Notes on the Front

How long is this puppy going to bark?  How long is this recession going to last?  Can we look into a crystal ball?  Can we call upon history?  Estimating the depth and the length of a recession is always a tentative exercise, except in hindsight.  But it can be a helpful exercise in developing the policies to see us through the dark days and prepare us for sunnier times.  So let's see what some of the commentators are telling us.  The following is culled from primarily two reports – the optimistic Department of Finance budget projections and the more pessimistic Goodbody report, Deleveraging the Irish Economy. 

A review of OECD countries suggests that recessions last between one and two years, although the downturns experienced by Finland and Sweden lasted three years. With the exception of Finland, which saw its economy contract by 11 percent, most economies suffered between one and four percent during the durations of their recessions.

So what can we make of Ireland?  It depends on whose numbers you're using.  The Department of Finance predicts the recession will be short-lived and relatively painless – a total decline of -2.1 percent in 2008 and 2009.  Then we'll return to growth, so that by 2011 we'll be back up jogging at a highly respectable 3.7 percent.  Hmmm.  The problem with this is that no one believes it.  Already, the Department's revenue projections are toast while their unemployment projections look decidedly shaky.  A rewrite is awaited soon.

Goodbody goes to the other extreme – suggesting that over 2008 and 2009 our economy will contract by -6.6 percent, putting us well over the historical average in other countries (to put it in our own context – during the 1980s our GDP didn't fall at at all while GNP only contracted by -2.9 percent in 1982/83).  Goodbody is hopeful of a return to growth in 2010 (1 percent) but they emphasise – hopeful.

So, the optimistic and pessimistic scenarios suggest a short duration of two years, though they vary considerably on the issue of how fast we will recover after that.  The main difference is between the degrees of contraction.  Even if we split the difference, the contraction will be severe by historical international standards.

The next thing to look at is the 'output gap'.  This measures the difference between actual GDP growth and potential GDP growth – the level of growth we can achieve with existing labour, capital, and technology without putting sustained upward pressure on inflation.  While this is a contrived measurement (there is considerable disagreement over how to measure potential GDP growth), it is useful because it can predict how long the economy will continue to 'under-perform' after it comes out of a recession.

The Department of Finance suggests the output gap will be negative over a considerable period.  In other words, actual GDP growth will lag behind potential growth.  Even in 2010 and 2011 – with GDP projected to rise – the gap will be considerable (-3.6 and -2.5 percent respectively).  The Department has no projections beyond this point.

Goodbody doesn't put numbers on the output gap but their historical survey suggests that an economy, on average, will continue to under perform for six years after initial contraction (in the worst case, Finland, under-perfomance lasted eight years). 

If we're lucky to have an average post-recession under-performance, then we should expect the economy to under-perform up to 2014.  However, given that our recession could be deeper and longer than average, this under-performance could last well beyond 2015.  And returning 'to trend' after that will mean that we will be back at full perfomance, which the ESRI has projected to be 3.5 to 4 percent.  In other words, growth up the middle of the next decade will probably be below that trend.

The biggest impact of this under-performance will be on employment.  Goodbody suggests that, on average, recessions add 5% of the workforce onto the dole (though, again, in the case of Finland, it suffered the worst, with unemployment rising from 4% to 18%).  The average rise takes about 5 years to work itself out. 

Will this be the case with Ireland?  This is where it gets extremely difficult to predict, especially as there is evidence that our recession will be deeper and our subsequent negative output will be longer than average.  Some commentators see silver linings: a large number of those losing their jobs are non-nationals who may not stay around; our 'flexible' labour market will make it easier to hire people (because it's so much easier to fire people), though this is debatable; and, of course, there is the traditional safety valve – emigration.

Whatever the fall-out, the projections are depressing: Goodbody expects unemployment to rise to 8.9 percent by 2010, while Finance predicts a lesser 7 percent, falling in 2011.  It's anybody's guess.

So what can we make of all this?  While all these figures are fluid, we can make a stab:

1. The recession will last at least two years and quite possibly three

2. The economy will under-perform up 2014 and probably beyond that

3. Unemployment will continue rising up to 2010 and possibly after that

The most important thing to remember with all these projections and historical averages is that nothing is pre-determined. While you can't buck the international trends, or quickly escape the terrible domestic policies that brought us to this point, we can take measures to limit the duration of the recession, hasten the closing of the output gap, get the economy operating to its full potential earlier and get people back to work quicker.

All the more reason why the Left must engage in an open and honest dialogue with the people about what we can expect and how it plans to hasten our recovery.  Politicians are wary of delivering bad news but now people want, and have a right to expect, an honest assessment. People will be more likely to listen to the messengers commuicating that honesty. 

After all, at Franklin Roosevelt's inauguration in 1933, he didn't promise that when people woke up the next morning they'd be back in work with money flowing aplenty.  He gave an honest assessment, told people not to fear – and then went out and did something, sweeping aside the forces of inaction and gloom.

The Left has the opportunity to do the same.