McCreevy’s declaration proves economists are realists, not pessimists

ECONOMICS is known as the dismal science. And economists, practising the dismal science, tend to be viewed as pessimists.

So this week I'd like to extend a note of thanks to Finance Minister McCreevy for proving we're actually realists not pessimists. Watching events unfold in the global market, we've long warned that economic conditions were deteriorating.

And we've long warned of the inevitable slowdown in Ireland. The minister finally corroborated this view last week when he unequivocally declared "the boom is over".

Looking abroad, and to the US last week, it's easy to see why we're right to be realists. US consumer confidence has fallen to a nine-year low.

This is a major concern because consumer spending accounts for two thirds of total US economic output. American unemployment is also rising, restricting US spending.

We're dependent on the US to drag the global economy out of its downturn; this data does little to assuage investor's fears.

So Minister McCreevy is absolutely correct to warn the boom is over. We in Ireland generally lag the US by six months in the economic cycle.

Consequently, the measure of Irish economic growth we will see this week 2nd quarter (Q2) Irish Gross Domestic Product (GDP) will look quite strong.

The US grew at only 0.3% in April, May and June 2002 when compared to the same months in 2001; yet we forecast 2% Q2 Irish GDP growth.

Conditions could be worse. And they will be when we see the data for July, August and September. Double-digit, annual GDP growth is a thing of the past. The boom has gone bust.

Bad news can be expected here in the form of inflation data on Friday. Prices in September were 4.5% higher than they were a year ago, and we expect that trend continued in October.

With the weather turning colder, homes will have bought heating oil in large quantities, which is overpriced due to the threat of another Gulf war.

With increased costs for education, health and transport, our inflation rate will stay above twice the eurozone average.

And with excise duties on consumer goods expected to rise in December's budget, our inflation rate can be expected only to rise in early 2003.

This will make especially difficult upcoming wage negotiations.

However, the minister may be able to use unemployment data (scheduled for release tomorrow) to his advantage.

We have seen multinationals scale back their operations here over the past months. If jobs become harder to find, unions may become more open to suggestions of wage freezes, and settle instead for backdated pay awards agreed under benchmarking.

On a euro note, the European Central Bank also meets on Thursday to decide on eurozone interest rates. Globally, interest rates will dominate the market's attention this week, as the Central Banks of the US, the UK and Europe all meet to set rates.

While I'm certain that rate cuts are coming, I don't think we'll have cheaper mortgage repayments by Friday.

The US has made 11 rate cuts over the past year and as long as the Dow is above 8,000, it will be reluctant to interfere further in the market.

And last week, we were told that eurozone inflation rose back above target in October, to 2.2%, which prevents the ECB from reducing interest rates on Thursday.

So the boom is over. The US economy is finally balanced, but should avoid falling back into recession.

Further interest rate cuts can be expected to stimulate growth but not this week.

Irish economic growth will suffer in sympathy with the US and the UK in 2003.

But it looks like we've realised the seriousness of current conditions just in time. If we reduce spending dramatically, the Irish economy should eventually come through this economic downturn relatively unscathed. As long as the US can lead the way.

Niall Dunne,

Ulster Bank Economist