Figures take us out of Club Med of bad economies but things not quite rosy

ANALYSIS:Exports and GDP are up but the continuing contraction of the economy is bad news

THE DOMESTIC economy continues to shrink. Exports continue to break records. And the gap between two parts of the economy grows ever wider (as chart 1 illustrates). Yesterday’s raft of figures on the size of the economy and on payments with the rest of the world confirm the trends in evidence since the freefall in output ended two years ago.

Start with the good news. Having revisited their numbers, the State’s statisticians revealed yesterday that Ireland’s balance of payments with the rest of the world was in surplus to the tune of almost €800 million last year (the last time they looked, they calculated that there was a €1 billion-plus deficit). Chart 2 shows it was the first such surplus this century and a turnaround from the peak deficits of 2007-08 when the imbalance was running at over €10 billion annually.

Although the State is bust and unable to pay its way, the economy as a whole is no longer borrowing from foreigners to fund itself (the private sector is paying off more foreign debt than the public sector is running up).

Another reason for the surplus is that exporters are earning more from selling to foreigners, which in turn makes it less necessary to borrow from them. Earning is always better than borrowing.

That the economy is back in the black makes it the first of the sickly PIIGS (Portugal, Ireland, Italy, Greece and Spain) to get out of the red. If nothing else, this will give the Government and officials more ammunition in their campaign to persuade the world – including their European counterparts, the troika and the markets – that Ireland is not a north Atlantic member of Club Med.

Yesterday’s GDP numbers, which show a quarterly expansion in this measure of economic activity, will also give a fillip to distancing efforts.

As chart three shows, Ireland’s GDP performance in the first quarter was on the north European end of the spectrum, on a quarter on quarter basis at least.

The statisticians also revised their figures for the size of the economy. Now they believe that it contracted by less than they previously thought last year. In raw money terms, the economy generated income of €156 billion in 2010. That is €2 billion higher than they estimated in March.

Among the reasons to welcome this revision is that it makes the national debt look a little smaller by the metric markets watch most closely. With yesterday’s news the debt/GDP ratio for 2010 falls to 94.7 per cent, down from 96 per cent.

Last year’s increase in exports of goods and services continued into 2011. Yesterday’s figures for the first quarter show the upward trend in exports, in evidence since mid-2009, powering ahead. Sales of Irish goods and services abroad, adjusted by the statisticians to account for seasonality, passed the €40 billion threshold in the first three months of the year. This was the first time that threshold has ever been passed. Another record broken and a new all-time export high.

But if anyone begins to think things are rosy on the basis of all this, then think again.

There was no shortage of bad news yesterday. The worst was from the home front. After the false dawn of early 2010, the domestic economy recorded its third consecutive quarter of contraction in the first three months of the year. As chart 1 shows, it has shrunk by almost one quarter since the bubble burst.

The largest component of domestic demand is households’ spending on goods and services. This contracted by almost 2 per cent in Q1, the biggest fall since the economy suffered its largest ever quarterly contraction at the beginning of 2009. Given the headwinds, it may well weaken further in the remaining quarters of 2011.

With public spending and investment almost certain to fall, it is hard to see growth coming from any of the three main components of domestic demand. If the global economy hits a soft patch, the only thing keeping the Irish economy going – exports – will suffer. It is easy to see that happening.

This, combined with domestic weakness, and 2011 could easily end up being the fourth consecutive year in which the economy contracts.

Is the Irish economy flatlining?

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