Not easy for green shoots to peek through

ESRI, the government think-tank, offered some cheer this week when it said the economy could hit an impressive spurt of growth after 2011 growing by 5% on average up to and including 2015.

Before getting too carried away, however, that projection is strongly underpinned by the view that the global recession will end in 2010, paving the way for the much vaunted term, the green shoots of recovery.

Those with long memories know that green shoots have tantalised in the economic sense in the past, as over anxious forecasters jump too far ahead of what economies are actually delivering.

That is true particularly in the case of the US economy regarded as the engine of growth for the rest of the world.

For the projected upturn to happen the ESRI insists the Government will have to deliver fully on this year’s and next year’s severe Budget cuts equivalent to about 7% of economic output, a hefty sum, and indeed a big ask in the climate of anger and disillusion with the banks and the Government over their handling of the crisis to date.

Forecasts in the present climate need to be heavily qualified in that sense.

In that context economist Dan O’Brien, of the Economist Intelligence Unit, believes the Government strategy is wrong and it will depress the economy further.

The experience of other economies is that cutting spending is the more efficient way.

Former finance minister Ray MacSharry got it right in 1987 when he slashed spending and left taxes alone. That approach freed up the Government to target spending more efficiently and it allowed consumers to have more money in their pockets that in turn helped stimulate economic growth.

In opting for higher taxes there is no guarantee the economy will return the kind of tax take the State hopes to gather in over the next two years. That money may also be squandered in various ways.

The other real problem is that in taking money from consumers it will add further to the already dramatic decline in the level of consumer demand.

In its rosier analysis the ESRI does allow that the global economy will not get back to growth until 2012.

That would damage Irish economic output, resulting in a net loss of output of 15% per annum to the economy over several years.

The report, Recover Scenarios for Ireland, insists that a number of things have to be delivered by the Government if some sparkle is to be returned to the economy now projected to fall by over 9% in 2009.

Already Mr O’Brien says we are technically in a depression at this stage given the economy will decline by over 11% from its peak during the present downturn.

The ESRI was the first to use the dreaded word recession back in July of last year about the economy, and the situation has deteriorated remarkably since that time.

For that reason its new analysis is adamant there can be no going back on the budget plans of 2009/2010.

While the Government has pandered to Europe in the two budgets they must deliver if our creditability is to be kept in tact.

Even at that the reality is that the State will have to pay a premium of up to 3% on the money it borrows to keep the country afloat because of international views that lending to the Irish government is high risk.

Overall, the recovery analysis looks like a bit of a fairy tale at this juncture given the dilemmas still haunting us, with NAMA, the proposed toxic bank, a classic case in point.

Before a Dáil committee on Thursday, Michael Somers, head of the National Treasury Management Agency and one of the most respected figures in the public sector, said NAMA could cause massive problems in the period ahead.

If that is so and the banking issue is not resolved the flow of credit, a key stipulation of the ESRI’s programme for recovery, could be seriously undermined.

Indeed well over half of its members who applied for credit were refused according to its recent report.

That does not sound like doors open to one and all and that fact was confirmed by Musgraves on Thursday who said the banks were being unnecessarily harsh in their dealings with many of their franchisees.

That difficulty is twofold of course. It reflects that companies have become higher risk in the worst performing economy in the developed world. And it also shows the banks are still keeping a sharp eye on their mounting bad debts ahead of the setting up of NAMA, all of which will make it harder for the so-called green shoots to start peeking through in 2011.