[i]. The projection for global growth in 2016 is a modest 3.2 %. This is 0.2% below the previous IMF outlook of last January. Ireland cannot escape the effects of world economic developments; as the National Economic and Social Council pointed out many years ago “…it is not possible to stop the world and let Ireland off”.[ii]
The message from the IMF for Irish politicians negotiating for a new government is that there is no crock of gold that will provide significant scope for increasing public expenditure or reducing taxation.
IMF’s April Outlook
The IMF published its World Economic Outlook this week (12 April). While it forecasts that economic recovery will continue, that recovery will be “… at an ever-slowing and increasingly fragile pace”. Over the past three months, there has been a renewed episode of global asset market volatility, some loss of growth momentum in the advanced economies, and continuing headwinds for emerging market and lower-income countries. In addition, several stresses of non-economic origin threaten economic activity. Not only do these developments lead to a further reduction in the baseline IMF projections for economic growth in 2016 and 2017, they also suggest that there other possible threats to favourable economic growth.
The IMF lists a number of risks and threats, which include:
- Financial performance is highlighted:
“Important among purely economic risks is a return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop”;
- Given China’s importance in global trade means that
“… bumps along the way could have substantial spill-over effects, especially on emerging market and developing economies”;
- Slow growth can lead to slower growth:
“… persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment”;
- Political issues are significant:
“In both the United States and Europe, the political discussion is turning increasingly inward. The causes are complex but certainly reflect growing income inequality as well as structural shifts, some connected with globalization, that are seen as having favored economic elites while leaving others behind” and
“In the United Kingdom, the planned June referendum on European Union membership has already created uncertainty for investors; a “Brexit” could do severe regional and global damage by disrupting established trading relationships”;
- Fear of terrorism also plays a role:
“The result could be a turn toward more nationalistic policies, including protectionist ones”; and
- The refugee crisis cannot be ignored:
“Adding to political strains in Europe is the tragedy of large-scale refugee inflows, especially from the Middle East”.
But it is not all bad news. The IMF does point to some improvements on the world stage, such as the firming of oil prices, lower capital outflows from China, and significant decisions by major central banks. These have all contributed to improved sentiment in the market places. The IMF believes that more can be done, particularly with greater cooperation across borders. As the IMF puts it,
“If national policymakers were to clearly recognize the risks they jointly face and act together to prepare for them, the positive effects on global confidence could be substantial. The result would be stronger growth under the baseline outcome as well as insurance against a derailed recovery.”
What about Ireland?
One has to dig deep into this 230-page report to find economic projections for the Irish economy. The report notes that for Ireland
“Fiscal projections are based on the 2015 budget, adjusted for differences between the IMF staff’s macroeconomic projections and those of the Irish authorities”.
The projections are re-produced in the Table.
The IMF projects a slackening in the growth in Gross Domestic Product (GDP) in the coming years – from 5% this year to 3.6% in 2017 and 2.7% in 2021. The current account balance figures show continuing progress in future years. With the expected better economic performance, the unemployment rate is forecast to fall further, with a 7.5% unemployment rate projected for 2017. This is a remarkable reduction from 15.1% in February 2012. As regards consumer price forecasts, the IMF sees fairly small increases annually over the coming years.
As a small open economy, Ireland depends significantly on its trade in global markets. However, in engaging in such trade, we must be conscious at all times of shifts in global developments – economic, financial and political. The current IMF report certainly counsels caution. However, with prudent management Ireland should continue to generate economic growth, even if not at the rate of 7.8% experienced last year.