We can’t pin hopes on international recovery

I HAVE just returned from a conference in Boston run by the Federal Reserve Bank of Boston on prospects for the US economy. The conference was addressed by most of the luminaries in the world of US economics, including Fed chairman Ben Bernanke.

Over the past couple of years most of us in this country have become totally obsessed with what is going on in the Irish economy, and taken our eye off the ball in relation to what is going on in the wider world.

Consequently, I found it really refreshing to get a view on the outside world, although the view I got was not one that would exactly have you running around in fits of unconfined joy.

The true nature of the massive black hole in the Irish public finances has really become apparent over the past couple of weeks. Over the next three or four budgets it is envisaged that the Government will be forced to take around €15 billion out of the Irish economy in an effort to restore some semblance of order to the public finances.

The immediate task revolves around the budget on December 7, when savings of somewhere between €4bn and €5bn will likely be targeted. When said quickly this does not sound like a lot of money, but when one works through the various taxation and expenditure areas to come up with such savings, one realises very quickly that this will be a very painful target to achieve.

Even if one could come up with the requisite level of savings through a combination of expenditure cutbacks and tax increases, there are serious risks involved in taking that amount of money out of an economy that is still on the floor.

The outlook for Ireland does look pretty bleak, but one can always cling to the possibility that a strong global economic recovery might just lift the Irish economy out of the doldrums. Unfortunately, most of the vibes that I picked up from the real economic experts in the US would not fill one with hope.

The US economy has emerged from recession over the past year, but the nature of the recovery is modest and is still shrouded in doubt and risks. In most US economic cycles, the consumer is generally the catalyst for recovery, but the US consumer is currently a shadow of its former self.

Consumer confidence and spending power is being eroded by a very weak private sector labour market, high levels of personal indebtedness, around 5 million house repossessions so far, reduced benefits, incredible job uncertainty and a depressed housing market.

In recognition of this, the Fed is giving serious consideration to unorthodox measures to try and revive private sector demand. With official interest rates now just above zero, there is no further scope to cut rates so other options are being considered.

Having printed a lot of new money over the past couple of years, the US central bank is now on the verge of engaging in another bout of money creation, or ‘Quantitative Easing Mark 2’. There is no guarantee this will work, because the business sector is still not terribly interested in investment, while the personal sector is more interested in saving than spending (similar to Ireland).

One idea suggested last weekend in Boston to get consumers spending is to impose a tax on savings. In other words, one would be forced to pay the equivalent of an interest rate to the savings institution for the privilege of saving. The hope is this would discourage saving and get people spending.

I personally find this a bizarre idea, but the very fact that such a notion is being mooted tells us a lot about the fragility of the US economy. The one message I came away from Boston with is in Ireland, we cannot sit back and hope a strong international recovery will ride to our rescue.