Implications of QNA Release for 2009

As I noted before, the Irish media and forecasters tend to focus on the year-average over year-average figure for GDP growth (averaging the four quarters of 2009 and comparing that to the average of the four quarters of 2008).   This figure is important for thinking about things like income tax revenue, which is levied on a calendar-year basis, but it can be misleading as an indicator of the economic growth taking place in the economy during a particular year.  This is because if GDP has fallen a lot coming in to the year, then the average level may be lower than the previous year, even if GDP starts to recover.

This situation exactly applies to measuring the Irish economy right now.  In news that will hardly be surprising to anyone who reads a newspaper, today’s QNA release shows that Irish GDP fell off a cliff in 2008:Q4, with seasonally adjusted real GDP falling 7.1% in 2008:Q4 relative to 2008:Q3—not at an annual rate.   This “base effect” will make the average-over-average figure for 2009 a very poor measure of underlying economic growth.  Here’s some quick calculations.  If Irish GDP stays at its 2008:Q4 level throughout the year (i.e. if we hit bottom in 2008:Q4 and managed to stay there for the year), then average-over-average GDP growth for 2009 would be exactly -5%.

Of course, all the incoming statistics suggest that the economy continued to contract rapidly in the first quarter this year—At 10.4 percent in February, the umployment rate has already risen by 1.8 percentage points since the December level, compared with an increase of 1.4 percentage points between September and December.  If GDP posted another 7 percent decline in 2009:Q1, then even a flat level of GDP for the rest of the year would imply an average-over-average growth rate of -11.6%.

An optimistic scenario would hope that the unemployment figures in the first quarter represent more of a lagged effect and hope to limit declines in the first half of the year to two percent in each of the first and second quarters, followed by a return to growth at, let’s say, a 3 percent annual rate.  This would still imply an average-over-average growth rate of -7.8% for 2009.

I think it’s time for those that use the average-over-average figures to revise their forecasts down.

13 replies on “Implications of QNA Release for 2009”

The GDP figures today are affected by a very large increase in royalty imports (up €1.5 bn on Q3, and €1 on Q4 2007). These are not really imports, but are income repatriation by another name. Conversely, income repatriation was down sharply. As such, GDP figures look like they have fallen like a stone, while GNP figures were actually higher than in Q3. This type of distortion will always be important in the Irish data, and extrpolating momentum like Karl is suggesting doesn’t seem wise. At least wait until the revised figures for 2008, which are likely to shake up the numbers again.

Just to clarify. Some of these calculations “extrapolate momentum” and are pessimistic. Some don’t and are more optimistic. I’m not recommending one way or another. All imply very large contraction figures on an annual-over-annual basis and all illustrate that this figure can be a somewhat distorted way to look at the pattern of growth occuring during the year.

One small optimistic note: Looking at Table 6 in the National Accounts release, inventory investment fell sharply in the 2008Q4. The change in stocks was +384 in 2007Q4 and -491 in 2008Q4. Interestingly, the change was +608 in 2007Q3. This suggests that businesses pulled back production sharply in the last quarter of the year and ran down stocks of finished goods. There is some hope that this process was well-advanced by the end of the year.

I’m been thinking about Ronnie’s argument about income repatriation figures affecting GDP in Q4 and I’m not sure I agree with it. GDP reflects the total amount of income generated from production in Ireland, irrespective of who receives the income. Income repatriation flows—whether into and out of Ireland—can lead to GNP moving in a different fashion in any given quarter. By that interpretation, there were some abnormal swings in net factor income from abroad in Q2 and Q3 and these were unwound in Q4, but the Q4 GDP figure is a correct reflection of production in Q4.

Ronnie, well spotted – the royalty item could as well be in factor income as in imports, and is one reason why qtly GNP is maybe a better guide than GDP. But your ‘GNP figures were actually higher than in Q3’ refers to the nsa table – sa, GNP fell 2.2% qoq in Q4.

On carry-over, the sa fig for GDP is -5.0 and for GNP is -3.2. There is no chance of these figs being achieved, since a Q1 09 deterioration is pretty certain, as Karl argues. If GNP drops 3% in Q1 and stays there (a fairly rosy scenario?) the fy decline is 6.2%.

Looks like I don’t understand the royalty\factor income issue (something to do with some type of income flow counting in imports?) or how it affects GDP but it wouldn’t be the first time I’ve learned something useful from this blog if someone came on and explained it.

Karl, Some MNCs choose to reward their “head offices” by paying them a fee for services rendered. Obviously this does not appear as a factor flow in the SNA, but instead as an import of services. Others just allow the profits to be higher and remit. This does appear as a factor outflow. From an economist’s point of view there may be little difference in the underlying flows.

Our low corporation tax rate would seem to favour the latter route. Maybe others can explain the kinds of situation (tax or otherwise) that typically motivate the former route for some MNCs.

Karl, whether those learned in the tax code deduct as imports or factor flows in getting to bottom-line GNP is the Sixth Sorrowful Mystery, and it does’nt matter. (Think expenditure table, not output or income, as does PH above).

The important point that you keep making, correctly, is that this is a high-frequency macroeconomic correction – real GNP seems to be falling about 1% per month – and the yoy crowd are just lazy. The monthly and quarterly data are really important, and time aggregation is a big trap just now.

Dreaded Estate wants to know the peak-to-trough decline. So de we all. To date (Table 4, expendture table sa) says about 7% to Q4 ’08, but it’s not over. My guess is (quarterly sa real GNP) that double figs is likely at this stage, low teens probable and mid-teens entirely possible. These words to be eaten in due course.

Three papers have been published to my knowledge on the Irish quarterly national accounts, one on volatility (by me in ESRI QEC), one by me and John Lawlor on seasonality (also in ESRI QEC), both a few years back, and one recently by Patrick Quill of the CSO on revisions (also ESRI QEC). All are downloadable free from ESRI webiste.

The main points made are, briefly and in order: (i) the Irish qtly numbers are very volatile by international standards, not CSO’s fault, just the way it is, I think an important point. (ii) there are substantial seasonals, and you can argue the toss about whether CSO’s sa adjustment (X-12 on the aggregate data) is the best – I think not, but a small point, and (iii) Quill thinks the scale/frequency of revisions are not out of line and I agree.

If hacks continue to quote yoy % changes for monthly and qtly figs, that’s their problem, but Karl is 100% right to insist on proper attention to the CSO’s high-frequency numbers, the best we have and a huge improvement on where we were.

Took the time to examine this release now and among the things that jumped out at me was the degree to which consumer spending held up reasonably well even into the 4th quarter. Indeed consumer spending was down less than 1 per cent in 2008 as a whole relative to 2007.

The big fall on the expenditure side is in capital formation — construction of course but not only that; a big fall-off in computer and transport machinery evident from the trade stats published today.

Not much evidence here that cross-border shopping or consumer risk aversion were big drivers in the substantial fall in the domestic expenditure contribution to overall activity.

It is revealing to examine a decomposition of the 7.5% fall in real GDP recorded in Table 3.

Using GDP shares in 2007Q4 as weights, the contributions of the various components are:

Consumption = -2.0%
Government spending = 0.1%
Business/residential Investment = -7.3%
Inventory adjustment = -1.8%
Net Exports = 3.5%

Clearly, the collapse in business/residential investment is the dominant contributor to the decline. The minus 2 percentage point contribution from consumption also strikes me as large, with the contraction apparently gathering pace given what we know about retail sales. The strong positive contribution from net exports is striking, as Alan Matthews had anticipated. Finally, the large negative contribution from inventory investment is unlikely to continue as stocks are run down.

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