By Dr. Micheál Collins
In the latest edition of the Nevin Economic Research Institute’s Quarterly Economic Observer we have outlined where we expect the economy of the Republic of Ireland to go over this and the next two years. In the institutes first set of economic projections, we detailed our expectations for economic growth, employment, unemployment and government finances. Unfortunately, our projections are pessimistic, highlighting an ongoing economic stagnation as a result of continued contractions to domestic demand, sustained uncertainty at a European level and a related slow recovery of the international economy.
Over this year and next, we expect the Republic of Ireland economy to marginally grow, with annual GDP growth of less than 1% per annum. While we anticipate some improvement in 2015, we expect growth will still be less than 2%. Within the economy, we note the likely expansion of exports and the sectors of the economy strongly linked to the external economic environment. However, this contrasts with the domestic economy and an ongoing decline in domestic demand which is likely to continue for at least another year as a consequence of continuing fiscal austerity combined with high level of indebtedness and a lack of domestic consumer and investor confidence.
The impact of weak growth is also relevant for the labour market. In general, the economy needs to be experiencing more than 2% GDP growth per annum to generate higher employment. Given our growth expectations, we envisage that unemployment will remain stubbornly high for the next few years, climbing to over 15% this year. We also expect a small decline in the total number of employees over each of the next three years with employment growth only returning in 2016.
The lack of growth and the combined effects of less employment and more unemployment add further pressure to the Government’s financial situation. While we anticipate that the Government will reach its fiscal targets in 2013, the prospect of higher budgetary deficits, larger numbers unemployed, further austerity measures and the contracting domestic economy leads us to question the Government’s capacity to reach its 2015 fiscal target of reducing the deficit to below 3% of GDP (the key target set out in the Troika agreement).
However, despite the gloomy outlook, there are options which Government can take to improve the overall outlook and assist the domestic economy as we await further improvements in international conditions. As the NERI, ICTU, SIPTU and others have outlined over the past year, there remains a clear need for a sizeable frontloaded investment stimulus for the domestic economy focused on job intensive projects in the areas of water infrastructure, broadband, early-childhood education, energy production and retrofitting. Funded by resources for commercial semi-states, pension funds and the European Investment Bank, there remains potential to expand such a stimulus well beyond that announced last July and significantly kick-start the domestic economy.
Similarly, Government action on restructuring the bank debt element of our national debt, and in particular the Anglo Irish promissory notes, has potential to provide an important source of fiscal adjustments in 2013. If this is achieved and is of a significant scale, it offers the prospect to reduce day-to-day Government expenditure and dampen some of the fiscal pressure outlined earlier.
Finally, our projection on the sustained nature of the unemployment crisis should remind us of the real need for public policy to take greater measures to address this. With more than 60% of the unemployed being long-term unemployed, many for multiple years, the challenges facing individuals, families, communities and the country as a whole in getting people back to decently paid sustainable work is likely to be the major public policy challenge of the next decade.
The latest NERI QEO is available at www.NERInstitute.net
Dr Micheál Collins is Senior Research Officer at the Nevin Economic Research Institute (NERI).