The latest Quarterly National Accounts release from the CSO is available here. The release has been poorly reported by the media outlets that I have seen thus far. The Irish Times reported that “The economy shrank by 8.5 per cent in the first three months of 2009” and this interpretation was repeated on the RTE 9 o’clock news.
The correct interpretation is hard to get wrong if you just take a look at the first page of the release, which says “Compared with the corresponding quarter of 2008, GDP at constant prices was 8.5 per cent lower.” So 8.5 percent is the cumulative decline over the past year rather than the decline that occurred over the first three months of the year.
The best read we have on what happened to the economy during the first quarter comes from the data on seasonally adjusted real GDP (though this is of course imperfect, given large revisions and uncertain seasonal factors, it’s the best we have.) This series declined 1.5 percent during the first three months of the year, not nearly as bad as the revised 5.4 percent decline that occurred during the fourth quarter of last year. So, while the year-over-year declines are unprecedented, RTE’s reporting of the story as implying the economy was contracting at an unprecedented pace during the first quarter is not correct.
In terms of forecasting for the year as a whole, 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). An absolute best case scenario would be one in which GDP stays flat at its 2009:Q1 level for the rest of the year (so that technically, we would hit the bottom of the recession). This would imply a year-average-over-year average for 2009 of -5.8%. A more realistic scenario would see further declines on a par with the first quarter’s throughout the rest of the year. This would produce a year-over-year figure of -7.9%.
Today’s figures are actually a bit better than I would have expected in light of the big jump in unemployment during the first quarter. I now think we are slightly more likely to avoid a double digit decline in average over average GDP growth than I did beforehand.
The other indicator that most people focus on, GNP, perfomed far worse in the first quarter. Real GNP was down 12 percent relative to year earlier, declining by 4.5% in 2009:Q1 compared with a 3.4% decline in 2008:Q4. The CSO discussed the different pattern of this indicator as follows:
The estimate of GNP is derived by adjusting GDP for income flows between residents and non-residents. The timing of these flows can be variable. They include, in particular, the profits of foreign owned enterprises which increased by some €713m between Q1 2008 and Q1 2009. The increase, in this quarter, in the net factor income flows is also affected by (a) reduced credits (inward flows),compared to Q1 2008, to Irish outward direct investment enterprises and (b) increased interest payments on government debt. As a result, the decline in GNP was more severe than that in GDP.
Clearly, item (b) here is a pattern that is going to continue, though I’ve no insight into item (a). It seems to me that forecasting GNP is more difficult than forecasting GDP, so I won’t try, though obviously this series seems more likely to record a year-aveage-over-year-average decline into the double digits.
36 replies on “2009:Q1 Quarterly National Accounts Release”
An other poster on thepropertypin suggested that we may be benefitting from the swine flu outbreak both in terms of drugs and miscellaneous medical devices, so there may be a large element of transfer pricing in the difference between GDP and GNP. More and more I’ve come to belive that the GDP number is somewhere between away-with-the-fairies and makey-uppy.
The NTMA also reduced its commercial paper holdings in the quarter, as far as I can see, from 22 bn to 17 bn. I don’t know if this repayment would have an effect, so I will leave that one up to you!
On reporting, being the summer period, journalists with a smattering of economics may not be always to hand – – although, the Irish Times reporter only needed to read the opening paragraph of the release.
The contributions of the economists from Davy and Goodbody were useful and I’m sure news services would also welcome unsolicited analysis from academics. Phoning around for one-line comments, wouldn’t be useful.
As for the headline, “Irish GNP plunged at annual 12% rate in first quarter of 2009,” does this imply the US system of annualised quarterly growth or the 12-month period?
The reason why there has been a such a steep fall in the economy is that the property boom sustained so many jobs.
In the period 1998 to Dec 2007, excluding the internationally traded goods/services sector and direct construction, more than 400,000 new jobs were added.
After 2000, jobs in the internationally traded goods/services sector fell by 11,000.
The property bubble added 127,000 jobs in construction and 400,000 in the public services, indirect property supporting services, distribution and tourism.
In 2006, the peak year of the bubble, 83,000 new jobs were added. Only 6,000 were in the internationally traded goods/services sector.
Average pay in construction was €40K compared with the industrial wage of €31K and that’s not including additional allowances in construction.
During the boom, the windfalls plus lending from Irish banks, made the Irish the second biggest investors in commercial property in Europe.
Typically, €10-€15 billion went annually into commercially property while venture capital investment was generally les than €200 million annually.
As for competitiveness, the World Bank said in 2007 that Ireland was among the four most expensive countries in the world.
Anyone who travelled, would not have been surprised with that information but as regards the issue of competitiveness, the dominant US -owned sectors and the indigenous sectors should not be lumped together.
Last week’s IMF report does refer to the fall in our share of FDI in recent years, in contrast with the superlatives from the IDA but there are many more issues at play than local costs.
During the boom, apart from Ryanair, there was no big local export success and the hopes in the late 90’s for the high-tech sector were not realised.
So indigenous exports are still mainly concentrated in traditional sectors and dependent on the traditional market, the UK.
The best potential market sector for Irish firms is the Eurozone and if food producers have trouble selling to Tesco at home, it would not be easy elsewhere.
According to the ECB, Irish unit labour costs rose by 33% in the period 1999-2007, compared with Germany’s 3% and Finland’s 11%. Of course new product development and so on are are also relevant but if prices are out of line, the task of breaking into a new market is not an easy one.
Worse, the pay of “employees” in the building sector is much more than returned to the Revenue. Much of it was spent immediately. The effects are likely to be larger than expected by 20-40%. Mostly sub-contractors are used, and no provision for pension etc is made.
I can’t see where you get the figure of 14% for the fall (seasonally-adjusted or otherwise) in the volume of GDP between 2007 Q1 and 2009 Q1. I make it a fall of 9.6% (Table 6 of the CSO release – GDP at constant prices: 47,948 in 2007 Q1 , 43,326 in 2009 Q1)
Re the future. I consider forecasting to be a mug’s game. So, I won’t try. But, on a cursory inspection of the figures for 2009 Q1, I’d say there is a reasonable (I’ll put it no stronger) chance GDP will grow in 2009 Q2 if April’s momentum is maintained (I don’t know about GNP). I base this on:
(a) Exports are doing well. The GDP fall in 2009 Q1 was due mainly to an unprecedented q-o-q fall in retail sales in 2009 Q1. They were down 16.4% q-o-q. But, they had recovered a little by April. In April they were 4.2% above the 2009 Q1 average. All seasonally-adjusted. Likewise, exports showed a big jump in April, again seasonally-adjusted. Obviously, April is only one month of the 2nd quarter. So, for all I know, things may have turned down in May and June. But, if April’s performance in both retail sales and exports was maintained in both May and June, I’d say there is a good chance GDP growth will be positive in 2009 Q2.
(b) Stocks. There was a fall in stock levels amounting to 1% of GDP in 2009 Q1 (after 1.5% of GDP in 2008 Q4). Without this fall, GDP would only have fallen by about 0.5% in 2009 Q1. I don’t know for how many quarters stocks can keep falling. But, there must be some limit.
Overall, if the global recession turns out to be be U- or V-shaped, I think there is a good chance that the fall in GDP in Ireland will be significantly less than forecast (I don’t know about GNP). If its W-shaped, then that’s different. I have no idea which is more likely.
How did the swine flu outbreak help the GDP figures in 2009 Q1 when it didn’t begin until April. Is the Irish pharmaceutical industry psychic?
You keep banging on about Ireland’s exports doing badly. Its your whole life. For the umpteenth time, they’re not. They’re doing spectacularily well.
Its consumer demand in Ireland that’s the problem, not exports. I compiled these figures and posted them on one of the other threads last night. And stop banging on about ‘they’re only chemicals’. Even if you exclude chemicals, Ireland’s exports are performing much better than any other EU country. I challenge you to print the following table in Finfacts.
y-o-y change in volume of total exports (goods + services) in 2009 Q1:
IRELAND -3.0% <<<<
U. Kingdom -11.0%
Czech Rep. -17.5%
@Michael Hennigan again.
And while your at it, Michael, perhaps you could contact the Irish Exporters Association (IEA)? Your lead story on Finfacts a few weeks ago was the IEA forecast that the volume of total exports (goods + services) from Ireland would fall by 13% in 2009. Its now clear this forecast was hooey. Not only their forecast, but they claimed that the value of total exports (goods + services) actually did fall by 9.6% y-o-y in 2009 Q1. The latter wasn’t a forecast but an estimate made in May for Ireland’s actual export performance in 2009 Q1. The CSO figures out yesterday showed there no y-o-y fall at all in the value of total exports.
Sorry for my mistake about the 14% and thanks for the check. I had mixed up a number in one my “scenarios” with the number for 2009:Q1 — that comment has been removed. Perhaps I should give heavy number crunching after 10PM a skip! In any case, the rest of the numbers, including the “scenario” numbers are correct.
With apologies to William Shakespeare , the gentleman (John) “doth protest too much, methinks.”
@John Peak export value was in 2002. We’ve already had our export recession. That is what Mr Hennigan is going on about. Yes, our relative performance in the last year has been good, but the performance in the last seven years has been poor. It’s not enough to say that things are grand because everyone else is further in the shitter than we are. We need to figure out why our exports peaked seven years ago, have declined since, and how we can re-energise them (other than through transfer payments).
I’m curious about your response to the Swine Flu psychic pharma industry point…
I don’t think you are correct about exports. Maybe about goods exports. Total exports (goods + services) have continue to grow strongly. From the CSO figures published yesterday, the volume of total exports in 2009 Q1 was 30.1% higher than in 2003 Q1 (Table 6). The figures only go back to 2003, so I can’t give the change since 2002.
@John I’m going from the trade figures:
Peak exports in 2002 at 93.7 bn 2008 86.3 bn.
I’ve no idea why there’s a disparity between the figures! But that would be government figures for you, I can never get them to add up (beyond rounding errors). Any clarifications welcome.
@RonanL It’s an interesting idea (not mine so!) that may explain the disparity between the drop in GNP and GDP. If it is not the case, then we are stuck increased tax-havenness as the alternative? Hardly sustainable if that is the case…
John is right, your figures only include goods. The CSO unhelpfully lists services imports under the ‘Balance of Payments’ header. Producing a combined release might start to remove the (common) misconception that exports have not done well over the last 7 years.
Mary Coughlan must love cheerleaders like you.
Service exports fell in Q1 and about 20 US firms are responsible for 70% of merchandise exports.
In the pharma/medical devices sector, about 10 Us firms are responsible for 57% of exports in Q1.
It’s good that we have the US firms but let’s not brag about “our great success” and dispense with questions on why we have been a failure in developing a significant indigenous sector after 50 years of FDI.
In 2008, our biggest home-grown tech company Iona had to give up the fight and put itself on the market.
Tommy Doherty, partner at business consultant Mazars, highlighted in March 2008 how New Zealand is taking advantage of markets in Europe.
New Zealand’s success has been its innovative approach to new markets especially but not only in Asia, where growing wealth is seeing consumers shift their eating habits from root vegetables to dairy and meat products.
“The food industry in New Zealand developed specific measures and worked with external partners to develop new technologies and new products. They created specific products for specific markets and created best practice dairy markets in Asia. And despite being 12,000 miles away from European markets, New Zealand has become increasingly competitive for its chilled lamb and their lamb exports to the EU have increased 40% in the last two years,” Doherty said.
The Irish Farmers’ Association is stuck in the past, seeking retention of protections and supports with the aid of the Irish Government. Banning Brazilian beef is seen as a panacea but if you are looking for a steak house across Europe, what’s the chance of finding an Irish branded one compared with a Brazilian, Argentinean or even a Uruguayan one?
Maybe it’s more comfortable to sing property man Ken MacDonald’s mantra, which he penned for the Sunday Independent in early 2007: “Why do we allow scaremongers and doomsayers with unfounded pessimism and unbridled negativity dictate our thinking and blunt consumer confidence? The Irish economy is the envy of the world. Job creation is phenomenal with more than 7,000 new jobs being created each month – despite the gloomy attention given to periodic job losses in some sectors.
Unemployment stands at 4.1%, the lowest in Europe; there are 750,000 more people in the workplace than a decade ago. We have revitalised cities and towns, a conveyor belt of entrepreneurial business people operating successfully on a world stage, a rich cultural and artistic heritage, a vibrant talented young population, rising by almost 100,000 per year, confident in their own and their country’s destiny. We should be celebrating our success on a daily basis. In any event, the Irish love affair with property will continue undaunted despite the knockers.”
I think we (as a country) are over focussed on this MNC vs Indineous issue. People will invest their money where-ever it makes the most of money. Irish capitalists won’t do any operation in ireland where it is more profitable to do it elsewhere, why would they? Similarly, US firms will stay here as long as we continue to be productive.
Ultimate ownership is greatly over-rated. Nokia is now 90% owned by US shareholders, though it is a Finnish company by any other standard. Ditto Ireland & Guinness.
True, we should still encourage EI to promote indigenous firms, but because of our late industrial development, we are right to go the FDI route. Out of the 150,000 EI supported workers, only about 50,000 are export faced, as most are serving the Irish market. The 150,000 IDA employees are virtually all export focussed. As such, MNC employment outranks Indigenous by 3:1.
I would strongly suggest anyone who is hung up on the indigenous question to read Telesis Report of 1980, as a bullet we thankfully missed. No country, it argued, had succeeded in achieving sustained economic growth except on the basis of native industry.
In fairness their timing was lousy. The three decades since Telesis have seen an entire continent of four billion people lift itself from subsistence onto the road to modernity, based precisely on a strategy of attracting foreign investment. If the growth of early developing countries was based on native industry, the strategy for late developing countries has been to harness foreign capital and know-how.
100 % agree.
Ireland using GDP as a measure of growth is completely disingenious in my opinion. I know other countries use GDP but tax havens like Ireland using it is going to completely give untrue reflections of real economic activity.
GNP would be far more realistic.
The 30 billion difference between GNP and GDP (probobly bigger now) is largely down to tax repatriation export issues according to a post i saw on Constintine Georgievs blog.
Nokia has still a huge impact on Finland.
At the end of 2008, Finland led Nokia’s country jobs at 23,320 from a total of 125,829. The firm had almost doubled its total payroll since 2006 through expansion in China and India but the home country remains the key part of its operation.
Some 300 Finnish companies are direct first-tier suppliers to Nokia and a big proportion of the Finnish employees, work in research and development.
So there is a big difference for the parent economy compared with CRH which has just over 2% of its payroll in Ireland.
According to the chairman of your former employer, most Irish-based US companies do not design their products in Ireland, while marketing and sales functions are located elsewhere.
It would be all fine if the shakeout from the crash could be abosrbed by new significant MNCs.
@Ronnie, fair enough and I agree with you as far as it goes (I am a service exporter myself!) – the BOP is moving in our favour. The problem I have is that there isn’t a huge direct jobs multiplyer effect of services. Goods production is more effective at creating jobs. In addition, I would rather not live in a two-tier country with the comfortable brains earning and the rest of the population existing to serve them. The knowledge economy is not going to suit the majority of the current workforce.
How anyone can discribe creating indiginous/native industry as “a bullet we thankfully missed” seems completely counter intuitive. Perhaps Asia has increased basic living standards out of having MNC’s manufacture there but profit repatriatisation is still a real issue. Profitable indiginous exporting companies are surely preferable. however as you point out Manufacture on behalf of MNCs can lift a lot of people from abject poverty. However surely our ambitions have to be a little bigger?
Otherwise we are deliberitly restricting competition and innovation.
It’s surely the extent.
About 50% of China’s goods exports come from forieign owned firms and 90% of its consumer electronics (Japan, Taiwan and Korea).
Ireland is more dependent on the US than any other country and 90% of our tradeable goods and service exports come from foreign firms.
if we are a late developed country, what does that make South Korea?
Sorry if there is confusion. I never said that we shouldn’t bother with indigenous firms, in fact I said that we should continue. The ‘missing the bullet’ part of the Telesis report was where they were pushing for a clear movement away from the FDI model. I am happy for us to keep trying with indigeous firms, though we abondon the FDI model at our peril.
The export sector will never be a big jobs generator, whether MNC or Indigenous. Taking the EI and IDA firms together, around 200k are directly employed serving overseas markets. Perhaps double that again for indirect employment in terms of locally sourced intermediate inputs (400k). This leaves 1.5million serving local needs. This I suppose is at the core of the critique that slashing wages at the current juncture will do anything for solving a domestic, unemployment-heavy imbalance.
Thats my point – it is a US owned firm! Yet your figures amply show that it is really Finnish. My point is ultimate ownership is greatly exaggerated as a factor in terms of investment decisions. As for design etc, you are right, and thats the space we should be getting into. But I disagree with your fatalism that they are not doing R&D here because the firm was not started in Ireland. They will do R&D here is we create the conditions. Your view is a re-run of the Telesis report all over again. I discussed this in more length in an article in the indo last year: http://www.independent.ie/business/irish/multinationals-love-affair-with-ireland-offers-more-than-a-fling-1349799.html
So Ronnie if we take 282,000 indirect workers dependent on the property boom to match the direct total of 282,000 in Dec 2006 – – including in say remote indirect areas such as retail, where then will be the engine of growth or is it ineviatbly emigration?
The engine of growth will be a fall in the savings rate from the incredible level that it is at. Export growth will chip in, though it is this resumption of domestic demand that will be driver in employment terms. However, as your numbers starkly illustrate Michael, we will clearly find it very tough to return to an unemployment rate of 5% any time soon. This again is the point. Exporting helps you in the long run, but cannot tackle an unemployment problem of this scale. Go and look at historic periods of ‘jobless-growth’ globally and you will see exporting as the lead contributor to this growth.
1. I’m a little confused at the heat being generated by the discussion of the export figures. It’s clear that, somewhat surprisingly, the export performance of the Irish economy has held up. We all know there are some issues in translating from export figures to the underlying health of the Irish economy (huge exports from particular pharmaceutical plants and the like) but it still seems like good news. It’s an investment lead recession with a collapse in domestic construction being the major contributing factor. Hopefully, when that correction is over, we can look forward again to some export-lead growth. Am I missing something here?
2. I agree with Ronnie that there is far too much focus on ownership. Indeed, I think this is one of the misapprehensions at the centre of the Innovation/Smart Economy debate (to the extent that there actually is a debate — by and large, economists aren’t bothering to engage, mainly it’s just people inside the echo chamber congratulating themselves.) The assumption is that we need to train all these PhDs, so they can invent stuff and then we get new Irish owned start-up firms. Probably a better argument is the need for a well-trained labour force so that foreign technology companies will be happy to locate here.
“The engine of growth will be a fall in the savings rate from the incredible level that it is at.”
Can you expand on why and when you think there will be a fall in the savings rate?
What drives anuimal spirits? God knows, but my take on the Finnish experience of the 1990s is:
1. The fall in the rate of growth of unemployment: In Finland, the savings rate was at its highest in 1992, when unemployment was rising at its fastest rate. The unemployment rate continued to rise until 1994 though at a slower pace, though in both 1993 and 1994 the savings rate plummeted. This makes sense – the rate of increase in unemployment is a measure of people’s fear of losing their job. Once unemployment starts to rise at a slower pace, this fear starts to abate, and precautionary saving starts to fall. As the peak in the rate of increase in Irish unemployment has now passed, the second half of the year could see household savings peak and start to fall, which could be the catalyst for a stabilisation and subsequent recovery in consumer spending. I could be getting causation all *&%$ ways here though.
2. Time: We have a higher private sector credit than in Finland, so to the extent that high savings is about deleveraging rather than fear, it will take longer to burn off.
3. Interest rates; The other catalyst to a fall in precautionary savings in Finland in the early 1990s was the fall in interest rates. In the finnish case, a very high interest rate environment persisited in the tteth of a sharp economic slowdown, a result of the German need for higher rates post-unification, and the attempt by the Finns to defend an overvalued currency. Following the float of the Markka in September 1992 interest rates tumbled. By the second half of the following year (equivalent to Ireland in late 2009) GDP had bottomed, household purchases of durables started to recover, residential investment had increased and even house prices had started to increase.
I think that it is clear that a recovery will be accompanied by a reduction in savings rates. I don’t think there is any great disagreement on that point. I think your post shows how they go hand in hand. The problem is when and why this will happen. It would seem that the drop in savings would be endogenous to the recovery rather than the cause of the recovery.
I understand Krugman’s position to be that zero interest rates (in the USA) are still 5%-8% too high to stimulate spending and investment ahead of saving. Krugman says we are in a liquidity trap where no matter how much money countries print to throw at the problem they cannotmake people spend it. As you said, the massive increase in private debt and the deleveraging going on is part of it.
We cannot just wait for that deleveraging process to complete because the economy is contracting all the while causing a vicious circle of less income to use causing more savings (causing less investment causing less money in the economy causing contraction causing less investment…..). Krugman says we could be stuck in this process for many many years.
One could say that it took World War II to break us out of the last similar cycle.
Won’t a necessary precursor to any fall in the savings rate be an increase in consumer confidence? The consumer confidence index published on Monday showed a sharp rise and indeed was at a 14-month high. Does anyone know what the time lag is between an increase in consumer confidence and people actually deciding to go out and spend again? The increase took most economists by surprise. My own theory (half-serious half-jest) was that the spike in consumer confidence was related to George Lee’s departure from RTE. No more Dr Doom every night. How could it not rise? If my theory is correct, Enda Kenny can claim credit for the recovery.
Ronnie said: “Irish capitalists won’t do any operation in ireland where it is more profitable to do it elsewhere, why would they?”
This seems like the kind of “perfect markets” assumption many economists are prone to but which just sounds barmy to the rest of us. Come on – do you, does anybody think that every business operating in Ireland has really seriously analysed whether there is another country where they could be increasing profits 2%? Of course not!
Clearly transaction costs are lower in Ireland for Irish capitalists.
The magnitudes for many businesses are clearly 20% – 200%, not 2%.
That’s an interesting report on teh extent of international outsourcing by Irish businesses Ronnie, and I admit my 2% was something of a reductio ad absurdum. But does not your 20 – 200% suggest that there might indeed be very good reason to adopt a strategy promoting indigenous enterprise (particularly SMEs) more than FDI?
I’m not sure why saying that there are big advantanges in offshoring makes the FDI strategy weaker. It is a mistake to think that indigeneous firms won’t offshore those elements of the value chain which can be done in a more cost effective way abroad. My point remains – ultimate ownership doesn’t matter much. Those activities in which we develop a comparative advantage will be done here, whether the main owner is an Irish or MNC firm.
In any case, I think there is a mistake in thinking that there is an ‘FDI Policy’ in Ireland which in some way excludes indigenous firms. Most of our policies are for both – investment in broadmand, transport infrastructure, human capital development etc. We also have a dedicated agency for each (IDA and EI) both with all the resources they need. I’m all for a continuation of this. When indigenous is ready to turn up to the party, well and good.
“It is a mistake to think that indigeneous firms won’t offshore those elements of the value chain which can be done in a more cost effective way abroad.”
It’s not that they won’t do this, rather I just think they may be less likely to do so than non-indigenous firms. I don’t have any empirical evidence for this, but if (as I suggest) transaction costs are lower for indigenous than for non-indigenous firms (and investors) then the same activity might have variying cost effectiveness for different firms.
Of course you’re right that good economic policies usually benefit both indigenous and non-indigenous firms/investors but in so far as we tailor policy to a strategy focused more on one than the other I think there is reason to favour indigenous firms, ceterus paribus.
A way to conclude the debate: Name the policy you want to generate this success in indigenous firms that we haven’t tried already, and lets see if it has any bearing on MNCs.
Well I don’t claim to know what policies we need to produce a successful indigenous sector, but one example would be priority of funding etc. for Enterprise Ireland rather than IDA. Another would be to use seed/venture capital to encourage Irish start-ups rather than using low taxes to attract existing foreign companies (fiscal and other resources being scarce).
David Jacobson has a couple of similar thoughts here: http://www.progressive-economy.ie/2009/06/irish-industrial-policy-strategic.html