Lenihan: We didn't notice the downturn

So said that Sunday Independent yesterday. It went on:

Mr Lenihan effectively admitted that the Government only became aware of the “decline” two months after he had been appointed Finance Minister. He said: “When we first saw the sign of decline in July …”

While I think the headline does not entirely warrant the content, it does say something about the Government’s inability to see what was coming down the line. Indeed their actions thus far point to a make-it-up-as-you-go-along strategy. But in fairness, they were not the only ones.

July was the month that the ESRI declared we were facing a recssion, which perhaps crystalised the minds of some politicians and commentators. The ESRI estimates looked low-ball to me at the time – and I said as much. I added:

As for the recent rise in unemployment, things are going to get much worse I fear. Unemployment hit 5.7% according to CSO figures released last week. That means 217,400 people out of work.

Now double it. 10% in 2009, or half a million people out of work. How bad would that be for the economy? Fundamentals are sound my ass.

That was July 6. Glass half full left a comment completely disagreeing with my forecast (which I based on what I was hearing anecdotally, and on what I would call a common sense view of the construction sector, the unwinding property bubble, banks that had overextended themselves, and the estimated 6 months that is given for the collapse of Bear Stearns to filter through the international monetary system). Some of the commentators over on Property Pin helped to crystalise my own views. Glass half full said:

I fear the litany of media reports about recession may have got to you. I don’t agree with your 10% unemployment forecast for next year. It is my view, and it’s only a hunch of course, that unemployment could reach 6% next year but no higher than that. As for the cycle we are in now, well yes troughs happen every so often and we are entering one now.

Yes, shoot the messenger. Could reach 6%? We’ve passed that already. However only this weekend, 6 months later, does Mr Lenihan come round to the more pessimistic view:

Unemployment is likely to rise to 10 per cent of the workforce next year, Brian Lenihan, the Minister for Finance, has warned, meaning it will have doubled in the space of a year.

I am no economic genius. Nor am I a fortune teller. But it was clear a very long time ago that the economy, and specifically employment, were in very serious trouble. Just the number of workers involved in the construction sector was reason enough to predict 10% unemployment in 2009. And Lenihan, it appears, struggled to see that coming.

South reminded my of the Economist’s own forecasts about the Irish economy, published back in November 2007.

* The fiscal position is deteriorating, and this will place constraints on government expenditure. A deficit is expected by 2009.
* GDP growth is expected to slow sharply in 2008, mainly because of the ongoing slowdown in the previously overheated property sector. However, there is a real risk of recession.
* Unemployment is expected to rise over the outlook period, as the construction sector shrinks,

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