Wednesday 26 April 2017

The economists' outlook for 2012: will we dodge the double dip recession this year

Irish economists cautiously but firmly reject the Government's economic hopes for 2012, writes Roisin Burke

Dermot O'Leary

Chief Economist at Goodbody Stockbrokers

THE prospect of a double dip recession is looming, thinks O'Leary. Although Ireland might not be 'officially' in recession as defined by GDP, that's the likely reality on the ground. "Looking at the fall in output and the fact that we are nowhere close to reaching previous peak levels, we're not going to reach them any time in the near future," he stated.

Exports, the one thing driving the economy at present, will more than halve in 2012, he predicts. "We expect export growth to slow to 2 per cent from 4.5 per cent last year.

"The recovery that was happening in the first half of 2011 wasn't a high-quality one, it was on the back of exports. You need to see domestic demand stabilise really before you can declare that we're out of recession and a reduction in employment as well."

Property prices will keep falling, O'Leary forecasts. "Our assumption is that prices will fall 60 per cent in total so another 12 per cent of that in 2012."

He expects ECB interest rates to be cut twice early in 2012. "We have them coming down to 0.5 per cent in Q1 of this year. Two 0.25 per cent drops in the first quarter of this year."

"We think the main policy push for 2012 should be to get more help for the banking system. Given the enormous cost to the taxpayer already, the focus should be on that."

Austin Hughes

Chief Economist, KBC Bank

Hughes thinks that unemployment levels will level off in 2012. "I imagine we've probably seen the peak," he said. "I don't think unemployment will be hugely different to the department of finance's current forecast of an average of 13.9 per cent."

"We're seeing some growth in employment in some of the export sectors and that is giving us some jobs and is restraining the rise of unemployment, as is the rate of emigration.

"But the unemployment level reflects a very drastic situation. This will require very significant policy action over the next while."

He views a fully fledged return to the markets by Ireland in 2012 as unlikely. "There are two elements: general market appetite for debt in Europe, and also for Irish government debt. In both those circumstances Ireland would fare poorly. It would require a radically different global economic background before Ireland could begin to think about market funding again."

Hughes expects Brent Oil price to average around $115. "It's likely to go down before it begins to turn around and go up later in the year," he said.

Unlike several other economists who expect a bigger slash in the ECB rate this year, Hughes expects one 0.25 per cent cut, so that the rate will be at 0.75 per cent at the end of 2012.

Dan McLaughlin

Chief Economist at BoI

McLaughlin expects unemployment to average at 14.4 per cent, "perhaps marginally lower in 2012 due to the labour force falling through emigration".

Like most of the economists we spoke to, he puts GDP growth in 2012 at circa 1 per cent.

EU politicians will get their house in order on tackling the fiscal crisis in 2012, he feels.

"People are realising that there can't be these seemingly endless summits, and what has to be done to save the euro will be done. The alternative is too serious: the collapse of the monetary system, each country would have to raise money on its own individual currency, a collapse in European trade for a while and stagnancy for years. For these reasons I think it will be avoided, it will only happen in the most dire of circumstances.

"It's more likely that someone could leave the euro, perhaps Greece. But I don't think that's likely -- I think Europe will try and muddle on."

Ireland returning to the markets depends on forces outside our control. "Whether we re-enter the market or not will depend on general investor sentiment towards the Eurozone. If Spanish and Italian debt yields start to fall in 2012 then ours will fall as well. Then, at some point, the authorities could issue short-term debt at 5 per cent, perhaps in the form of treasury bills."

John Beggs

Chief Economist at AIB

Beggs thinks last year's GDP growth will show just 0.5 per cent when figures are released. "We would put it at 1 per cent for this year, with a margin for error of 0.5 per cent." There's plenty of downside risk on that 1 per cent, he added.

"Exports are at risk but they could outperform and surprise. However, we're forecasting a volume growth of just 2.7 per cent for 2012, down from an estimated 4 per cent in 2011 -- a significant slowdown.

"Property prices probably have more to fall -- we have pencilled in another 10 per cent drop during 2012.

"With exports making up 100 per cent of our GDP, an argument could be made for Ireland exiting the euro, but there are many dangers attached to that scenario.

"You could argue that if we had a cheaper currency we could do better, but what would the multinational sector think if Ireland floated free, further disengaged from Europe? It could have a big impact on FDI. There are huge risks involved in currency adjustment."

The euro could rally in 2012. "The currency markets have actually been remarkably stable considering that people are talking about the demise of the euro. If you solve Europe and have better growth prospects, you'll get a weaker dollar and stronger sterling, to the tune of 5-7 per cent.

"Oil has remained artificially high because of volatility of investing European bonds, and it is likely to go up further in 2012, towards a $120 rate.

"There's going to be little or no growth in Eurozone," Beggs predicts, "around 0-0.5 per cent."

Simon Barry

Chief Economist at Ulster Bank

"We had factored in stronger export and GDP growth in 2012, but given the international context that's looking more and more unlikely," said Barry.

"There's been a marked deterioration in the eurozone, which is 40 per cent of our export market. That economy is now going back into recession and that seriously affects our growth prospects in 2012.

"For 2012 we had been looking for growth acceleration of 1.5 per cent of GDP -- but I think it's now more likely at around 1 per cent.

"However, the situation in the US has actually been very positive, where over 15 per cent of all our exports go. The market there is holding up and does offer some kind of support against the disappointing news coming from Europe."

Export growth will be at 3-4 per cent in 2012, down from 4.5 per cent for 2011, Barry forecasts. "This faltering growth affects economic momentum," he said.

Talk of the demise of the euro is greatly exaggerated, Barry believes. "If you look at the longer-term average of the euro it's about 72p. And it's well above that right now at 82.5p. The euro is still a pretty strong currency and the idea that it has somehow collapsed doesn't align with the evidence."

Barry expects the ECB to cut rates twice this year, with two quarter per cent cuts, which will both occur before mid-year.

Alan McQuaid

Chief Economist at Bloxham Stockbrokers

Though McQuaid doesn't envisage a euro breakup in 2012, if it were to happen, then a two-tier scenario could occur -- with Ireland in the outer tier.

"My gut feeling is it will survive in one form or other, and we'll be in it. If there's a two-tier system we probably won't be in tier one. Programme countries like Ireland, Spain and Portugal would be in the second tier."

He is cautious as to the stock markets' prospects. "Some firms are performing well, and past concerns have been factored in -- so we'll maybe see a 5 or 10 per cent increase."

Any improvement in unemployment levels will be a slow process. "The average will be slightly lower than last year, at 14 per cent. It could peak at 14.7 per cent during 2012.

"I think oil prices will rise in the first half of the year. Disruption of supply in Iran or other supply concerns could be a problem, push prices up, probably up to $120 or maybe even $150."

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