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News : Irish Economy Last Updated: Aug 23, 2010 - 8:24:15 PM

Irish Economy: ESRI forecasts GDP growth of 2.75% in 2011 with GNP at 2.25%; Budget deficit to fall to 10.5% of GDP; Expected Exchequer shortfall is €19.9bn
By Michael Hennigan, Founder and Editor of Finfacts
Jul 14, 2010 - 7:10:19 AM

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Irish Economy: The ESRI (Economic and Social Research Institute), the publicly funded but independent economics think-tank, today in its latest Quarterly Economic Commentary, forecasts 2010 GDP (gross domestic product) growth at 0.25 per cent; GNP (gross national product  --  excluding profits of multinational sector) will contract 0.5 per cent and in 2011 GDP is expected to grow by 2.75 per cent, with GNP growing more slowly at 2.25 per cent. For 2011, the budget deficit will fall to 10.25 per cent of GDP.  The General Government Balance, based on EU criteria will be €16.5bn and the expected Exchequer shortfall is €19.9bn.

Employment in 2010 is forecast to be 72,000 lower than in 2009, on an annual average basis  - - a cumulative fall in employment of 266,000 since 2007. Corresponding to this fall,  the number unemployed will average 286,000 in 2010. This implies that the unemployment rate would average 13.25 per cent. For 2011, the rate will fall marginally to 13 per cent. The ESRI has revised upwards its figures for net outward migration, to 70,000 in 2010 and 50,000 in 2011.

The General Government Deficit will be 11.5 per cent of GDP in 2010. Including the cost of the bailout monies for Anglo Irish Bank and Irish Nationwide, this figure would be 19.75 per cent. In 2011, the deficit will fall to 10.5 per cent of GDP. This is based on the assumption that a full €3bn package of austerity measures is implemented in the 2011 budget. By the end of 2011 the gross government debt will be equivalent to 94 per cent of GDP, compared to 44 per cent in 2008. Interest payments (excluding toxic property loans agency NAMA), which will also increase due to the cost of the bank bailout, will be close to €6bn, or 3.5 per cent of GDP in 2011.

The forecast of tax revenue for 2010 is for an overall decline of 2 per cent. This is equivalent to a full-year tax take of €32.5bn. Given that the current annualised number is below €32bn, this estimate is based on a pick-up in revenue in the second half of this year as the economy begins to recover. Tax revenue is forecast at  €33.8bn in 2011 and spending at  €56.4bn. The expected Exchequer shortfall is €19.9bn (in the total calculation, there are a number of other minor items). The General Government Balance, based on EU criteria is €16.5bn.

In the year ending April 2010, total house completions fell by 50 per cent, while registrations fell by 64 per cent. Data for the first three months of this year show total commencements of 1,706. Based on these latest indicators, the institute is forecasting total house completions of 10,000 in 2010 and this implies a fall of 43.5 per cent in housing investment this year. For 2011, it expects the number of house completions to stabilise at 10,000 units. While the contraction in house building will no longer act as a drag on economic growth, this sector will not make any significant contribution to growth in 2011.

The pace of decline of house prices is showing no sign of slowing. In the first quarter of the year, house prices in Dublin registered their largest quarter-on-quarter decline, equivalent to 10.3 per cent, while house prices nationally fell by 4.8 per cent. At this time, house prices in Dublin are 42 per cent below their peak, and nationally they were 34 per cent below peak. The institute expects the cumulative fall in the price of new houses to be close to 50 per cent from the peak by the end of 2011.

Overall, world trade is projected to grow by 10.6 per cent in 2010 and 8.4 per cent in 2011. The ESRI says while this would obviously be a positive development from an Irish perspective, it should be noted that the acceleration of growth in trade is being driven by non-OECD countries e.g Asia, with whom Ireland has relatively little trade.

Having performed solidly in 2010, despite the slump in international trade, the ESRI expects the volume of merchandise exports to expand by 5.25% in 2010 and 4.25% in 2011. Non-tourism services exports will grow by 4.75 per cent in 2010 and 5 per cent in 2011 in volume terms.

For 2011 the ESRI has implemented a stylised budget based on the pre-announced targets included in the Budget 2010 document. The document includes cuts of €3bn, with €2bn targeted at the current side of the budget and a €1 billion reduction in capital expenditure. It assumed an increase in €1bn in taxation, split between increases in income tax (including PRSI) and some form of property taxation.

The institute estimates that such a budget package would reduce the General Government Deficit by between 1.5 and 2 percentage points of GDP. The impact on the wider economy is to reduce the growth rate by approximately one percentage point.

Some of the authors'  -- Prof. Alan Barrett, Dr. Ide Kearney, Jean Goggin and Thomas Conefrey - -  main findings of the analysis include the following:

  • For 2010, we expect GDP to grow by ¼ percent in volume terms; the corresponding figure for GNP is for a fall of ½ per cent.

  • For 2011, we expect GDP to grow by 2¾ per cent and GNP to grow by 2¼ per cent. While this return to growth is to be welcomed, it should be seen as a modest pace of growth.

  • One reason for describing the 2011 growth forecast as modest relates to our expectation that employment will not grow between 2010 and 2011. Instead, we expect the number employed to average close to 1.9 million in both 2010 and 2011.

  • In spite of the stability in the numbers employed, we expect unemployment to fall between 2010 and 2011, averaging 13¼ per cent in 2010 and 13 per cent in 2011. This expected fall in the rate of unemployment is related in part to expected migratory outflows – 70,000 in the year ending April 2010 and 50,000 in the year ending April 2011.

  • We expect the General Government Deficit to be 11½ per cent of GDP in 2010. Including the cost of the bailout monies for Anglo Irish Bank and INBS, this figure would be 19¾ per cent. For 2011, we expect the deficit to fall to 10 per cent of GDP. This is based on the assumption that a full €3bn package of austerity measures is implemented in the 2011 budget.

  • In the General Assessment, we discuss the government's plans for further fiscal austerity measures. Given the vulnerability of the Irish economy to the vagaries of market sentiment on our sovereign debt, we argue that it is imperative that the government adhere to its programme of fiscal consolidation.

  • Within the confines of this austerity programme, it is vital that whatever resources are available be used strategically to help tackle the growing problem of unemployment. We caution against the use of spending on infrastructure as a form of employment creation as the cost per job created can be large. Making longer-term investments in people through training and education programmes could be a more effective way of combating unemployment.

Diverting public spending from infrastructure to re-skilling and up-skilling people

The ESRI says while adherence to the programme of fiscal adjustment is crucial, it is clear that this remains a huge challenge. As the IMF recently noted, the possibility of “consolidation fatigue” exists, whereby the general willingness on the part of the public to accept the fiscal measures may diminish.  In this context, it says it would hope that the widespread political consensus that existed prior to Budget 2010 on the broad fiscal parameters will remain.

One of the many lessons from the 1980s is that the absence of political consensus made the task of dealing with the public finances substantially more difficult relative to the situation when such consensus was in place.

The institute says at a more micro-level, the discussion in this Commentary on the growing problem of unemployment, and in particular youth and long-term unemployment, prompts it to re-iterate points that have been made previously on the need to manage active labour market polices in the most efficient and effective ways possible. ESRI research in this area has identified two strands to the management of active labour market programmes.0 One strand is concerned with how people should be selected for participation on schemes, while the second strand is concerned with “what works” once people have been selected.

The ESRI says a number of principles have emerged from this work. With regard to selection, more highly educated people and people with longer periods of previous labour market experience are more likely to move back from unemployment to employment without intervention relative to other groups. In a context of limited resources, this implies that resources should be focused on those who are most likely to need interventions, such as younger and less-educated workers.

With regard to the second strand of “what works”, evidence accumulated during the 1990s suggests that the most effective programmes were those that were linked closely to demand in the labour market. In situations where individuals may not have had the levels of skills needed to participate in the most effective programmes, the lesson from this research was to provide progression routes through levels of training, and education where needed. The institute says while there can be a trend towards a weakening of benefit conditionality during a recession, enforcements of the requirements to participate in training and employment programmes can yield benefits in the long-run

The ESRI concludes: "It appears to us that public funds would be better used in re-skilling and up-skilling people who are unemployed as opposed to using spending on infrastructure as a form of employment creation. As argued by Morgenroth  (Irish Public Capital Spending in a Recession), public capital projects should be undertaken on the basis that they have a long-run return to the whole economy and not because they create short-term employment. This is because of a relatively high cost per job created via public investment.

It is clear that the labour market may well be the area where the legacy effects of the recession are highest in terms of the human cost. For this reason, enlightened policy in this area is critical."

However, this assumes that the likes of State agency, FÁS, can  provide useful courses. It has a record of mismanagement and is not renowned for the quality of its training.

Managing the Housing Market under EMU: Policy Issues

This paper (see link below) argues that within the Eurozone, the best instrument available to governments to manage regional housing markets is fiscal policy. For countries such as Ireland and Spain, this may entail a shift in focus away from the Stability and Growth Pact target of not running a deficit to the requirement to run large surpluses for a number of years where there is a housing boom. In addition, more active use of taxation would manage risks to the wider economy arising from housing market bubbles by specifically targeting the housing sector.

It seems obvious but how realistic is it in the context of the Irish governance system?

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