THE SECOND half of 2010 has not started well. The incipient economic recovery, evident in the first half of the year, appears to be losing momentum. The most recent and timely indicators of the economy’s vigour have all disappointed. The public finances in July remained weak. Tax revenues continue their long period of contraction. As a result, exchequer deficit control targets are off course by a not insignificant €250 million. A usually reliable survey of the important manufacturing sector, released at the beginning of the week, showed that those in the sector judged the recovery to be weakening by most measures in July.
Of this week’s data releases, the most depressing was surely July’s jobless figures. For the third consecutive month the numbers claiming unemployment benefit rose sharply. The State’s rate of unemployment hit a 16-year high. Dole queues in every region lengthened. But an increase in joblessness, however wretched for those directly affected, need not mean that prospects for everyone else are darkening. As economists never tire of pointing out, employment lags behind output, so a further upward drift in joblessness is to be expected. But both the size of the recent increases in the claimant count and their composition, with white-collar workers now accounting for most new claims, raises real concerns about a second recessionary wave dragging the economy under again.
This poses many questions. One is whether the Government’s austerity measures are helping or hindering recovery. Internationally, a heated debate continues among economists on the relationship between fiscal policy and economic activity. Some argue that to maintain economy-wide demand, more public spending is needed when the private sector pulls in its horns. Others question the positive impulse of public spending on economic growth and point to the risks for all high-deficit countries, up to and including the US, of going the way of Greece. This controversy will rage on.
But for Ireland, this debate is academic. The bond market long ago answered the question about the limits of Government stimulus. (If there was any good news this week it was that the effective rate of interest paid to holders of Irish debt in that market continued to fall). It should be recalled that Ireland, along with Portugal and Spain, came perilously close to being shut out of the government debt market in early May. So serious had the situation become that the EU and International Monetary Fund were forced to put in place an enormous rescue package. It is no coincidence that its size matches exactly the government funding requirements of Ireland, Portugal and Spain combined for three years.
The fragility of the position is reflected in near-universal agreement among this State’s independent economists that there is no option but to remain on the path of fiscal correction set out by the Government last December. Straying from that course would be to lurch towards Greece which, economically, has become a protectorate of the European and international communities. Ireland must avoid such a fate.