UNCERTAINTIES over global markets and the cost of the banking bailout have led the Economic and Social Research Institute (ESRI) to serve up two possible recovery scenarios for the Irish economy, neither of them particularly appetising.
In the more optimistic high growth scenario, a surge in exports could drive a vigorous recovery somewhere between 2012 and 2015. In the low growth scenario, lower output would see unemployment and higher structural budget deficits continue far longer.
ESRI research professor John FitzGerald said: “The first time we served up two possible scenarios was in 1991, and the media didn’t like it then either. There is no one simple answer to the questions people are asking.
“We don’t expect to see much employment growth next year because any growth will be export-led, which will not create many jobs. The type of investment that should drive employment growth should happen after 2012.
“The problem facing the Government is that they must formulate their policies not knowing which scenario is more likely to pan out. We are predicting fiscal cuts of €7.5 billion over the period 2011-2014, but this might not be enough in a low growth scenario.”
The ESRI report said Ireland needed greater wage competition, the costs of the banking crisis to be contained, a labour market policy that was clearly job-friendly, and fiscal austerity measures to continue. If these factors are managed, high growth may occur. If not, the low growth scenario is more likely.
This latest ESRI report said the “deadweight” cost of the banking crisis has significantly added to the burden of fiscal adjustment. Added to this, the economy has suffered a permanent major loss of output.
Output may yet end up 15% to 20% below where it would have been without the crisis. In the upbeat scenario, output per head could be restored to 2007 levels by 2015. Taking the more grim view, those losses would be higher and a full recovery would take longer.
However, the ESRI believes the austerity measures undertaken in the 2009 and 2010 budgets have already achieved much of the heavy lifting in relation to reducing the structural deficit.
Prof FitzGerald notes: “Even under the ‘low growth’ scenario, we estimate that the structural deficit... would be less than that estimated by the EU Commission.”
He said: “A failure to tackle the fiscal crisis in 2009-10 would have greatly aggravated the difficulties facing the economy. This would have been manifested in an elevated level of debt, debt-interest payments and a higher interest rate.”
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