Will the new international austerity measures have a major impact on world growth?
David Bloch, MD of the Brightwater Group comments:
President Obama warned in the early summer that a premature exit from stimulus measures could erode the tentative steps towards recovery that the global economy has made.
Last month's question:
Will the new international austerity measures have a major impact on world growth?
- Yes: 52%
- No: 31%
- Uncertain: 17%
Of course the new measures will have an impact on world growth. Europe's major economies are focusing on belt-tightening and many would argue that for the first time in years, governments are actually being proactive rather than reactive. What is surprising for many economists is that the general public have also recognised the necessity of severe cuts in spending across many European countries. While Ireland is often grouped with the likes of Greece, Spain and Portugal, it has handled its debt problems much differently and considerably earlier than the likes of Greece where people are taking to the streets in violent protests and Spain where their austerity plan was just barely passed through Parliament. Ireland is often put forward as a model for taking the proper austerity measures to put the country on the road to recovery.
Ireland first introduced austerity measures two years ago, well before any other European country. At the time, the main concern was ensuring that international investor confidence in Ireland remained so that the country could continue to borrow. Even recent events such as the downgrading of Standard & Poors' credit rating of Ireland from AA to AA minus hasn't dented international confidence in the country as last week's strong showing in the auction of Irish bonds demonstrated. Perhaps investors realise that even an AA minus rating means that the borrower has "very strong capacity to meet financial commitments" and because of that they haven't lost any real confidence in the Irish economy.
The Irish government is now pinning all its hopes on an export revival to help lift the economy. Small businesses may still be struggling with cash flow but with multinationals based here such as Facebook, Microsoft, Linked In and Pfizer all benefiting from the 12.5 % tax rate, Ireland is one of the most export dependent economies in the world and they really need to increase their export figures to make a difference. Ironically wage cuts have driven wages bill down therefore improving competitiveness.
Much has been made of the "Fear Factor" in these times – are consumers too afraid to spend, therefore contributing to the demise of hopes for job creation and economic recovery? Perhaps this was true last year – however this year is a very different scenario. Figures show that consumer spending is rising and indeed many people are conscious of helping the Irish economy. A recent survey from retail publication "Checkout" shows that shoppers in Ireland are making much more of an effort to buy Irish with domestic goods all climbing in this year's list of top 100 brands. The motor industry, always a good indicator of the public's willingness to spend has seen new car sales figures improve 47% on the first seven months of last year according to a recent survey by the Society of Irish Motor Industry. The very nature of people means that they will want to take advantage of cheaper prices either to buy a new car or a new house particularly when prices are considerably lower and they can get what they perceive is a bargain. This is now resulting in a slow but definite return to spending and hopefully this will contribute to the overall economic recovery in Ireland. If other nations can see success in our highly publicised efforts to put our economy back on its feet, then surely their own austerity measures will gain a modicum of public support as well.
To conclude, worldwide austerity measures have to slow the recovery down as there is less money in the system, but at the end of the day, market forces will out and things are slowly, but steadily improving. As inevitable as a bust is after a boom, so is a boom after a bust – it's just going to take a little longer this time!
Take this month's poll:
Will closer fiscal policies help both the Republic of Ireland and Northern Ireland grow faster?