The psychology of fear keeps us prepared for the worst economically, but that’s the wrong way to go

There’s a difference between a downturn, a slowdown, a recession, a crash, and a slump. The psychology of fear dictates that many people will assume the most frightening of these scenarios.

But our economic situation says otherwise. Forecasts don’t always count for much. They’re usually right until they end up wrong, in which case they’re just revised.

The Treasury was still expecting the Irish economy to grow next year when Finance Minister Paschal Donohoe announced his €11 billion budget a few weeks ago.

The employer group Ibec this week lowered its growth forecasts for economic output next year from 4 percent to 3 percent. It may be wrong, but if it’s right, we’re not facing another economic catastrophe.

The Irish economy recovered from Covid at lightning speed. It was helped by other countries continuing to buy our stuff and the Irish spending some of their accumulated savings. Government subsidies that kept people in employment also made a big difference.

Public finances remain in a strong position, at least for the time being. Massive corporate tax revenues have made a big difference, but they’re not the only area where the state is raking in money.

In the first 10 months of 2019 – the last normal year before Covid – the state took in over 17 billion euros in income tax. So far this year it has been almost 24 billion euros.

Sales tax revenue in the first 10 months of 2019 amounted to €12.5 billion. So far this year, it’s been 15.5 billion euros.

The downturn we are likely to experience could wipe out these numbers if it turns into a jobs crisis. But the economy has developed really strongly in recent years.

The coming downturn may or may not technically meet the criteria for a recession. It probably will. Things will slow down and people will lose their jobs. We’re beginning to see it in areas ranging from hospitality with restaurant closures to tech companies like Twitter cutting staff.

Those on the lowest incomes are already struggling with the consequences of rising energy bills, rents and groceries.

But that doesn’t mean we’re headed for another 2008 slump. It is astonishing considering that Ireland is one of only three EU economies heading into this period with a budget surplus.

We are virtually alone in consensus economic forecasts for next year’s growth. But we’ll have to see how long these predictions hold up.

The really grim days of 2009-2012 caused people with money left to spend to save and hang on. Companies were so shocked that the hubris of the boom years collapsed around them that they didn’t invest even if they had the resources to do so.

This downturn/recession is probably the clearest you will ever experience. Usually, downturns catch people off guard as they carry on under the delusional belief that everything will stay the same. And then – boom.

This time, people are anticipating a recession who haven’t even experienced a downturn. They are so conditioned to limit their spending and planning for the future too much and too soon.

Households and businesses are rightly wary, but a complete retreat can often only make things worse.

From a government perspective, now is the time to invest in the future. A downturn is a good time to pour money into the tourism industry to bring international visitor numbers back to pre-Covid levels.

Now is also the time to continue the drive for FDI.

It would be a mistake to close up shop by withdrawing from marketing Ireland abroad. It is unfortunate that at this time IDA Ireland has lost a very effective and experienced General Manager to the private sector in Martin Shanahan. His successor must be appointed very quickly.

A recession is one thing, but predicting how long it will last is another. Speak to economists now, and they’re reluctant to speculate on how long such a downturn might last. Higher interest rates will remain, but they are not particularly high by historical standards.

Inflation measures the rate at which prices are increasing. Even if it goes down, that doesn’t mean products will get cheaper. We’ll likely see a real drop in purchasing power, but it doesn’t have to be an economic disaster.

Business bosses are better at guiding their companies through slower times. During the boom, many of them had never experienced a slowdown.

Mortgage borrowing has been very high due to house price inflation in recent years. The central bank’s lending rules should have ensured that anyone who took out a mortgage in the last five years had some protection against a fall in house prices.

Prices could drop 10 percent or more before these people have a home that’s worth less than they owe for it. This is unlike the peak of 2006, when many people had mortgages greater than 100 percent and the slightest drop in value put them in negative equity for several years.

In contrast to the boom years, fewer people were buying real estate for short-term gain.

There are families right now that are really struggling before the worst of the downturn comes.

The state will have to prioritize these budgets in the coming months when things get even more difficult.

But many people are well equipped to weather a period when things are slowing down. Our economy cannot always be somewhere on the way to a boom or in the midst of a crisis. There has to be something in between and we’re about to see it.