Ireland in Recession: FT Analysis

The article is fair and balanced. The box with the sub heading ‘A bad bank may not keep the sector from state control’ is particularly revealing. It seems to be part of a broad PR exercise/media briefing that has sought to distinguish between Anglo Irish-style nationalisation and post-NAMA recapitalisation. If the latter results in majority state ownership then, so the message seems to be, ‘so be it’. Hints that the authorities are becoming more favourably disposed to Patrick Honohan’s NAMA 2.0 are also emerging.
The concerted campaign to point out that LTVs of 70% imply that when the assets are valued at 50c in the euro there has been a 50% haircut is also interesting. As is the oft-repeated assertion that while the subbies are, effectively, toast we must protect the senior bond holders.
Can we spot an emerging consensus?

At the risk of being proved totally wrong, I’ll stick my neck out and challenge two of the main claims made in the FT article. The lead for the article on the front page of the FT is ‘The Irish Republic faces the industrialised world’s deepest recession’. In the article itself, it states that ‘the consensus forecast is for an 8.4 per cent fall in GDP in 2009’.

While I don’t wish to be dogmatic and say definitely that these claims will prove false, I think that the chances are increasing that they will indeed prove very over-pessimistic. The reason for believing this to be likely is the performance of Irish merchandise exports so far in 2009. Uniquely in the industrialised world, these have risen continuously so far in 2009 from their lowpoint in 2008 Q4. The FT article fails to give a single mention to Ireland’s excellent export performance in the current global recession, even though exports equate in value to about 90 per cent of Ireland’s GDP, and its quite impossible to analyse how the economy is performing unless they are taken into account. So, its rather misleading for the FT to state that its an article about the ‘Irish economy’ or about the ‘recession in Ireland’. Its simply an article about the banks and NAMA, which, although important, are only part of the economic picture.

Between 2008 Q4 and 2009 Q1, the VOLUME of Irish merchandise exports rose by about 4.5%. Between 2009 Q1 and 2009 Q2, the VOLUME of Irish merchandise exports rose by about 5.5%. For June 2009, the CSO has so far published figures only for the VALUE of merchandise exports (VOLUME figures always lag a month behind in CSO Releases). But, based on these, there seems a reasonable chance that the VOLUME figures hit an all-time high in June 2009.

Overall, in 2009 H1 the VOLUME of Irish merchandise exports was virtually unchanged from whole year 2009. So, if they merely maintain the same volume in 2009 H2 as in 2009 H1, they will be virtually unchanged in 2009 as a whole compared with 2008 as a whole. This would be a spectacular performance. Most OECD countries are currently seeing 20% to 30% falls in the volume of their merchandise exports (somewhat less for services exports). In addition, most analysts now see world trade growing in 2009 H2, in contrast to the very severe contraction in 2009 H1. So, there has to be a reasonable chance (not a certainty) that the VOLUME of Irish merchandise exports in 2009 will actually be higher than in 2008.

Based largely on the performance of merchandise exports so far in 2009, the consensus forecast for the fall in GDP in 2009 has been dropping quite sharply in recent weeks. Back in March/April, the consensus was for a fall in GDP of 9.5 per cent. By June/July, it was down to 8.5 per cent. However, in recent weeks there have been several forecasts in the range 7.0 per cent to 7.5 per cent. I think National Irish Bank forecast a 7.1 per cent fall a couple of weels ago, the lowest to date. As I’m not Mystic Meg, I can’t predict the future. However, I’d say that there is a reasonable chance of this trend continuing. It all depends on how exports perform in 2009 H2, whether they continue the outstanding performance of 2009 H1, or fall back again. Its simply not possible to predict this and those economists who make dogmatic assertions that the fall in GDP in 2009 will be x per cent or y per cent are being somewhat dishonest in not acknowledging the very high degree of uncertainty that exists in such forecasts (particularily in an open economy like Ireland’s, where the value of total exports is almost 100% of the value of GDP).

My reading would be as follows:

(a) If merchandise exports continue to grow in 2009 H2 at the same rate as in 2009 H1 (volume growth of 4.5% to 5.5% a quarter), then the fall in GDP in 2009 will be nowhere near the 8.4 per cent that the FT article claims. It would be more likely to be about 4 per cent, which would certainly not be the largest in the industrialised world, and might even be less than the EU average.

(b) If merchandise exports stop growing in 2009 H2 and simply remain at their 2009 Q2 volume level, then the fall in GDP in 2009 will be around 6 per cent, which again would probably not be the largest in the indutrialised world and only fractionally above the EU average.

(c) If merchandise exports actually contract in 2009 H2 back to their 2008 H2 levels, and the growth in 2009 H1 proves a flash in the pan, then the fall in GDP in 2009 will probably indeed be around the 8.4 per cent that the FT article claims.

It is simply not possible to know at this stage which of these scenarios will occur. Given that most analysts now see world trade and the global economy growing in 2009 H2, in contrast to the very severe contraction in 2009 H1, scenario (c) does seem very pessimistic. My own opinion is that scenario (a) is the most likely, but one never knows.

The FT article also unfavourably compares a predicted fall in GDP in Ireland of 1.5 per cent in 2009 Q2 with growth of 0.3 per cent in France and Germany. However, in my humble opinion it is by no means certain that GDP actually fell in Ireland in 2009 Q2. It may have done. Or it may not have done. There are two important sectors of the Irish economy (consumer spending on services and services exports) for which the CSO DOES NOT publish monthly data, and the first we know about how they performed comes with the quarterly publication of the GDP figures themselves. In the absence of monthly figures on these sectors, it is impossible to predict the overall change in GDP in the quarter. However, for the two important sectors of the Irish economy (retail sales and merchandise exports) for which the CSO DOES publish monthly data, both of them recorded significant growth in 2009 Q2. The volume of retail sales was UP 4% in 2009 Q2 over 2009 Q1, and the volume of merchandise exports was UP over 5% in 2009 Q2 over 2009 Q1.

Based on what the CSO has published for these two sectors, I’ll stick my neck out and say that GDP in Ireland PROBABLY grew in 2009 Q2. However, this is subject to the other two sectors (consumer spending on services and services exports) not performing much worse than expected in that quarter. As I say, the CSO does not publish monthly data for these two sectors, so I simply can’t be certain. But, at the very least, based on the monthly figures the CSO has published (for retail sales and merchandise exports), I’ll be very surprised if the y-o-y fall in GDP in 2009 Q2 is not much lower than the 8.5 per cent recorded in 2009 Q1.

@John
Let’s hope that GDP didn’t grow in Q2 because a small number of US chemical companies boosted exports.

It took bust banks for the property sector and its shills, to come down from cloud cuckoo land.

Just picture the crowing if the recession was declared at an end with the country still deep in red ink.

The manufacturing PMI survey data today showed a drop in production for 18 straight months.

What is the import content of the chemical exports?

How many jobs have been created in the sector in the past year?

It’s good to have more machines humming but lets’ keep it in perspective.