Comment: 'Such welcome and unwelcome news at once, 'tis hard to reconcile." That quote from Shakespeare's Macbeth sums up the mood of many economists right now.
Following disappointing economic growth of just 3 per cent for the first half of this year from the Central Statistics Office (CSO) last Friday, the Economic and Social Research Institute (ESRI) has just forecast growth of almost 6 per cent for the whole of 2005.
The only thing that is clear is that, regardless of scale, the quality of growth is declining. The CSO showed that growth depended increasingly on consumer spending.
Reconciling figures from the ESRI, the CSO and the recent Exchequer returns is difficult - though it is clear that, whatever the final growth rate for 2005, we are entering a phase of yellow-pack growth.
Growth forecasts matter because of the relationship tax revenues have with Government spending on the one hand and growth on the other. Stronger growth brings money in and reduces Government spending on welfare. Weaker growth does the opposite. The relationship cannot be measured, but its broad movements follow an economic cycle.
A useful rule of thumb is this: if growth is one percentage point higher or lower than forecast, the budgetary balance will be about €700 million better or worse. That's a couple of new hospitals to you and me. The latest Exchequer returns data show that tax revenues in the first three quarters were €1 billion ahead of target. However, more than two-thirds of this is due to windfall gains from investigations and a demographically driven property market.
As far as the underlying cycle is concerned, the signals coming from the Exchequer data are mixed. Strong Vat returns indicate continuing consumer strength but very weak corporate profits. And the rate of growth in income tax is below what would be consistent with strong employment growth.
In its optimism, the ESRI is relying on very strong employment growth - 93,000 in the 12 months to May 2005.
There is likely to be some improvement in the external performance of the economy as exports convalesce and imports moderate. But the ESRI admits that growth is particularly dependent on the present construction boom, and on personal consumption rates that are driven by exceptionally low interest rates.
Conditions in the euro zone and Germany will keep those rates low until the end of 2006. Growth in Ireland will, consequently, remain strong at least until then. And the ESRI has already factored in oil prices of about $60 (€49) per barrel.
But if the CSO is right about the growth rate in the first half of the year, growth would have to exceed 8 per cent in the second half for the ESRI to be right.
Either that or the CSO might revise its numbers upwards. But the CSO's most recent revision of its data was downward, and the composition of employment growth is increasingly in volatile and low value-added sectors.
