News Brendan Keenan

Tuesday 25 October 2016

Brendan Keenan: Sure, houses are selling but that doesn't mean we're out of woods

Published 11/10/2012 | 05:00

A week is a long time in politics, but in a financial recession like this, a year is just a phase. And therein lies a problem.

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Many weeks have gone by since the general election, and there are not that many left until its second anniversary. Not long after that, political thoughts turn to the next election.

The economic cycle is following a different path. When the bailout programme was drawn up in 2010, it seemed a long way to 2013, and not unreasonable to think that it might mark the year of recovery.

Anything else would have been politically unreasonable. A programme which saw low growth and deficits out to 2015 would hardly have been acceptable. But the anticipated year of recovery is almost upon us, and it is not looking terribly good.

It might still be called a recovery, if last week's forecasts from the Central Bank -- which are much in line with the general consensus -- turn out to be correct. Indeed "recovery" can be said to have begun last year, with output (GDP) growing since then.

But feeble growth is not what we want. Recovery implies something much stronger. Instead, growth this year is forecast as weaker than 2011, at just half a per cent, and the total increase in output over the three years is put at just over 3.5pc. It now looks as if 2014 is the best candidate for something more robust.

Perhaps that was always a more likely date, but the 2010 forecasts could not have taken account of the severity of the euro crisis. There is a telling graph in the Central Bank report showing business activity in the eurozone and in the wider world. They track each other extremely closely until two years ago, when they diverge dramatically.

There is the weak US recovery we have all heard about, and which now seems to be slackening. Unlike the sharper 2009 recovery, the euro area does not take part in that upturn. The gap in GDP growth between the two is more than two percentage points, representing about €200bn in lost income.

Had that not happened, things would have looked markedly different in Ireland too, despite its domestic crisis. Austerity has slowed the economy, of course, but the original forecast seems to have been right about the impact. The fact that the forecasts are veering off course reflects the weaker international conditions

This is bad for the economy, but it is even worse for the politics. Not just professional politics either, as the government parties worry about the effects of another cheerless year or two, as the election gets ever closer.

There is also the wider politics of maintaining even grudging support for the process. If personal experience is anything to go by, people's most pressing desire is not that it should all be over, but that there should be some end in sight.

"When are things going to get better?" and "No more bad news please," are the two most common refrains.


One cannot help feeling, had 2012 been a year of noticeable improvement, with a hope of more in 2013, that the general mood would be even better than the straightforward growth in GDP would warrant. There would then be a chance that this would translate into more investment and spending, reinforcing the recovery.

On that basis, however tentatively, I would say there is a change of tone in the housing market. Estate agent signs seem to have a shorter life than they did, and conversations have begun to talk about bargains rather than just price falls.

Dublin city centre seems a bit livelier, but that is an even more tentative observation and is not backed up by data -- although the trends may be a little more mixed.

We should be under no illusions, though. Whatever the exact contents of the next Budget, it is going to deliver another fall in disposable income next year. The issue is not growth, but minimising the harm which may be done by another year of minimal progress.

The only response for the Government in this situation may be to recognise that the programme is off course and to signal a clear change of direction.

Direction, not basic policy. Even if it was possible to find the funds for a stimulus programme, for instance, it would have little effect against the background of a weakening global economy. Better to keep such powder dry until it can be used to intensify the effects of a global turnaround at home.

Ireland is in an inescapable debt trap until such a turnaround occurs. Policy is to cut another 5pc of GDP in the next couple of Budgets -- directly reducing the deficit by about 2.5pc of GDP, and having growth provide a further 3pc reduction.

It might start happening in 2014, or it might not. Even if it does, the pressures on the Government over the next 18 months, until signs of improvement emerge, could be intense. It might even fracture over the 2014 Budget.

The best change of direction would be one away from targeting deficits. They were always a bad target but in circumstances like these, they can be positively harmful. The key objectives are the size of the public sector, which identifies the size of the necessary tax burden, and the mix of taxes which should be used to raise that sum.

One cannot be precise about the exact amounts involved, although the IMF thinks we are almost there, when allowance is made for the effects of recession. The corrections planned for the next three years certainly look like a good working total.

This the argument for applying them quicker than three years. As the Central Bank put it: "Without increasing the overall scale of fiscal correction, there is a case for getting the adjustment over more quickly."

I would add that there is a case for saying that this will be the end of the austerity process and Ireland reserves its position on what to do about debt interest costs after that.

I know the Government will not go that far. But a fresh, expanded, detailed programme for the next two Budgets, with the promise of neutral Budgets thereafter, may be the only way to preserve any slight improvement in confidence in the face of disappointments on growth.

Purely as an aside. It may also be the only chance for the Government to match what is now the probable economic cycle to its electoral one.

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