Thursday, November 4, 2010

Getting back to reality?

The 10-page Information Note on the Economic and Budgetary Outlook 2011-2014 has caught the media attention.  The key issues have been the commitment to a budgetary of adjustment of €6 billion in the December Budget (with €3 of spending cuts for every €1 of tax increases) and the postponed of interest payments on the Promissory Notes issued as part of the bank recapitalisation programme. 

Although the note lacks specifics on budgetary actions it does give an insight into the assumptions and predictions the DoF is using for it’s budgetary analysis.  The most recent set of forecasts came from last December’s Stability Programme Update and we considered these in a recent post.

One of our main beefs was with the “positive macroeconomic forecasts” used.

Dof GDP Projections

The DoF has now brought their growth forecasts back a little closer to reality and we have the following updated projections.

DoF Updated Projections

Laying these on our previous graph gives us the new growth path.

Dof GDP Projections Nov 10

The downward drop in the 2009 figure to the end of the solid lines is attributed to “revisions by the CSO to the level of GDP in 2009 and to previous years (a methodological change)”.  The dashed lines form the DoF projections and they are now clearly lower.  So the DoF must have a closer grasp of reality and on which to base their analysis.  Or maybe not.

For 2010 the DoF is now projecting nominal GDP of €157.3 billion and a growth of ‘just’ 0.25%.  However, half year figures for 2010 have already been released.  These tell ue that nominal GDP for the first six months of the year was €78.1 billion.  To get the annual forecast of the DoF, nominal GDP in the last six months of the year has to be €79.2 billion.  While an annual growth forecast of 0.25% might seem modest this actually needs a growth of 1.4% in the last six months of the year relative to the first six months.  This might happen (driven mainly by chemical exports) but is an accelerated growth rate for the latter half of this year nonetheless.

Moving to 2011 we see that the DoF has ‘slashed’ its real growth forecast from 3.3% to 1.75%.  Again it might appear that this more modest growth forecast is appropriate.  However, the December 2009 forecast was based on a 2011 budget ‘adjustment’ of €2 billion.  We are now told that this will be €6 billion.  The extra €4 billion adjustment, if fully implemented, will act as a considerable drag on the growth rate.  Determining the exact growth effects of this austerity is not an exact science, but assume the effect of it could possibly be of the order of a 2% reduction in the growth rate.  [This would happen if the €4 billion fiscal adjustment resulted in a drop in GDP of about €3 billion, which in itself may be optimistic depending on how the additional adjustment is achieved – tax or spend].

Anyway let’s assume the €6 billion package cuts a further 2% off the growth rate.  This means that the updated growth forecast could be 3.3% minus 2.0% equal to 1.3%.  This would be with no revision whatsoever of the underlying growth prospects.  The actual updated growth forecast for 2011 is 1.75%.  The DoF hasn’t forecast a fall in the growth rate for 2011 – it has just forecast an increase!! But the increase is camouflaged by the impact of the additional €4 billion adjustment just announced.

Back to reality? Not quite.

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