will continue into 2013. Domestic-demand measures consumer spending, investment and government spending on public services. I say unprecedented because no EU country has experienced six years of falling domestic demand (though, eventually, Greece will probably achieve this).
Comparisons with the Government estimates in the last budget show how bad it could be.
As seen, the ESRI projections show substantial slippage from the Government’s projections with all domestic indicators in negative, even in 2013. That government spending on public services (government consumption) will fall is a given, since it is an active policy.
- The Government is hoping that consumer spending will flat-line in 2013; the ESRI claims it will still be falling.
- The Government is hoping that investment will start rising in 2013; the ESRI projects it will still be in decline.
In all likelihood, the Government will have to revise their forecasts downwards in the Stability Programme Update in the spring – with consequences for public finances. With the possibility of the domestic demand recession continuing into 2014, it is difficult to describe this scenario as one of ‘growth’ or ‘turning the corner’. Based on the ESRI projection, the domestic-demand recession will probably bottom-out in the last quarter of 2013 or the first quarter of 2014. But bottoming-out is not the same as economic recovery – it just means the good ship Ireland has finally sunk to the bottom; it says nothing about getting back to the surface.
Even more worrying are the ESRI projections for employment and wages.
The ESRI projects employment to fall in both 2012 and 2013. If their projections hold, there will be 60,000 fewer people at work than the Government is estimating. On this basis, the ‘jobs-recession’ will continue through this year and next year.
In addition to falling employment, the ESRI is projecting that average real wages per employee (after inflation) will continue falling.
The Government is hoping that real wages will fall by less than half-a-percent over the next years; the ESRI is projecting a fall of 2.7 percent. Real wage declines will further erode workers’ living standards. With households deleveraging and the prospect of more taxation and charges, the impact on domestic demand could be substantial as more people reduce their consumer spending and businesses postpone investment plans.
Export growth will provide only statistical comfort as long as that growth is rooted in multi-national sector. Though new investment (BSkyB, PayPal, etc.) will provide a welcomed fillip, in general most multi-nationals are rooted in capital-intensive sectors which import most of the goods and services they use in producing their products (meaning little downstream benefit). Even the Department of Finance admits that export growth will not generate much employment in the medium-term or be ‘tax-rich’.
Yet, the ESRI is bullish on the Government’s budgetary targets. This is curious given that they project GDP and GNP to be lower than Government estimates by 2013 (in particular GNP, which they project will be €3.3 billion lower). If job creation rates are weak, if real wages are falling, if consumer spending remains in decline putting even more pressure on businesses (Insolvency.ie claims there were a greater number of corporate insolvencies in January 2012 compared to same period last year) – then it is difficult to see budgetary targets holding. Of course, the Government can hold back on spending to make up the short-fall (capital projects, current programmes) but this only fuels further deflation down the line.
So what have we got? All the main domestic indicators are in decline for the next two years, job creation rates are falling well short of Government targets, real wages are falling – how can this be called ‘working’?
One part can be attributed to an ‘escalation of commitment’. Once you call for a particular strategy to be pursued (in the ESRI’s case – an austerity strategy), it is difficult to extricate yourself from this call when the results are damaging and counter-productive. Therefore, you end up calling for more, like Boxer in Animal Farm who sees the solution to everything in ‘doing more, harder’. To question the strategy is a form of self-criticism, something that none of us like to engage in.
Another part of the problem is the conflation of two issues: ‘is austerity working’and ‘there is no alternative to austerity‘. Once you state the latter, the question of whether austerity is working becomes almost irrelevant. Imagine a situation where you affirm that there is no alternative to austerity but also conclude that austerity is a failure. This no longer constitutes analysis but rather fatalism: we must do this; it’s bad, it won’t work; but we must do this.
In one sense, I appreciate the ESRI’s approach. After all, there is only so much existential economic grief that people can put up with. To be told the only thing that we can do will fail – that would be the ultimate proverbial ‘straw’.
But that is a problem only for those who believe there is no alternative. We don’t have to travel that desultory road. By walking a different path we are free to look at the ESRI projections with fresh eyes. And what do we see?
A domestic economy mired in recession with no end in sight until at least 2014. Does that ‘work’ for you?