AT A time of great global uncertainty, economic forecasting becomes an imprecise art and necessarily involves a large margin of error. The latest quarterly commentary by the Economic and Social Research Institute (ESRI) illustrates the difficulties that forecasters face as they adjust to rapid and unexpected changes in economic activity, both domestic and global. In December, the ESRI was already projecting a sharp contraction in the economy for 2009: negative growth of 5 per cent and an average unemployment rate of over 9 per cent.
In its latest commentary, the ESRI acknowledges that the pace of economic decline has surpassed “even the most pessimistic expectations” – including its own. The institute has again revised its forecasts: the economy is now predicted to contract by 9 per cent in 2009 and the average rate of unemployment to reach 13 per cent of the labour force. A 14 per cent decline in economic activity over three years (2008-2010) is by historic and international standards, the ESRI accepts, “a truly dramatic development”.
Such sizeable forecast revisions within such a short time period are a measure of the severity of the global recession: an economic downturn that everyone has greatly underestimated. Economic activity in the euro zone, in the UK and the US, is expected to fall by 4 per cent this year with Germany likely to experience an even sharper rate of decline. At best, the ESRI expects the global economy may recover next year but the rebound will represent little more than a slow reversal of a very rapid rate of economic decline. Moreover, even while that recovery gathers pace, the rate of unemployment is likely to continue rising. By 2010, the ESRI estimates that some 365,000 may be out of work here, or one in six of the labour force.
Nevertheless while the institute accepts the economic outlook may be negative, it does find some positive developments amid the encircling gloom. It broadly welcomes the Government’s efforts to restore fiscal sustainability by measures taken both in February – the pension levy – and earlier this month with the emergency Budget. Given that euro membership rules out devaluation as an option, wage falls – whether achieved by a pension levy in the public sector or pay cuts in the private sector – are the necessary and unavoidable means to regaining competitiveness lost over recent years. And that painful adjustment, the ESRI accepts, should leave the Irish economy much better placed to benefit from the global recovery .