The post-bailout prospects of lower net interest rates and strong exports are encouraging

IN MY last article on December 18th, I listed some positive features of our real economy that had received little or no publicity in our gloom-laden media.

These include:

1. The fact that in the 11 months to November our 2010 budget deficit was €1.5 billion below the figure that had been forecast in the budget of December 2009.

2. After two dreadful years our agricultural output rose sharply last year, and in the nine months to September the value of food exports rose by more than 10 per cent – with a good prospect of growth in the current year.

3. Unlike other peripheral European economies we have been moving rapidly towards an external payments surplus. This export growth has been reflected in rising output not only in the pharmaceutical sector but also in most of the industrial sectors in which indigenous firms predominate.

By exporting more and importing less we are transferring to other states part of the negative impact of our downturn. As a result, Euroframe (the voice of 10 European forecasting units) has estimated that the dampening effect on our economic growth of the €15 billion fiscal adjustments planned for the next four years will be much less than had been feared – an average negative impact of just 1 per cent a year.

4. As suggested in press reports this week, for its own reasons the EU may be considering reducing the 5.8 per cent interest rate on its financial facility, although this has yet to be confirmed.

5. The governor of the Central Bank and the Department of Finance believe we may not need to draw down €25 billion of the €35 billion facility provided for the banking system in the EU-IMF bailout.

On that basis the department has calculated that the availability of this €25 billion facility as a back-up overdraft could enable us to safely employ our own accumulated balances to finance part of our exchequer deficits over the next two years – instead of having to use more expensive bailout money.

Even if the EU interest rate were not to be reduced, the Department of Finance has estimated (table 6 on page D.19 of Budget 2011) that the actual 2011 interest rate payable could in this way be reduced from last year’s 4.5 per cent to 3.5 per cent this year and could be only 4.3 per cent in 2012.

6. Although the EU expects our 2011 growth rate to be less than 1 per cent it is worth noting that in October and November both the ESRI and the Central Bank, as well as a number of international agencies, were suggesting an Irish 2011 growth rate of well over 2 per cent – which the IMF then believed would be the third highest growth rate in western Europe.

We shall have to wait some months to learn whether the IMF and other international agencies remain so positive about the likely performance of the Irish economy this year, but in this context the post-bailout prospect of a reduced net interest rate in the current and immediately following year, as well as further positive news about exports and manufacturing output, is encouraging.

The only other Irish economic growth figure contained in the October IMF report was that for the year 2015 at 3.5 per cent. That was a good deal higher than the 2.5 per cent growth rate that the IMF was then projecting for the euro area as a whole – higher than their October IMF forecasts for any other European state except the Slovak Republic.

All this is an encouraging prospect for the two main Opposition parties, who may be about to inherit what will be a difficult but perhaps less than disastrous economic situation.

They are unlikely to say much about good news during the election – in which they would be wise to avoid the usual kind of election promises, including what could be unrealistic promises of a major renegotiation of the EU-IMF bailout.

Leaving aside the interest rate issue, which it seems may now be alleviated, most other changes that the new government might be tempted to seek in the terms of the “bailout” would necessarily entail new taxes or new cuts in place of those they might seek to drop.

Moreover, on the other renegotiation issue that has been specifically mentioned – the recent cut in our high minimum wage – a new government could meet European resistance. Given that our biggest economic problem is the excess of many Irish pay rates well above those of our EU partners, the EU officials who will now be monitoring our progress quarterly may well see this cut at the bottom end of our pay scales, however socially negative, as being an essential part of our economic adjustment.

Uniquely, this is an election in which, while there is intense competition between the two Opposition parties for seats, they seem certain between them to win far more seats than they collectively need, giving them a large majority that could eventually make political discipline difficult to maintain.

This is a situation in which under-promising and subsequently over-performing is likely to be the key to successful government – and perhaps to a second term for a non-Fianna Fáil government for the first time in 80 years.