The Rubber Band Effect theory has come up in discussions surrounding the launch of the Central Bank’s latest quarterly commentary. Chief economist Gabriel Fagan explained that the theory contends that the strength of recovery is directly proportional to the depth of recession. Fagan approaches the theory with the idea that it may explain Ireland’s 6 per cent growth, which comes in the form of increased demand, postponed consumption and deferred investment.
However, we must also look at this theory in a broader context. If we look at the PIIGS (Portugal, Italy, Ireland, Greece, Spain), the countries which suffered most during the economic recession due to their significant debt burdens, it becomes clear that it may be misleading to put too much store into the Rubber Band Effect theory. Logically we should be witnessing Greece’s economy expanding at a much faster rate than Ireland, having fallen further initially. Rather than experiencing improvements, Greece seems to be barely holding itself together. The economy has shrunk by a quarter in five years and unemployment is above 25 per cent. Economic history also tells us that the deeper the recession, the longer it takes to recover.
Irish statistics do seem to support the theory. A report released by the Central Bank suggests that Ireland’s current spurt of jobs-rich growth underpins a resurgence in domestic demand and a healthy stream of tax revenue for the exchequer. The report also referenced a pick-up in growth in export countries such as the US and UK, a €1.1 trillion ECB stimulus, cheap money internationally and the restoration of bank balance sheets. Fagan also notes that the rehabilitation of public finances is an “outstanding achievement” of the current economic era.
However, Ireland’s case seems to be the exception rather than the rule as other countries which were severely hit by the recession do not seem to be bouncing back to the same effect, causing one to question the “elastic band theory of recession.”
Author: Kate Weedy