Economics: I've spent the greater part of my professional career producing economic forecasts, but I don't do them any more. Not surprisingly though, I keep a weather eye on the sort of numbers the practitioners are coming up with. You can take the man from the bog, as they say, but you can't stop him thinking about turf!
From time to time, my interest in such matters compels me to gather together the latest published forecasts from a range of sources and compute averages, standard deviations and the like. (I know, it's time I got a life, but I can't help it.) Anyway, the last time I surrendered to this compulsion was earlier this week. Here's what I found.
On average, the five forecasters whose prognostications I examined (ESRI, Central Bank, OECD, Davy stockbrokers and Goodbody Stockbrokers) expect gross national product (GNP) to grow by 5.5 per cent this year and by 5.3 per cent in 2007. They expect the volume of consumer spending, boosted by the effect of maturing SSIAs, to increase by 6-6.5 per cent in each of the two years. They expect both exports and fixed investment to expand at a slightly slower pace than this, the latter around a gently decelerating trend as house-building activity peaks.
They expect employment growth to slow a little from this year's near 4 per cent pace to something close to 3 per cent, unemployment to stabilise at just under 4.5 per cent, and inflation to decelerate from an annual average rate of 3.9 per cent this year to 3.3 per cent in 2007 as some of the factors that have recently been pushing it up recede.
In brief, the "consensus" is that next year will bring more of the same, give or take a few 10ths of a percentage point. "Consensus" may not be strictly correct usage in this kind of context, but it seems especially apt on this occasion because a notable feature of the forecasts is their similarity.
For example, the most bullish projection of 2007 GNP growth is 6.2 per cent, while the most bearish is 4.9 per cent. In a similar vein, the most optimistic assessment of the prospects for consumer spending sees it increasing by 7.4 per cent next year, but the most downbeat envisages "only" 5.8 per cent growth.
A sad feature of macroeconomic forecasts (including those that I used to produce myself) is that they are wrong more often than they are right and by margins that are not trivial. This is not because forecasters are especially careless or clueless, it's just the nature of the exercise: perfect foresight is a gift that's in short supply.
In any case, what it means is that there is always some value in addressing the question of how things might be different from what the forecasters envisage. If, as the record would suggest will be the case, the Irish economy's performance next year departs significantly from what the current consensus expects, will it be better or not as good?
For my part, I can think of more reasons why it might not be as good than reasons why it might be better. One relates to the SSIA effect already mentioned. Current forecasts are based on the assumption that 30-40 per cent of maturing SSIAs will be spent. I think the balance of risk around this expectation is that the proportion will be lower. The early evidence, such as it is, points in this direction.
On a related point, I think the balance of risk in relation to interest rates is that they will rise by more than is currently expected. The notion that 4 per cent will provide a ceiling for the European Central Bank's "refi" rate seems to have gained currency.
However, given the ECB's own assessment of prospects for economic activity and inflation in the euro zone, it is not hard to imagine the "refi" rate being raised to 4.5 per cent or more before the end of 2007.
If that happens, the risk is that the housing market will soften by rather more than current economic forecasts are predicated upon, with negative knock-on effects for construction activity and perhaps consumer spending.
There is also the risk that the US economy will lose momentum more quickly than is commonly supposed. This would make for a more challenging international trading environment for Irish exporters than that which underpins the latest batch of forecasts, all the more so if it were accompanied by further weakening of the dollar.
I have another, more subtle, reason for believing that the balance of risks in relation to the forecasts for 2007 is tilted towards the downside. It relates to the prospects for 2008 and beyond.
On this score, the predominant view among economy-watchers is that the tailwinds that are currently propelling things along at a brisk tempo (SSIAs, immigration, etc) will stop blowing towards the end of next year. The corollary is that the good times as we know them will come to an end around then.
In this vein, Goodbody, for example, expects GNP growth to slow from 6.2 per cent in 2007 to 3.7 per cent in 2008. In what they describe as their "baseline" forecast, Davy's sees GNP growing by just 3 per cent in 2008, slowly enough to cause an appreciable increase in unemployment.
Davy has also constructed a pessimistic scenario for 2008 in which it sees growth all but evaporating and unemployment rising to almost 7 per cent.
Similar messages about the period beyond the immediate future are contained in recent reports from the ESRI and the IMF.
The point is that, if economic agents believe that the good times have only a short shelf life left, they may start to behave accordingly. If firms, for example, are persuaded that growth is going to slow sharply in 2008 (a big "if" perhaps), are they not likely to trim their current investment plans? Likewise, if households are persuaded that unemployment is going to start rising appreciably in 2008, is that not likely to affect their spending behaviour well in advance?
In other words, will the expectation of a significant change in economic conditions not become a factor in bringing that change forward?
If this is so, we will start to see evidence of a slowdown in activity well before it is supposed to begin in 2008.
Jim O'Leary currently lectures in Economics at NUI Maynooth. He can be contacted at jim.oleary@nuim.ie
