Economists and the markets are rating Irish political stability morer highly than I would have thought. The prominence of their concern undermines the despairing view that whoever forms the next government doesn’t much matter. It’s the EU,IMF, the markets whoever…. that really run the show. I pay attention when Stephen Collins political editor of the Irish Times states confidently that the Budget will pass despite TDs ” huffing and puffing”. Stephen is among the government’s most scorching critics but he believes they have to win this one.
The National Recovery Plan is a different matter. It can be altered within parameters set at the time. The next EU bailout strategy begins in 2013. For that Angela Merkel has made it clear she demands that the markets share the burdens with the States. But this is far too complex and far ahead to be factored in now.
Overall, economists’ first reaction to the four year plan uses more sophisticated language than the gang in the pub (or is it the tray bake party in the kitchen now to save money)? But the message from each one is roughly the same: cautious pessimism
Philip Lane of The Irish Economy blog walks on egg shells and he offers a cautious lead analysis in the Irish Times, registering only mild disappointment. But is govenment silence on the future of the banks so strange at this juncture? They surely don’t want to second guess the ECB and the IMF in public before the bailout details are decided.
The growth rate is a key issue for the international investor community, which is trying to work out whether the Irish economy will grow sufficiently quickly to make its public and private debt levels sustainable. Similarly, increasing domestic sources of funding is viewed as a key step in reducing dependence on external investors.
In terms of pro-growth policies, the main message in the document is that the Government stands behind its longstanding pro-export pro-business strategy. The plan reaffirms the commitment to the 12.5 per cent corporate tax rate, while also seeking to protect the budgets for the IDA, Enterprise Ireland and research and innovation.
While medium-term macroeconomic modelling is necessarily imprecise, it is disappointing that the plan did not specify in more detail the extent to which these pro-growth proposals are expected to improve growth performance within the near-term confines of the 2011-2014 period
Furthermore, the plan is silent on the impact of the banking crisis on projected growth rates
On the tax side, the rolling back of allowances and credits will be painful for lower-earning workers but a broadening of the tax base is a key structural reform for long-term sustainability, as is the projected increase in the pension age. However, the limited plan for a property tax seems under-ambitious.
James Nixon, chief European economist, Societe Generale:
“The main thing that stands out is that they still expect the economy to grow by 2.7pc over the next four years but it’s hard to see how that can be true.
“They’re taking 4pc of GDP out of the economy next year, which is going to hurt, and we are in an environment where the ECB are headed for the exit and interest rates and the euro are going to be higher, so it doesn’t really add up.
Philip Shaw, chief economist, Investec
“What is a little odd is that they are publishing this now while the IMF are poring over the books and deciding what needs to be done. It rather smacks of trying to bounce the IMF into agreement.”
“It really depends, to a certain extent anyway, on European Union policy on sovereign bailouts and what it says about the private sector sharing the pain of any bailout.
“The Irish government is doing what it can to address the situation, but to a certain extent it is a hostage to fortune.”
Ben May, European economist, Capital Economics:“I’m not sure it’s really going to convince markets. The whole political uncertainty at the moment means that people aren’t 100pc sure that they will even be able to pass the budget. Even if they do, there’s probably going to be a new government early next year
Stephen Lewis, chief economist, Monument Securities:“It doesn’t seem all that realistic to me. It seems they’re planning very stringent fiscal measures, and yet they expect the economy to grow against that background. That seems highly unlikely.
“I think that the euro will probably wait for the political reaction to this, because the big question mark over the austerity plan is whether it gets through the vote in the Dail, and as long as those concerns persist, I don’t think the details of the plan are going to impress the market all that much.”
The fundamental key factor is world recovery and on that ,Kevin O’Rourke in The Irish Economy blog is pessimistic
Optimists point to the growth in Irish exports as the route to our recovery. Since we can’t devalue, we will be relying on foreign income growth more than on relative price shifts to achieve this happy outcome. So it seems worth pointing out that the Dutch CPB’s September data on world trade and industrial production were released yesterday. They confirm a trend which has been there since January: the momentum of the world recovery is steadily decreasing.