Peter Jones: An Irish question for Nationalists
THE economic fortunes of the Republic and Britain may play a big part in how we vote in two years’ time, writes Peter Jones
IF THE economic future of Scotland is going to be central to winning or losing the vote for independence due in 2014, then a very interesting tale of two countries is beginning to emerge which will serve as a useful test of whether the Nationalist or Unionist case is a better bet. In short, it is whether the British or Irish economy comes out ahead over the next two years.
Much interest and debate has been stirred within economic circles by the current issue of The Economist (for which I write, but not in this issue). Its front cover trumpets: “Heading out of the storm: better news for the UK economy”, and it says inside that “The British economy is coming out of recession, and is stronger than almost everyone believes”.
Given the gloom and pessimism which has marked almost every analysis of UK prospects in recent times, it is a pretty startling claim. Quite a few other economists, however, back it, although only up to a point. Discussing the article yesterday, Ian Stewart, Deloitte’s UK chief economist said that the claim is not so surprising as all 37 independent forecasting groups which provide GDP forecasts to the Treasury expect UK growth to bounce back in 2013. “Most believe that the UK’s double dip recession is drawing to an end and that growth will resume in the first quarter of next year,” he says.
Partly, this is based on the fact that the first estimate of a 0.7 per cent decline in GDP in the second three months of this year has since been revised upwards to a 0.4 per cent reduction which is now being mostly attributed to the extra bank holiday to mark the Queen’s diamond jubilee. As manufacturing output jumped up in July and business indicators are showing greater optimism all round, economists reckon that the autumn quarter should show reasonable growth.
But the key argument made by The Economist is that British consumers, having been heavily battered in the last four years, are feeling much cheerier. Most economists agree, says Mr Stewart, as the big VAT and National Insurance tax rises are in the past, and inflation, on the Consumer Price Index, has halved in the last year.
Also boosting confidence is the surprising resilience of the UK labour market as employment has risen over the last three years because private sector job growth has outstripped public sector job losses. Mr Stewart adds: “These factors are supporting consumer spending power. Real disposable incomes have risen 1.7 per cent over the last year having declined through 2011. And consumer spending is rising once again. Given that consumer spending accounts for over 60 per cent of the UK economy, an upturn in consumer activity should lend significant support to growth next year.”
But, says Mr Stewart, he thinks that the real test is whether the longer-term outlook for growth is getting better or worse, adding: “The news here is not encouraging. Average or consensus forecasts for UK GDP growth for 2013 have dropped from 1.8 per cent to 1.3 per cent in the last four months.” This is pretty weak for an economy used to growing at 2.5 per cent a year, he notes.
What about Ireland, which was dropped as a Nationalist icon after its banks and economy collapsed and it had to get an €85 billion EU bail-out in 2010? Ostensibly, looking at September’s quarterly economic commentary from the Dublin-based Economic and Social Research Institute (ESRI), things look reasonably bright.
It forecasts GDP growth this year of 1.8 per cent and next year of 2.1 per cent following 1.4 per cent growth in 2011. But the commentary makes it clear it regards GDP as an unreliable guide, being skewed by the profits of the many foreign-owned companies based in Ireland whose profits are repatriated out of the country. If you take those out, you are left with gross national product (GNP) which, says the ESRI, “we consider to be a better measure of Ireland’s economic performance”.
Ireland’s GNP contracted again in 2011, by 2.5 per cent, is expected to fall a further 0.2 per cent this year, but is predicted to rise again by just 0.7 per cent in 2013.
It means, measured by GNP, that the Irish economy will be some 14 per cent smaller than the pre-crisis peak by the end of 2012, more than twice the contraction that Scotland as part of the UK has experienced. And recovery, despite the Irish government having all necessary levers of fiscal power (albeit under the strict tutelage of the EU), is painfully slow.
Moreover, unemployment is expected by the ESRI to peak at 14.8 per cent this year, way above the current Scotland jobless rate of 8.2 per cent. This is having a disastrous effect on Ireland’s most precious resource – its people, particularly the young and highly educated.
In 2011-12, some 87,000 people emigrated in search of work. Since the crisis struck in 2008, about 182,900 people aged between 15-29 have moved. A lot of those still there are stuck in negative equity traps of houses bought during the boom years now worth less than the mortgage owed on them.
Not everything is bad. Exports are growing much faster than imports although, as most of these are generated by foreign-owned firms, this is of limited impact on the core domestic economy. CPI inflation is low and, because of deflation during the crisis, the real cost of purchases in Irish shops is about 5 per cent lower than five years ago.
So, both Britain and Ireland seem to be growing again, but Ireland at a much slower rate and from a much deeper hole. For both countries, whether recovery continues depends on uncertainties. The biggest are a renewed eurozone crisis and US recovery stalling.
Doubts that the European Central Bank’s bond-buying programme will solve the sovereign debt problems of various European countries (including Ireland) are beginning to resurface. Worries that post-next month’s US elections, political gridlock will reappear and the tax rises/spending cuts package in January’s “fiscal cliff” will de-rail US growth, are growing.
If either of these events do happen, how the two economies cope with them will also be a good test of the Unionist and Nationalist cases in the referendum.
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Wednesday 19 June 2013
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