Irish Mail on Sunday, May 29, 2011
The forecasts for economic growth this year range from zero to 2%.Â The most pessimistic prediction was that published during the week by the OECD. The most optimistic was issued only a few weeks ago by the ESRI.Â There is a wide difference between the two but thatâ€™s easily explained. The OECD expects that consumer spending will continue to fall this year and at an even faster rate than in 2010. The ESRI, on the other hand, expects personal consumption to stabilise and remain at or about last yearâ€™s level. The ESRI is also more optimistic about export growth. It expects exports to be 7.5% up on last year while the OECD puts the growth at 5.3%.
Economics was never a very precise science and itâ€™s even less so after the unprecedented traumatic events of recent years. But while there are different views on the outlook for the current year, both the OECD and the ESRI are agreed that the economy is on a growth path and is going to turn in a reasonable performance next year.
The ESRI is still the most optimistic of the two, forecasting growth of 3% but the OECD is not too far behind with a forecast of 2.3%. The Central Bank recently put the figure at 2%, no different from the rate predicted by the IMF last December when it finalised the bail-out agreement.
The figures are different but all are agreed that the economy is no longer contracting and will achieve a growth rate next year on a par with international trends. The OECD is predicting an average growth of 2.8% among its 34 member countries with the US economy growing by 3% and the Eurozone by 2%.
If we achieve the 3% growth predicted by the ESRI, weâ€™ll be doing better than average and even at the 2% forecast by the others, weâ€™ll at least be level pegging with our European partners.
So we have some reason to be optimistic and the clear message from these figures is that the more optimistic we are, the better we are going to do. Export growth is leading the recovery, fuelled by the upturn in world demand and our improved competitiveness. But domestic demand has a part to play. After the sharp contraction in both private and public spending in recent years any improvement in home demand will give the economy an extra impetus. With little or no scope for higher public spending, that increased demand has to come from the private sector.
Consumers have been spending less partly because they have less money but mainly because they feel less secure about the future and are saving more. We have suffered a number of traumatic economic knocks in recent years and consumers are understandably cautious about spending. There hasnâ€™t even been the prospect of rising prices to encourage people to buy now rather than later. But that has changed to some extent. Consumer prices rose by 2.2% over the past three months and while much of that was due to fuel and mortgage interest, the price of clothes and footwear, which had fallen sharply last year, jumped by almost 11% recovering most of the previous reductions.
We may be insecure but surprisingly 73% of those surveyed last year for another OECD report said that they were satisfied with their life. That was far higher than the OECD average of 59%. Germany was down at 56%.
That satisfaction rating suggests that it wouldnâ€™t take too much to bounce us back into a positive frame of mind. So an upturn in consumer confidence may come sooner rather than later. National morale seems to have received a boost from the recent head of state visits. Thatâ€™s bound to help, as would a little less spreading of doom and gloom. Itâ€™s time to stop talking or thinking about default.
The national debt is manageable. There is, of course, a strong case for passing some of the burden onto the foreign financiers and banks that gambled just as recklessly on our property bubble as the Irish banks. And that should be pursued just as itâ€™s essential to ensure that our own share of the burden is more equitable spread than it has been up to now.
But letâ€™s not forget the facts. Even with the debts incurred in bailing out the banks, and projected budget deficits, the national debt will peak at less than 120% of national income in 2014. We were there before in 1987 with an underlying economy that had far less growth potential than it currently has.
At last count, our debt to GDP ratio was 96.2% — not too much higher than the Eurozone average of 85%. Greece is up at 143%, Italy at 119% and Belgium, which has had a caretaker government for over a year, is slightly ahead of us at 96.8%. Even Germany, for all its wealth, has a debt to GDP ratio of 83.2%.
So letâ€™s look on the bright side. The glass is half full and filling, rather than half full and emptying.