SCENARIO 1: RECOVERY

Under the best ESRI scenario growth in gross national product will reach 3.6 per cent a year in the second half of the decade as problems in the Irish financial sector are tackled effectively and the European economy normalises.

While full employment would not be reached by 2020 even in this best-case scenario, the level of unemployment would be more than halved to around 6 per cent.

Such an outcome would of itself play a major role in restoring the public finances to a sustainable path. This would allow a shift to a more neutral fiscal stance from 2015 onwards that would be much more supportive of growth.

In this scenario the EU economy returns to a “reasonable” rate of growth over the rest of the decade. It is also assumed that the export sector of the economy would see its markets grow, resulting in increases in output and employment.

In turn, growth in foreign demand would help produce a turnaround in domestic demand. As firms increase their sales and their profitability they would need to invest to continue growing.

Demographic pressures would mean that more dwellings would need to be built later in the decade and a recovery in household circumstances would suggest that this investment could, in theory at least, be financed.

SCENARIO 2: DELAYED ADJUSTMENT

GNP growth in the second half of the decade reaches 3.2 per cent a year.

In this ESRI scenario, the EU economy recovers but domestic policy fails to resolve problems, such as those in the Irish financial system and the labour market.

Such a scenario could see the economy “seriously underperform its potential”.

In this scenario, the ESRI warns of a danger that the skills and experience of the long-term unemployed could be impaired by their time out of work. The result might be that they might not benefit from a return to employment growth.

This would cause the unemployment rate to remain in double digits for most of the decade.

The institute urges the development of “a suite of labour market policies to ensure that, in the event of a recovery, the long-term unemployed find their way back into employment”.

The delayed recovery scenario, in turn, would mean that fiscal policy could not be relaxed until much later in the decade.

As a result, the 2015 and 2016 budgets would have to take more money out of the economy.


SCENARIO 3: STAGNATION

GNP grows at 1 per cent a year out to 2020. This stagnation scenario by the ESRI is based on circumstances where the EU economy does not return to growth in the near future.

The result would be a "zombie" decade for the EU and this would have serious consequences for Ireland.

With no growth in the EU, the Irish economy, even if managed effectively, would do well to grow over the second half of the decade.

The unemployment rate in 2020 would remain where it is today, while emigration would be expected to run at 22,000 a year for the foreseeable future.

The failure of growth would have serious implications for the public finances.

In order to keep borrowing under control, continuing tough budgets would be needed until the end of the decade.

In spite of this very tough fiscal stance, the burden of debt would remain very high.

This would leave the economy very vulnerable to new shocks.

Any attempt to use fiscal policy to stimulate domestic demand would rapidly run into twin constraints: the need to keep the government debt sustainable and the need to maintain broad balance on the current account of the balance of payments.