There were two major projections from the government on budget day that have not yet entered the public debate.
First, the economy is projected to flat-line next year. The government projects 0.4 percent growth in real GNI*. This is the preferred measurement for assessing economic activity in the state. 0.4 percent is barely any growth at all and is only just above the recession zone. The Finance Minister omitted this in his speech, instead focusing on the lesser known ‘modified domestic demand’:
‘ . . . my department has revised down its forecast for Modified Domestic Demand – the most appropriate measure of our domestic economy – to 1¼ per cent for next year.’
This is incorrect. The most appropriate measure is GNI*. Referencing this, though, might have raised awkward questions.
We can get a sense of the deterioration in government projections by reviewing the Department of Finances’ revisions of the components of economic growth – from April (Stability Programme Update) to September (the budget).
The revisions downwards are quite significant, especially given that they occurred within five months.
- Consumer spending projection has been cut in half
- Modified investment (which factors out multinational distortions) has been revised downwards by nearly 2/3.
- GNI* has been slashed to nearly zero.
While employment growth is expected to moderate at 1.2 percent (down from a projected 2.1 percent in back in April), unemployment has not been revised upwards.
The government projects all this to be temporary. GNI* and consumer spending is expected to bounce back in 2024, though investment will remain relatively muted. Hopefully, this is the case. But with such uncertainty in international markets it is difficult to project beyond a year.
The second piece of bad news which hasn’t received enough attention is the inflation projection for next year.
In 2022 the government is projecting an inflation rate of 8.5 percent. Next year it will remain high at 7.1 percent. This is well above other estimates from the Central Bank, ESRI and NERI who projected inflation for next year at between 4 and 4.5 percent. And it is well above what the government was projecting six months ago.
This means that over this year and next inflation will run at 16.2 percent. Incomes will have to rise by this amount over 2022 and 2023 just to stand still. This wasn’t expected.
Continued high inflation will depress consumer spending which, in turn will impact on investment (businesses are reluctant to invest if consumer spending isn’t sufficient to produce a return on their investment). The Government is projecting that inflation increases will moderate by 2024, rising by only 2.4 percent with energy prices rising be even less. But this should be treated with caution as no one knows how this current crisis will impact on the medium term.
So we have an economy flirting with recession within a high inflation environment. The government is banking on the assumption that social transfers, especially the once-off component, will serve not only to protect living standards but also bolster consumer spending. It is further hoping that their subsidies to the business sector will deter further price rises and maintain employment.
Let’s hope it comes right. For if the Irish economy falls into a slump with high inflation rates (what is popularly known as stagflation) it will become extremely difficult to dig ourselves out.
A first step is to start highlighting all this in the public debate. It would be bad enough to fall into recession. But to pretend that the prospect doesn’t exist would be just as bad.
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