The next seven years may see an economic recovery take hold, triggering a virtuous circle of growth and debt reduction, or the economy could stagnate unleashing a vicious circle of rising debt and unemployment, the ESRI says in its latest medium-term review.
The institute has outlined three economic scenarios that could unfold over the next seven years. The most benign scenario is that the economy recovers, although this would see GDP growth only reaching 2.2% by 2020.
This scenario is predicated on an international recovery, which would increase demand for exports. This would increase wage levels and in turn boost domestic demand.
Increased investment from multinationals would also boost domestic demand and make a big dent in the unemployment rate.
Under the most optimistic outlook, the unemployment rate would dip below 6% by 2020 and the debt/GNP ratio would drop from a current rate of 150% to 100% over that timeframe.
Even under the benign scenario, the ESRI is recommending the Government sticks to the planned €3.1bn budget consolidation this year.
If the economy grows, then the country could record a fiscal surplus by 2018 with a neutral budget position from 2016-20.
However, if the economy fails to grow and the Government does not introduce the €3.1bn consolidation this year, then it could be faced with ramping up austerity measures beyond 2015, warned the ESRI.
Under the delayed adjustment scenario, the international recovery would still proceed but the Irish economy would post anaemic growth as the banking sector remains deeply troubled and SMEs are starved of credit.
The unemployment rate would fall to just over 8% by 2020 and the debt/GNP ratio would drop to just below 110% over the same timeframe. The Government could still hit a fiscal surplus by 2018, but only with a tougher adjustment over the next few years.
However, under the worse-case scenario, the economy would stagnate over the next decade because of external factors such as a zombie-like eurozone. Ireland would be in recession or near recessionary levels out to 2020.
The Government would have to introduce austerity budgets for the foreseeable future and the unemployment rate would still be in double digits by 2020.
According to the ESRI’s John Fitzgerald, the biggest determinant of growth will be when fiscal consolidation across the eurozone comes to an end. Budget cuts take roughly 1.5% off Irish growth and 1.5% off eurozone growth.
The biggest risks to a recovery is an inadequate response to the crisis at EU level, particularly an incomplete banking union.
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