ECONOMICS: Ireland's addiction to blunt year-on-year figures blinds many to the sharper quarterly truth
THE IRISH recession is almost over. That statement may shock some readers as much as the mind-boggling billions needed to fill the crater in our banking system. Yet amid the clamour over the damage wreaked by reckless lending in the past, the recent stabilisation in the economy has received little attention.
Three reasons account for the blind-spot about that improvement: lagging statistics; widespread focus on the wrong metrics; and “feel” versus concrete evidence. First, data on the economy as a whole – National Accounts – are only produced once a quarter. Even then, the figures are way out-of-date, being released almost three months following the end of the reference period ie first-quarter numbers will be available in late June. It is far too late to wait until then to find out what has happened in the economy. As a consequence, many real-time (or virtually real-time) indicators are produced. The latest evidence from those indices for the month of March – the PMI surveys, Live Register and consumer confidence – suggest that the economy is bottoming.
Second, we seem to have an obsession in Ireland (almost uniquely in the developed world) with annual changes. But 12 months is an age in macroeconomic terms, particularly at turning points. It is difficult and unsatisfactory to attempt to spot whether activity has reached an inflection point by focusing on the change compared with this time last year. For example, in any year, activity could plummet for the first six months and then move sideways for the next six. The annual change would show up as a big negative, yet the period in which the economy had troughed would be long in the past. In other countries, quarter-on-quarter rather than year-on-year changes in gross national product (GDP) – GNP is a superior metric in the Irish case, but I’ll come back to that – are used to assess the economy’s performance. So when you hear that the US has expanded by X per cent, that gain is calculated by comparing this quarter with the one just past.
The Central Statistics Office has produced quarterly National Accounts since 1997, adjusted for seasonal factors. They are robust and no more volatile than their Japanese equivalent for example. That series showed that we entered recession in the first quarter of 2008. It may ultimately pinpoint that we exited in this current quarter. By comparing each quarter with the previous one, real GNP started to decline over two years ago. When the second quarter 2010 numbers are revealed (in September!), they will probably record that national income rose quarter-on-quarter in Q2. Yet the more backward-looking year-on-year change will remain misleadingly negative.
The third reason that the turning point in the economy may be missed is that the average citizen won’t “feel” the improvement for a number of months after growth has returned. The primary metric by which most people judge their economic wellbeing is employment, it being the primary driver of income. Unemployment invariably lags turning points, for a simple reason. Companies generally look in the rear-view mirror and, in the initial stages of recovery, are cautious about investing for the future. When they finally believe that recovery is for real, they start to hire. Typically, the lag is anything between three and nine months. So if the economy reached its nadir in the first quarter of 2010, we can expect the unemployment rate to peak below 14 per cent in the summer.
Even if the economy is set to emerge from recession overall, some sectors such as construction and indigenous industry will languish behind for a time. As in 2001-2002, Ireland is now a two-speed economy (it didnt last long back then thanks to the creation of a credit bubble). Large export-focused companies are rebounding, as the global economy strengthens. But, at the same time, domestic-orientated businesses are struggling to find the floor. Businesses manufacturing pharmaceuticals, medical devices and software and a diverse range of firms that trade business services are expanding. But the profits of those companies are invariably repatriated to their predominately overseas owners.
That causes further measurement difficulties and confusion. The premium of GDP (output) over GNP (gross national product, or income of Irish residents) has widened from 17 per cent to almost 25 per cent during the recession. Irish GDP is inflated by the activities of the multinational sector, so GNP is the most accurate guide to domestic conditions and ultimately what Irish residents pocket. Ireland is not quite unique: the other euro area country where GDP exceeds GNP by a massive amount is Luxembourg. But for a different reason, as many of the workers that produce in Luxembourg during the day head back home across the border to Belgium, France and Germany at night.
A final point is worth making on the subject of domestic perception versus the reality of the activity numbers. People look around to see scattered shops and outlets lying vacant and hear about rising insolvencies. Yet that troubling scene provides few insights about today’s economy with the possible exception that retail rents still need addressing. Many of those businesses were not viable from the start, their business models based on the 2006-2007 unreality. They shed the bulk of their staff long ago and are only now capitulating. The turning point in the economy won’t help them. But that shakeout will lead to renewal: the firms founded in 2010 face a new environment with their choice of skilled workers willing to labour for much less, cheaper rents, lower property prices and other reduced costs of business.
Rossa White is chief economist with Davy
