More pain to come before we enjoy any gains

FRIENDS First’s analysis of the state of the economy ahead of the CSO stats on Thursday was pretty grim.

After Thursday’s figure showing GDP growth of 2.75% in the first quarter was published, economists fell over themselves to say that this was good news.

Earlier this week, Friends First’s Jim Power did nothing to lift the spirits when warning the country faced tough budgets over the next two years, if the Government was serious about tackling the national debt.

He also said that given the huge fiscal pressure on EU states, the euro could collapse as the single currency.

One of Power’s core arguments is that so much pressure is on individual governments to get borrowing and budgets under control, that Europe faces a period of very low growth.

To add salt in the wounds, he noted that between 1999 and 2009, European GDP growth averaged just 1.5%.

In broad terms, Power’s analysis is not that different from the CSO figures.

However, he says growth this year will be static, against a 1% rise envisaged by the CSO and others.

Where Power has been more hardline than others is in saying that the European Union has to go all out to curb spending to bring national debt and budget deficits back into line.

The US and some non-EU states argue that harsh cutbacks have to be combined with a certain amount of fiscal stimulus to help get the economy off the floor.

Paul Krugman, the renowned US economist, however, has long held the view that we have to face this period of austerity for at least five years before shafts of light start to reappear.

In that context, Power has captured the mood of the situation better than most.

Being technically out of recession is of little comfort, as the fallout from the property bubble and credit crunch continues to sap confidence in the economy.

Economists now feel they have to give us a boost, having failed to warn of the dangers that we continued to ignore about the property sector for several years leading up to the crash.

Some weeks back, Ernst & Young cut to the chase about the overall impact of the fiscal crisis and the banking collapse for Ireland.

Neil Gibson said Ireland should distance itself from the other so-called “PIIGS” countries – Portugal, Italy, Greece and Spain.

“Ireland is not Greece,” he said when launching an all-Ireland economic review, pointing out we enjoyed “key economic competitive advantages which will ensure its emergence from association with this group.”

Though worst in terms of its fiscal deficit last year at 14%, Ireland is “top of the eurozone league for graduate skills in the 25-34 age group, has the fastest rate of price correction (CPI 4.5% in 2009) boosting cost competitiveness and is second in export orientation at 87% (behind Luxembourg and joint with Malta).

“Those advantages set us apart from the other weaker economies and should ensure economic stability in the years ahead.”

Gibson warned there were risks to the downside and if export growth is hit due to weaker global demand, the possibility of a 6% economic decline in the current year was a distinct possibility.

With construction gone as a driver of growth and no domestic activity to take up the slack, he warned it will be 2022 before we get back to the levels of employment enjoyed in 2007.

Taking an all-Ireland view, he noted 300,000 jobs were lost through the depression.

Despite the window dressing it is clear that this recovery will take a long time before it begins to feel solid in a real sense.

The banks are continuing to lend less, a fact confirmed by the latest credit figures from the Central Bank for the year to the end of May.

This is further confirmation that talk of recovery is just that at the moment and that a lot more pain is coming down the tracks.


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