Beware of parties bearing gifts at election time

As we approach the end of another year, it is safe to say that it has been a very good one from an economic perspective, or at least in comparison to anything we have seen since 2007.

This week, the CSO released the official growth numbers for the third quarter of the year.

Prior to the publication of the quarterly national accounts for the three-month period to the end of September, we had a pretty comprehensive picture of economic activity based on individual data releases, but the national accounts data bring it all together and fill in the gaps that were still remaining.

The news in the third quarter was unambiguously good.

The economy has expanded strongly in 2015 and the momentum heading into 2016 is good.

In the first nine months of the year we now know that GDP was 7% ahead of the first nine months of 2014, and GNP was 5.6% higher.

These are strong growth numbers, but the most re-assuring aspect is that the components of growth show that the recovery has become more broadly based.

Consumer spending expanded by 3.5%; capital formation, investment, expanded by 26.4%, exports of goods and services expanded by 13.3%; and imports of goods and services expanded by 16.8%.

As these numbers show, it is probably no longer appropriate to talk about recovery, the economy has recovered.

For a government facing into a potentially difficult general election in the early weeks of 2016, the latest growth numbers represent more good news, but as I have warned on many occasions in recent months, there are still numerous vulnerabilities.

This message was hammered home, again, this week by the Central Bank, which published the latest Macro Financial Review.

The purpose of this review is to outline the outlook for the banking, insurance and non-bank financial firms.

Its view on the economy is, not surprisingly, upbeat notwithstanding the uncertain international environment.

The Chinese economy and its financial markets, and weak activity in the euro area are the key global risks highlighted.

However, it also warns that in an environment of low interest rates, investors are trying hard to find better returns across asset classes, and hence the consequent danger that they may engage in excessive risk-taking.

In the event of something going wrong or a shock to confidence, global financial stability could be very dangerous in an environment of excessive risk exposure.

As a small open economy that is so heavily exposed to global economic and financial market developments, Ireland would obviously have a significant vulnerability to negative external developments.

The Central Bank suggests that the still high levels of household and non-financial corporate debt render Ireland vulnerable to a negative external economic shock or higher interest rates.

There is nothing new or remotely profound about the latest analysis from the Central Bank, but this does not mean that the messages it contains are not worth repeating again and again.

Such repetition is particularly important at the moment as the parties of government fall over each other to make promises ahead of the election.

We can be pretty certain that as the parties of opposition publish their election manifestos over the coming weeks, the trend will be the same.

There is now a distinct danger that we will see a dangerous race to the bottom in terms of policy promises.

That is always dangerous.

All political parties should bear in mind that the key to prudent policy making is to behave in a counter-cyclical manner.

If an economy is growing strongly, policy should be prudent; and if an economy is growing weakly, policy should be accommodative.

We got further evidence this week that the economic cycle is strong and strengthening, so a prudent policy platform is exactly what the economy requires for the foreseeable future.

Voters should eschew those parties that make the most generous promises.

We all know where pro-cyclical economic policy took us in the past. Please, let us avoid the same mistakes again.