A reason to cheer as revision finds €2.6bn - just don't get carried away
ANALYSIS:Given the headwinds, there is little reason to believe robust recovery is at hand – but there is some good news, writes DAN O'BRIEN,Economics Editor
THE EURO breaking apart remains a nightmarish possibility. Flagging international demand will negatively affect the Irish economy – later if not sooner. The economy is still afflicted by profound domestic weaknesses. Irish economic figures are more volatile than in most other peer economies, and hence somewhat less reliable as health indicators.
These are the caveats. They are important caveats. What follows, therefore, should not be interpreted as heralding the beginning of sustained recovery. From the hard data and the ferocity of the headwinds, there is little reason to believe that robust recovery is at hand.
All that said, the new information published this week on the state of the economy gives more cause for cheer than gloom.
First up is a number-crunching issue. A bigger-than-usual revision exercise by the CSO has resulted in the finding of €2.6 billion that it had not previously noticed. Last year, the economy generated €159 billion in wealth, as measured by cash gross domestic product. The statisticians had previously thought the figure was €156.4 billion. It was higher in previous years too (see chart 1).
This, one hastens to add, is emphatically not similar to the Department of Finance last year finding €3 billion it had previously mislaid. The better GDP figures came about because the CSO has improved the way it measures economic activity. It does not mean that a pile of banknotes stacking up to €2.6 billion has been found down the back of a State-owned couch.
But it is welcome nonetheless. Among other things, it makes the State’s very large debt burden marginally smaller when expressed as a percentage of GDP – by far the most commonly watched debt measure.
The revisions also make last year’s rate of growth look healthier. At 1.4 per cent, it is twice the rate previously estimated.
Released for the first time – accidentally on Wednesday, formally yesterday – were economic growth figures for the first three months of the year. Bad headline figures masked a decent performance by the standards of recent years.
Apart from some consumers closing their wallets in protest at January’s VAT hike, nothing that happened to any of the other components of growth caused alarm. Some components and sectors surprised to the upside.
The main reason headline GDP and GNP contracted in the first three months is an accounting idiosyncrasy. The way GDP/GNP is totted means that exports add to both measures, while imports lower them.
Imports, particularly when they add to an economy’s productive capacity, are good, not bad. In the first quarter, much of the surge in imports was due to the importing of aircraft.
One bank economist commented yesterday that “negative for Q1 GDP was a 4.9 per cent surge in imports”. It is unclear whether he thinks this was truly negative or merely negative in the arithmetic sense. That Michael O’Leary is investing more in sky-bussing people about the place is only positive. The business and profits generated are good for the Irish economy. They make for a stronger Ryanair, more jobs and more corporation tax revenues. Where’s the negative in that?
The statisticians’ revisions have also affected the balance of payments. These figures measure, among other things, how much the entire economy is shelling out to foreigners and how much it is earning from them.
As the second chart shows, Ireland was not paying its way in the final years of the bubble. To fund this deficit, the economy as a whole had to borrow from the rest of the world. Put another way, Irish residents collectively borrowed from foreigners to pay other foreigners for their goods and services. One does not have to be an economist to work out that doing so for too long will eventually lead to trouble.
It is positive, then, that since the crash the balance of payments deficit has closed.
Before yesterday, the CSO’s number crunchers had estimated that last year there was a tiny surplus.
Yesterday’s revisions show that instead of a surplus in 2011 of a pifflingly small €127 million (loose change given the size of the inflows and outflows), it was many multiples of that, standing at €1.8 billion.
Alas, as other figures published yesterday show, Irish residents have net liabilities with the rest of the world of a massive €160 billion. It will take many years and bigger surpluses before that is reduced to lower, safer level.