Recovery Scenarios for Ireland

Recovery Scenarios for Ireland

By Adele Bergin, Thomas Conefrey, John FitzGerald & Ide Kearney This paper explores recovery scenarios for the Irish economy over the period to 2015:

• World recovery is essential for a return to growth in Ireland. In the World Recovery scenario, the global economy grows from 2011 onwards. Given the depth of the current recession, the Irish economy can be expected to experience a period of above average growth while recovering some of the lost ground. However, output per head would still only be restored to its 2007 level by the middle of the next decade.
• There are significant permanent costs arising from the current recession. Even with a world recovery in 2011, the current recession implies a 10% permanent loss of GDP, together with higher emigration and lower employment. As a consequence of the recession, the potential growth rate of the economy is likely to have fallen from 3.6 % per annum to 3% per annum.
• A prolonged recession would increase these losses. If the world recession were to continue for another year to 2012, the permanent loss of output would be closer to 15 per cent with even higher unemployment and emigration.
• Approximately half of the budget deficit is structural. The structural deficit is the appropriate target for fiscal policy; the cyclical element will be eliminated once the recession ends. The budgets of 2009 and the planned budget for 2010 would together halve the size of the structural deficit to 3 to 4 per cent of GDP. This is an appropriate fiscal policy response. The structural deficit would widen further if the world recession persisted for another year.
• The resolution of the banking crisis is necessary for economic recovery. The very substantial borrowing needed to fund a solution will add to uncertainty and to the risks facing the economy.

  Policy Implications:

• An improvement in competitiveness is required if the Irish labour market is to return to full employment in a reasonable time scale. It is likely that nominal wages will fall to help achieve this.
• The rapid rise in unemployment means that policy needs to focus on preventing a rise in long-term unemployment.
• It is important that the planned budget for 2010 is implemented. If the world economy recovers by 2011, the elimination of the structural deficit will require only limited further fiscal policy action in the medium term. However, a prolonged world recession would necessitate a tighter fiscal policy stance in 2011 and beyond.

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