Quarterly figures not the wide angle needed to see true state of economy


ANALYSIS:The best that can be said about the numbers is that the economy has hit bottom – probably, writes DAN O'BRIEN,Economics Editor

THE RECESSION has ended. After eight consecutive quarters of contraction, economic growth has returned. Not only was the GDP measure of economic expansion unusually strong in the first quarter of 2010, at 2.7 per cent, it was by a distance the highest rate recorded among the euro zone economies (see Chart 3).

But this measure flatters to deceive. GNP – which differs from GDP mostly in that it excludes multinationals’ profits – continued to decline, falling by 0.5 per cent on the final three months of 2009. Domestic demand, which excludes imports and exports, shrank by 1.7 per cent.

To see where the economy is now, and to put it in context with peer economies, a wider angle and longer time horizon than the latest three-month GDP figures is needed.

Taking the beginning of 2007 is the best starting point. Then, the property mania ended. The economy teetered throughout that year before plunging into recession from the beginning of 2008. Chart 4 shows just how much earlier the downturn started in Ireland and how the “Great Recession” has been a mere blip for most other countries compared to the output shock this economy has suffered.

The best that can really be said about yesterday’s numbers is that the economy has hit bottom. Probably.

(Incidentally, it is worth noting by those who obstinately suggest that Ireland’s woes were caused by the collapse of Lehman Brothers that the economy had already suffered approximately half of its peak-to-trough contraction by the time of that event, as Chart 4 illustrates.)

To predict where the economy is heading, yesterday’s first-quarter numbers need to be broken and down and more timely indicators examined.

The most encouraging news comes from exports. Over the course of 2009, sales of goods and services to foreigners held up remarkably well given the 1930-style collapse in international demand. Multinational manufacturers and resiliently competitive services firms accounted for this success.

In the first quarter of 2010, their combined exports surged, expanding by a blistering 6.9 per cent quarter on quarter to reach the second highest level on record. The only more recent data available is sales of merchandise goods for April. A 4.4 per cent month-on-month rise suggests that strong growth continued into the second quarter.

Although a weakening euro will disproportionately benefit the Republic, owing to its large trade links with the UK and the US, the risks to the international recovery, and hence demand for Irish exports, are many and of very high potential impact.

If there is a less than positive aspect of the trade numbers in recent quarters, it is the limited contribution of indigenously owned firms, as evidenced by the decoupling of GDP and GNP measures of growth over the past five quarters (see Chart 4).

The picture revealed in yesterday’s national accounts numbers is grim in parts. Unavoidable austerity measures have caused government consumption to contract. Given the precariousness of the public finances, this component of demand can be expected to drag down overall GDP/GNP for the foreseeable future.

Further large falls in investment spending will weigh even more heavily, as the precipitous rate of decline over the past three years accelerated in the first three months of 2010.

All the signs are that companies continue to face a severe credit crunch. Given that Irish businesses are unusually dependent on bank financing to fund spending on investment, capital formation will remain limited.

The outlook for employment over the remainder of the year is less than positive.

Jobs growth lags output growth (be it GDP or GNP). Compare Charts 4 and 5. In 2007 when Irish GDP and GNP faltered, employment continued to grow. In the first quarter of 2010, when GDP rebounded, total employment in the economy fell by almost a full percentage point over the last quarter of 2009.

Such a contraction is very large by historical standards for this country or when compared to the recent experiences of peer countries. As Chart 5 illustrates, Ireland has suffered the worst employment shock of any developed country, with one in eight jobs having disappeared.

Only Spain and to a lesser extent the US have experienced jobs destruction on a remotely comparable scale, respectively losing one in 10 and one in 20 jobs since the peak.

Regardless of what happens to output over the remainder of the year, it will be 2011 at the earliest before employment begins to expand.