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Economic Forecasting

Dáil Éireann Debate, Wednesday - 1 February 2012

Wednesday, 1 February 2012

Ceisteanna (3, 4)

Richard Boyd Barrett

Ceist:

3Deputy Richard Boyd Barrett asked the Minister for Finance if he will respond to the recent downgrading of growth projections by the IMF and others, for Ireland and the Eurozone economies; and if he will make a statement on the matter. [5893/12]

Amharc ar fhreagra

Freagraí ó Béal (12 píosaí cainte)

There is a good deal of uncertainty at the moment as evidenced by the wide range of GDP projections for this year not only for Ireland, but also for the euro area. The recent downgrading of forecasts by the IMF, including those for Ireland, reflects heightened concern about growth prospects in the euro area and the wider global outlook. As a small, open economy whose recovery is being driven by exports, Ireland will be affected by weaker euro area growth. However, the substantial competitiveness improvements we have seen in recent years will provide some support. It is important to note that a weakening of activity in our main trading partners is already factored into the Department of Finance forecasts for economic growth which underpin the 2012 budget.

The budget forecast is for real GDP growth of 1.3% in 2012. This forecast was prepared on the basis of economic information, domestic and international, available up to the end of November 2011 and it was mid-range at that time. Given the highly uncertain environment, the budget documentation also pointed to several risks to this forecast, some to the downside and some to the upside. These risks remain valid.

While the weak external outlook is of concern, there have also been some positive developments since budget time, not least of which is the trajectory of ECB interest rates which appears more favourable than was the case in November. In addition, recent exchange rate movements will provide some benefit for the exporting sector. Some of the economic data, domestically and internationally, have not been as poor as some were assuming. For example, high frequency survey data shows that economic activity in the euro area increased in January, the first such increase in five months, while at home consumer sentiment picked up, as did new manufacturing export orders. Moreover, concerted action has been taken at European level to address the weaknesses that have become evident in the design of monetary union. Measures include the so-called six-pack of legislative reforms as well as the agreement on a fiscal compact to ensure fiscal discipline in participating member states. I am confident that this strong policy response will contribute to a restoration of confidence in the euro area as we go through 2012.

During the coming months my Department will continue to monitor the economic situation in terms of positive and negative developments and, as is the norm, it will publish an updated macro-economic assessment in the spring in the context of the stability programme update. It is anticipated that the update will be published in April in line with the requirements under the European semester agreed by member states last year.

The Minister's response is made up of "on the one hand this and on the other hand that" and the view that we should wait and see. I am calling on the Minister to respond to the alarming but accurate concerns expressed by a major international financial body, the IMF. It is a body that I do not have much time for and whose activities over the years have contributed substantially to the mess we are in now. However, when the head of the IMF states that we may be headed towards a 1930s-style depression, one must take it reasonably seriously. I do not understand why there seems to be no acknowledgment that the rather dramatic downgrading of growth forecasts that has occurred in recent months is precisely as a result of austerity and the cuts in expenditure. It is a consequence of these cuts working their way through in terms of a serious drop in consumer demand and, similarly, a collapse in investment in this country and a drop in investment throughout in Europe. These two things are absolutely connected.

Has the Deputy a question?

Will the Minister explain it to me, please, because the economics of his outlook appear to defy gravity? If we continue to cut as required by the fiscal compact and the austerity programme will it not inevitably produce the same result that we have seen in recent months, that is, growth will continue to contract and we will enter a downward spiral? How can anything else happen if the Government continues to cut expenditure, if there is no investment and if the banks continue to hoard money in the ECB?

That is an interesting intervention but growth in Ireland has been marked down because of failing growth in our customer countries abroad. It is not because of anything in the domestic economy. In fact, the economy in Ireland is positioned to grow and if we got fair weather abroad certainly it would grow strongly. The economy is growing. It grew last year by at least 1%. It continues to grow in the first quarter of this year and as things settle down in Europe I expect there will be stronger growth patterns at the end of the year.

The critics make the connection that the budget targets will be off course because of the down-marking of growth rates. I do not believe this is the case for several reasons. First, our exports are going rather well. Second, the thing had improved at the end of the year beyond what we factored into the budget. The Deputy will remember the budget was worked on a deficit of 10.1% but it will come in for 2011 somewhere between 9.8% or 9.9%. If one thinks of it as a journey, we are a couple of miles up the road towards our destination. Therefore, the situation has improved and there is no reason at present to think we will not reach our fiscal target of a deficit of 8.6% at year end.

I am not interested in the fiscal target of 8.6%, I am interested in growth and jobs and that is what my question was about. The Minister should not deliberately misinterpret my question by referring to the Irish economy. I referred in particular to Christine Lagarde's comments about the entire eurozone. Ireland's growth projection is down, as is the case for Europe and Germany. Who will buy our exports if consumer demand is depressed right across the European economy, even in the large supposedly wealthy states where demand is also contracting? If people do not have an income because of the austerity already imposed and the further austerity demanded by the fiscal compact and if investment is collapsing because large businesses do not believe it is safe to invest in a depressed economic environment, from where will the jobs and growth come?

Some 20% of our exports go to the United States, another 20% to the United Kingdom, 40% to Europe in general and the other member state and 20% to other markets. Many of our exports are inelastic to demand, for example medical and pharmaceutical products. If one is sick and needs a stent for one's heart, one will buy and pay for the stent. Food is in the same category, particularly food exports into south east Asia and emerging markets. The new emerging families in China and India want to give their children protein and dairy products and they see Ireland as the premier world brand. Almost any food that is produced in Ireland can be sold. Therefore, it is not true to say there is a direct relationship between the downturn in world demand and the ability of Ireland to export. We proved that all last year, with exports increasing by 4.5% having already increased the previous year by 6%. We know from the order books that exports will have risen again this year. Therefore, the Deputy's analysis is not fully correct.

Michael McGrath

Ceist:

4Deputy Michael McGrath asked the Minister for Finance if he has reviewed his growth projection for 2012 from the Budget day forecast of 1.3% in view of a significant number of recent downgrades; his views on the implications for this year’s general Government deficit target of a growth rate of 0.5%; and if he will make a statement on the matter. [5821/12]

Amharc ar fhreagra

The budget forecast is for real GDP growth of 1.3% in 2012. This forecast was a downward revision from that published in the medium term fiscal statement published at the beginning of November and was necessitated by the deterioration in the external environment that became evident during November. The budget forecast incorporated all of the information – both domestic and international – that was available up to end-November 2011, and was mid-range at that time. Given the highly uncertain environment, the budget documentation also outlined a number of risks to this forecast, some to the downside and some to the upside.

Clearly, the uncertainty which characterised the second half of last year remains and this is reflected in the wide range of GDP projections for this year, not just for Ireland, but also for the euro area. However, there also have been positive developments since budget time, not least of which is the trajectory for ECB interest rates which appears more favourable than when my Department's forecasts were prepared. In addition, recent exchange rate movements will provide some benefit to the exporting sector. I also note that some of the economic data – domestically and internationally – has not been as poor as some have assumed.

With regard to the fiscal targets, it is important to note that the Exchequer budgetary position at end-2011 was better than anticipated at budget time, thereby providing a small safety margin in terms of achieving the 2012 deficit target. On a purely model-based approach, a reduction in real GDP by about 1% would, all other things being equal, see the general Government deficit worsen by about a 0.5% point of GDP. However, it is worth noting that while the troika has revised down its GDP growth forecast for this year to 0.5%, it still sees the overall deficit target of 8.6% as achievable. In this respect, I would also highlight that it is the nominal growth rate of GDP - that is volume and price changes - which drives tax revenue and affects the various fiscal ratios, as opposed to just real or volume changes.

To sum up, the level of uncertainty surrounding macroeconomic forecasts for Ireland and internationally is very high. However, given that the forecasts were produced in early December and that the fiscal position ended the year marginally better than had been anticipated on budget day, there is no reason to believe our fiscal targets will not be met. As always, my Department will continue to monitor the economic and budgetary situation over the coming months, in particular the monthly Exchequer situation, and this analysis will inform official thinking on these matters. As is the norm, my Department will publish a revised set of economic and budgetary forecasts in the April stability programme update.

We can all agree that growth is central to bringing us out of our economic difficulties and that forecasting is an imprecise science. However, five different bodies have downgraded Irish growth predictions since the beginning of this year. These range from Davy's saying growth will be 0.4%, Goodbody's 0.7%, ESRI 0.9%, the troika 0.5% and NCB 0.3%. The Department's current forecast is 1.3%. The issue is not the achievement of the fiscal target but, to take up the point raised by Deputy Boyd Barrett, the risk that if the fiscal target looks like it is slipping because of the growth projection, we will be forced to introduce additional fiscal measures during the year. That is a risk we all want to avoid.

I welcome the Minister's comments with regard to our starting position in 2012, which is somewhat better than anticipated. This gives some welcome headroom on the fiscal side for 2012. However, the downgrade of the Irish growth forecast by all of the bodies mentioned is a major concern. The medium forecast is now only 0.5%. The Minister's medium term fiscal statement points out that if growth is 1% less than anticipated by Government - then 1.6% - the outturn would be a deficit of 9.1%. Based on the data available to him at this point, is the Minister satisfied we will be in a position to achieve the overall target without additional measures beyond what was announced in the budget in December?

The simple answer is "Yes". I did not say I anticipated a deficit of 9.1%. What I said was that if one had a model where one put in a lower growth, one would come out with a projection and one could do the sums that way. However, there are many other variables, which I pointed out. Both the troika and the Department of Finance believe that 8.6% is still an achievable target.

I agree that matters are very uncertain. Looking, for example, at the forecasts made by the Department during 2011, one can see that in April we forecasted growth of 2.5%, which was mid-way in the estimates of growth at the time. In early autumn, we pulled back that forecast to 1.5% or 1.6% and by budget day we pulled it back to 1.3%. These were all prudent positions given the data available at the time. I foresee a further pull-back when the forecasts are revisited in April. However, there are margins and buffers built into the budgetary position which, despite the pull-back in growth figures, will allow us to reach the deficit target of 8.6%.

While we have tended to focus on the picture in 2012 because we can look at that with the highest degree of certainty, the forecasts beyond that, for 2013 of 2.4% and 2014 of 3% and our medium-term outlook are very much dependent on those rates being achieved. The Minister's medium term fiscal statement lays out clearly that if there is 1% slippage in that, our debt-to-GDP will peak at 123% and if there is 2% slippage, our debt-to-GDP will reach 133%. At what point will we begin to look at the potential for change to the growth rates beyond this year? Will that be reviewed in April with the stability programme update?

We will keep everything in mind, but we can control only that which is under our control. Many events are international and are outside our control. One must remember all the time that the budget is not built on real growth figures, but on growth plus inflation. The recent figures from the Central Statistics Office make a projection of an increase of 1.8% in the Consumer Price Index for next year. Therefore, if one adds 1.8% onto half of the budgetary growth figure of 1.3% we get 2.5%, and the budget is built on 2.5% growth in nominal terms.

I take the point made by Deputy Boyd Barrett. Obviously, there will be a reduction in economic activity and that runs counter to growth and job creation. However, in purely fiscal terms, even with half the growth rate on which the budget is built, taken with the latest figures from the CSO on the Consumer Price Index, we still have a nominal growth rate without taking into account any of the other factors I mentioned.

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