Friday, September 22, 2023

The past is a foreign country

We all like looking to the past for evidence and pointers to help understand the present.  A deterioration in the current of the balance of payments has been such a pointer for instances of economic mismanagement in Ireland. 

Following Honohan and Walsh (2002) we can see that in the last fifty years the Irish economy has gone through two loops of:

  1. Imbalances building up via that deterioration of the current account,
  2. Weaknesses being exposed and resulting in a shooting up of the unemployment rate,
  3. A period of painful readjustment before,
  4. Recoveries took hold.

These loops from 1975 to 1998 and from 2003 to 2018 are shown below using the unemployment rate (vertical axis) and the current account (horizontal axis).

Internal and External Imbalances 1975-2022

The thing is though, these are not really useful for assessment the current position of the Irish economy.  2022 saw Ireland with an average unemployment rate of around 4.5 per cent while the surplus on the modified current account of the balance of payments (CA*) was equivalent to around 7.5 per cent of modified gross national income (GNI*). 

The economy had reached a near identical position in 2019 but then COVID19 reared its head.  Relative to the economic history of the State since its foundation, it is an unprecedented position: near full employment and large balance of payments surpluses. From a policy perspective, the unemployment rate could be a bigger constraint to achieving priorities. Sure, we should not forget the mistakes of the past, but they do things differently there.

Addendum: It is somewhat nonsensical but a further way of looking at it is to consider the sum of the unemployment rate and the current account deficit (thus a deficit is represented by a positive number).  This shows:

Internal and External Imbalances Sum of 1975-2022

Again, we can see the imbalances building up after 1975 and 2003.  But the main thing is to highlight just how far 2022 is from even those starting points.  We know things can change quickly but we should also recognise where we are now is pretty much unprecedented.