How Not To Spend Your Way Out of a Recession. The Recession Diaries - April 19th

An economy relying on consumer spending to drive a recovery is an economy that will be eventually be disappointed. Not that consumption cannot play a vital role. Indeed, businesses dependent on domestic demand need a robust level of spending to survive and expand, invest and employ. But it must always be placed in context. For headlines numbers may look good but hide deep flaws in the economy – flaws which we know all too well will not remain hidden for long.

Ernst & Young have just published their economic projections up to 2014. They provide a range of headline numbers which we can compare with Government projections. Between 2010 and 2014:

• E&Y projects GDP growth to be 13.8 percent; the Government is projecting 17.1 percent. May not seem like much but this undershoot will produce continued deterioration in other economic and fiscal indicators.

• Unemployment will remain high according to E&Y. By 2014, they project joblessness will remain close to 2009 levels: at 12.1 percent. The Government is hoping it will fall to single figures (9.5 percent). That’s a significant and depressing gap.

• E&Y is one more forecaster to predict the Government won’t reach the 2014 Maastricht guideline target. They predict we will still have a deficit of -4.6 percent.

• More alarming, E&Y projects overall debt levels will be over 95 percent of GDP. The Government projects they can hold the line at below 81 percent. The difference between these two points to higher debt servicing costs that will soak up ever more limited resources.

This is all of a piece – low growth, high unemployment and growing debt. However, just as concerning is the degree to which growth will be reliant – not on export growth or investment (though E&Y sees investment rising higher that Government projections in 2011/2012) – but on consumer spending.

Under Government projections, consumer spending will make up 40 percent of GDP growth between 2010 and 2014. However, under E&Y projections, consumer spending will make up 50 percent of a much lower GDP growth.

A related, and vital issue, is who is going to be spending. This is something that neither set of projections addresses and, admittedly, it would be difficult (though not impossible) to model this. However, if we find that Ireland continues on its merry unequal way, higher consumer spending will have a less beneficial impact on the economy.

That Ireland has high levels of income and wage inequality is incontestable and is cogently summarised by the joint ICTU/TASC HEAP report. If this trend continues in the future (and given that it is working class, rather than professional occupations, hat have taken the hardest hit, this is likely), then we will see consumer spending driven by higher income groups – groups that tend to consume import-intensive products (cars, durable products, etc.). This will have a less beneficial impact than spending by low-average income groups which tends to be less import-intensive.

Therefore, we could be heading into two processes which will reinforce the prospects of a two-tier economy:

• One, growth driven by the multi-national sector which won’t be as tax or job-rich as the indigenous sector, and
• Two, consumer spending driven by groups whose spend will flow out of the country, with less benefit to the indigenous economy.

This will contribute to a low-growth, high debt scenario. Of course, none of this gets an airing. The Government is obsessed by headline rates that directly impact on the fiscal crisis (and they continue to miss those targets) while others are rushing to ‘return to normal’ scenarios that gloss over these inconvenient issues.

Ultimately, sustainable growth will emerge out of a combination of high-levels of investment (which, as the Davy report shows, will be driven by the public sector or won’t be driven at all); expansion of our indigenous base – through both public and private sector activity if we’re going to be pragmatic; and carbon-reducing strategies. Consumption has an important role to play in this mix but only if it is results from a redistributive process whereby spending by higher income groups is limited through taxation while incomes at the lower level are enhanced.

But in terms of the debate, never mind policy, this is exactly where we’re not at.

Comments

[Pat Donnelly]

E&Y have irons in the fire so their forecast is surprizingly realistic!
I expect there to be no growth or 1% at best. GDP will grow but not GNP. But in a deflationary environment, with devaluing euro, merely treading water will be a very creditable performance. Please dear reader, do not waste this opportunity to reorganize your lives!