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Economic Forecaster of the year looks ahead to 2014

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IrishCentral sat down with economist Jim O’Sullivan this week to ask his opinion on the economic outlook in the US and Ireland for 2014. According to MarketWatch, he is "the best high-frequency economic forecaster in America." He was MarketWatch Forecaster of the Year for 2004, 2006, 2008, 2011, 2012 and 2013.

Jim is an Irish American who attended Trinity College in Dublin where he completed a BA in Economics.

Looking to the year ahead, what is the outlook for US Economy?

The economy should continue to recover this year. That is not to say everything will be fully back yet to where it was in 2007, before the financial crisis, but we have come a long way, despite a lot of lingering headwinds. The crisis led to an 8.7 million decline in employment, making for the worst U.S. recession since the Great Depression, but employment is now up 7.6 million from the low. Of course, because of labor force growth, employment also needs to grow over time, so we need to do better than just back to where we were. A lot of people are still out of work, but the trend in employment growth has been around 180,000 per month recently. We expect acceleration to around 200,000 per month in 2014. While far from booming, that represents progress. The glass is half full and filling rather than half empty and emptying!

As for GDP, the trend for most of the recovery has been for only around a 2-2.5% growth rate, but there was a pickup to over 3% in the second half of last year. We expect that 3%-plus pace to continue in 2014.

What are the opportunities for SMEs (small and medium enterprises) in 2014?

Realistically, there is not going to be a sea change in 2014. More than four years into the recovery, if we have not seen a boom by now, chances are we are not going to see one. That said, the economy is slowly but surely improving. The improvement has benefited small and medium as well as large firms. Construction firms in particular, many of which are relatively small, benefited as the housing sector belatedly began to recover. Commercial construction was also slow to recover but appears to be picking up now.

What are some risks that could dampen the economic recovery?

There always risks! Certainly, a loss of confidence in financial markets can become self-fulfilling to some extent. Markets have been rattled a bit recently by concerns about emerging markets. There is also the risk that markets could over-extrapolate a couple of stronger readings for inflation, causing interest rates to rise more rapidly than justified by the solid-but-not-spectacular pace for growth. Conversely, there are also upside risks. Monetary policy remains extraordinarily accommodative, the drag from fiscal policy will fade dramatically this year, and accelerating growth can effectively feed on itself – with increased spending leading to increased employment, leading to increased spending, and so on. Personally, I think the risks are more on the upside than the downside this year.

What advice would you have for middle class earners? Pay down debt and save more?

I'll preface my answer with the caveat that our firm advises institutional clients on broad macro trends. In turn, they make their own decisions on how to invest. We are not financial advisors. But I would think it is generally good advice for most people to save more, using those savings to either make risk-appropriate investments or to pay down debt. I'll add that there is much more of a case for paying down expensive credit card debt than historically cheap mortgage debt.

What do you think is going to happen to Ireland's economy now that it is out of the IMF program?

Ireland has started recovering again, albeit after dramatic weakening. As big as the U.S housing bubble was, the Irish one was much bigger, and housing was much more important to the Irish economy than the U.S. economy. The result was a much more severe recession. In the U.S., the unemployment rate jumped from 4.5% to a high of 10.0%; it is now 6.7%. In Ireland, it went from 4.5% to 15.0; it is now 12.4%. Of course, it would be even higher without emigration. Nonetheless, the long climb back has begun.

What can Irish government do to influence this?

The Irish economy is highly dependent on exports, so one of the big negatives for Ireland is the weak Eurozone economy. In turn, the single biggest drag on Eurozone growth is the still-weak European banking system. So I would say anything the Irish government can do to encourage pan-European efforts to recapitalize the European banking system would probably help Ireland as well. I am certainly not saying the Irish taxpayer should inject money into French or Italian banks! Irish taxpayers have done more than their share in bailing out the creditors of the banks in Ireland and should probably keep pushing for relief. But European governments in general need to do what they can to get credit flowing again.

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