Volatility in Irish growth figures hinders forecasts

The volatility in official Irish figures for economic growth ranks among the highest in the western world, according to a new analysis from the Economic & Social Research Institute.

A paper by ESRI researcher Niall Conroy suggests that the difficulties in measuring Irish gross national product and gross domestic product on a quarterly basis are at their greatest at turning points in the economy.

"Today's note shows that the volatility in quarterly GNP and GDP in Ireland is amongst the highest in the OECD," said Mr Conroy in reference to his paper titled Irish Quarterly Macroeconomic Data, A Volatility Analysis.

“We can also see that the high levels of volatility are evident in several sectors of the economy, particularly those with a strong multi-national corporation presence.”

He added: “While the rate of volatility in quarterly GNP and GDP has been highlighted previously, we can see that volatility is at its highest at potential turning points in the economy.”

Policy response

This is crucial from an analytical perspective when the economy moves from recession to growth, as seen in recent times, or from growth into recession, as seen when Ireland’s economy crashed. While such changes call for a policy response, volatility in growth figures are a hindrance.

The new ESRI analysis follows acute difficulty last year in the measurement of Ireland’s economic growth as activity stepped up appreciably with the return of domestic demand as the year continued.

For example, an unanticipated advance in quarterly growth in spring and early summer led Minister for Finance Michael Noonan to upgrade his growth forecast for the Irish economy twice within one week last autumn.

At the same time, there was intense debate in economic circles over the impact on Ireland’s growth figures of contract manufacturing carried out abroad for Irish-based multinationals .

The Central Statistics Office eventually concluded that such manufacturing was not a “particularly significant” driver of Ireland’s economic growth last year but not before the Irish Fiscal Advisory Council suggested the adjustment to trade data in 2014 may have accounted for a significant portion of GDP growth.

Quarterly National Accounts released by the CSO provide the most comprehensive estimates of Irish economic activity.

However, volatility in quarter-to-quarter changes in GDP and GNP is a frequent phenomenon. “The measured volatility reflects both the underlying volatility in the Irish economy, but also the difficulty in measuring economic output in a small open economy,” said the ESRI.