At the very least, our economy is now slowing down; indeed, as was suggested in this column last week, our national output may be declining slightly. The externally-owned high-tech industrial sector is bearing the main initial brunt of the downturn, and up to July, at any rate, the output of our indigenous industries had been little affected.
But the industrial downturn should not be exaggerated. Growth in the pharmaceutical sector has continued to offset some of the losses elsewhere, and it is important to realise that for technical reasons the CS0's manufacturing output index greatly exaggerates the scale of the overall decline in output that has been taking place since April.
That index shows a seasonally-adjusted drop of 13 per cent in manufacturing output in the three months ended July, by comparison with the immediately preceding three months. But that reflects the over-weighting of certain sectors in the construction of the overall output figure.
The weighting system used for each sector in order to arrive at a figure for manufacturing output as a whole is based on the gross value added in each sector. And this means that some high-tech industries with high profit margins loom much larger in the measurement process than is warranted by their contribution to the economy.
The classic example of this is the Basic Chemicals sector, in which the production of Viagra by Pfizer here plays a major role. This industry employs only about 3 per cent of our manufacturing labour force, and is responsible for just under 5 per cent of manufacturing wages and salaries. (Pay rates as well as profits are very high in this industry). But, because of the extraordinarily high profits that Viagra earns, this Basic Chemicals sector is credited with almost one-third of all the value added by our entire manufacturing sector. Consequently when output of this sector falls - as it did by over 21 per cent in the three months ended July last - this has a huge impact on our published index of total manufacturing output.
However, if this index of total manufacturing output were instead to be constructed by giving each sector of industry a weight based on its wages and salaries bill, the drop in manufacturing output in the three months ended July would emerge as having been only 6 per cent rather than 13 per cent.
Now, a 6 per cent decline in overall industrial output is much closer to the drop in exports that occurred during that same three month period, viz 5 per cent, although it should be said that our export figures are also affected by the inclusion in their value of the profits made in processing them - profits that accrue to the parent firms abroad rather than to our economy.
We have to accept that, because our economic growth has been dependent both on what is currently a declining inflow of high-tech investment from the US and also on the output of these firms located here, it is likely that the recession in that country, aggravated by the cataclysm of September 11th, will have a greater effect on Ireland than on other European countries.
Inevitably this is going to mean hardship for some people - perhaps for as many as 70,000 workers if the ESRI medium-term forecast of a rise in unemployment to 7.5 per cent proves accurate. But - although this offers little consolation to those likely to be affected - that disruption of our economy is likely to be temporary: the ESRI suggests that in terms of output and employment the ground temporarily lost during this recession will be fully recovered within a few years.
Thus this recession offers no grounds for feeling that the strategy of achieving rapid economic growth by attracting high-tech industries was in any way mistaken. It is clearly better to have provided employment since 1993 for some 700,000 people in Ireland - over 450,000 of them in new jobs - than not to have created these jobs at all.
This is perhaps a good moment to look at another aspect of Irish economic activity which until now has received little publicity. I am referring to the reverse side of foreign investment in Ireland - Irish investment overseas.
Few people realise that a dynamic minority of Irish industrial and financial firms are now multinationals, with substantial investments abroad. In an article this subject last year I said that there appeared to be some 30 Irish firms with significant direct investments abroad, and that this annual outflow of investment seemed to have risen from £2.8 billion in 1998 to £4 billion in 1999.
Forfas has published a report on Irish investment overseas, which confirms that Irish multinationals are now playing a not insignificant role abroad. Their figures for investment by Irish multinationals abroad correspond almost exactly with the figures derived from the balance of payments that I published here 15 months ago.
What I was unable to do because of lack of data at that time was to estimate the total stock of Irish direct investment abroad at the end of 2000, which Forfas now puts at £13.5 billion - although for reasons given below this may be an underestimate. The fact that two-thirds of this total is accounted for by investments made in the past five years shows how very recent this process is.
This report also shows that the scale of our stock of direct investment abroad last year, measured as a percentage of our GNP, was about 20 per cent. .
In the presentation of this otherwise very useful Report it seems to me that the growing significance of this aspect of Irish economic activity is to some extent underplayed. But, as a very recent entrant to the multinational market, it seems no way surprising that we should not yet have attained a ratio of external investment stock to GNP that is near to that of long-established foreign investors such as the UK, Switzerland, Sweden, Belgium and the Netherlands - between 35 per cent and 70 per cent of their GNP.
It is, I believe, much more relevant to compare us with some other European countries that are less externally engaged than the Big Five, but which have nevertheless been investing abroad for far longer than Ireland. And I am impressed by the fact that within a few years of launching into this kind of economic activity, already by 1999 our foreign direct investment was looming larger with us than with countries such as France, Italy, Spain and Austria.
Moreover, there are indications in this report that the data in it from which I have drawn the above figures may significantly understate the scale of Irish foreign direct investment. For US Department of Commerce material quoted in the report yields a 1999 figure (£13 billion) for Irish direct investment in the US that is bigger than the total for all such investment in that year.
Incidentally these US figures, which also indicate that Irish multinationals employ 65,000 people in that country, apparently make Ireland out to be the sixth-largest foreign investor there. That will be news to most people.
gfitzgerald@irish-times.ie