First Swallow of Spring in Ireland

Contributor John is the first to “call” a recovery in Ireland.  He suggests that this should trigger a blog-thread here on irisheconomy.ie at some point.  I am a financial economist not a macroeconomist but I am curious to start such a thread and read what braver souls have to say.  See John’s text below (from an earlier thread):

“For what its worth, I’ll stick my neck out and say that Ireland is now out of recession. I should emphasise that I’m referring to Q3 rather than to Q2. I don’t claim to be infallible. Its just my opinion based on a reading of the latest manufacturing, trade, retail and other statistics. I could quite easily be wrong. But, if I’m right, I trust the news (figures won’t be published for Q3 until December) will trigger a thread here. “

17 replies on “First Swallow of Spring in Ireland”

I should make it clear that I was referring to GDP in Q3, not GNP. Its almost impossible to predict GNP on a quarterly basis as it depends so much on the timing of payments by multi-nationals.

I had thought until a few days ago that there might be positive growth in GDP in Q2. But, it turns out that the CSO published incorrect figures for merchandise exports in May in their monthly release a couple of weeks ago. They published a correction earlier this week. They got the value of exports correct first time, but the unit price and volume figures they initially published for May were totally wrong. An unprecedented error, in my experience. As a result, the volume of merchandise exports only increased by about 1% in Q2 over Q1, compared with the 5% the previous incorrect CSO figures indicated. While this is still an exceptionally good performance compared with other countries, its probably not enough to ensure positive GDP growth in Q2. But, ironically, it increases the chances of positive GDP growth in Q3, as the change in exports in Q3 will be measured against a lower base in Q2.

My main concern right now is the risk of a uniquely Irish double dip recession induced by the Budget in December. So Q3 and Q4 might look ‘better’ this year (even positive), but I see a risk of a return to recession in the first half of next year due to a contraction in public expenditure in 2010 (necessary and all as that is) and consumer expenditure (due to increased taxes/continued increases in unemployment).

So it might turn out to be a false ‘spring’.

A recovery is a recover in GDP then, not a recovery in, for example, employment or disposable income?

You economist guys should get out more… 🙂

@yoganmahew

As you may know, the focus on successive quarterly GDP outturns as defining recsssion/recovery is not favoured by authoritative commentators on the business cycle, such as the NBER who take great pains, e.g. in their last memo , to use a defintion at once broader and more nuanced.

http://www.nber.org/cycles/dec2008.html

For example they say

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.”

Also see the FAQs at the end of that page. And everyone should get out more 🙂

At a breakfast talk by Dan McLoughlin this morning and he is predicting we will be technically out of recession by Q3 but most of this is down to exports which make up 80% of GDP and most of this is down to Pharma. The domestically traded economy where most of us live and work won’t be out of recession until 2010.

(Then again he was always an optimist)

@Aidan

I was, but thanks for reposting it, in particular the NBER definitions, as I have a bone to pick with them too! By dating at the trough, there is a good chance that we are already well into recovery by their method. However, there is also a good chance, IMO, that we will see a jobless recovery, or backwards J as I like to call it (to distinguish it from L!). To my mind, this is no recovery at all. The economy is made up of people as well as companies and while joblessness and underemployment are rising, we are not recovering, even if notional productivity is increasing.

The NBER definition is so nuanced that it is unscientific — under their open-ended definition the term “recession” is not a reproducible measurable concept. This makes related analysis using their expansion-contraction time series problematic since the new series has no scientifically definable meaning. Suppose we want to scientifically test whether low-grade bonds outperform high-grade bonds during a contraction — we cannot use the NBER time series since perhaps this is one of the indicators that the committee kicked around during their “nuanced” determination. This creates a potential simultaneity problem.

The NBER definition also has a strong aroma of a self-aggrandizing organizational power-grabbing — a recession in the USA begins and ends when the NBER committee says so, and there are no other useful measures. Any simply-determined reproducible measures might lower NBER’s subscription revenues and/or not meet their high intellectual standards (take your pick). Ireland is better off with a clearer and simpler definition, like the 2 quarters negative growth definition. The coming recovery (??) is likely to be very nuanced!

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@Stuart

If Dan McLaughlin’s forecast proves accurate, the growth in Ireland would be no different to that in Germany and France. Both these recorded GDP growth of +0.3% in Q2 and are now officially considered to be out of recession. However, breaking down Germany’s growth figures shows:

change in GDP in Q2: +0.3%
change in domestic consumption in Q2: -1.3%
change in exports in Q2: -1.2%
change in imports in Q2: -5.1%

So, the domestically traded economy in Germany was still in recession in Q2. And even Germany’s exports were still in recession in Q2. Their GDP growth in Q2 was due entirely to a fall in imports that was larger than the fall in exports (which, if you are familiar with economic terminology, is classed as an increase in net exports). The breakdown for France is similar. Both these countries are now officially considered to be out of recession, even though the domestically traded economy in both of them was still in recession.

Re economic recoveries and jobs growth, there is generally a time-lag of up to a year between GDP growth resuming and jobs growth resuming. That is the case for nearly every economy.

When economists start discussing what it means to come in and out of recession, I think back to Wittgenstein’s language games. If an economist comes up with a “scientific” definition of recession, then the “scientific” term could be divorced from the way the term is used socially and culturally. For example, if unemployment is growing by 3% a year, and economists call an end to the recession, because GDP is growing marginally, then the economist seems out of touch with reality, and the term develops a social definition that differs from the economic one. The NBER approach is kind of Humpty-Dumpty-ish. A recession is whatever they say it is.

Ultimately, it does not matter what we call a recession. What matters is creating a strong, healthy economy with sustainable growth. In Ireland, asset prices are still overinflated, wages will be under pressure for the foreseeable further, and the country’s fiscal situation is as nasty as some of the beaches in West Cork. It’s going to be a long, tough slog, recession or no.

@Gerard O’Neill

My main concern right now is the risk of a uniquely Irish double dip recession induced by the Budget in December.

Every chance you are correct.

I would be concerned that there is every risk of a double dip globally.

An investment research site I have come to appreciate over the last 18 months reported that amongst U.S. publicly traded companies, for every $1 of insider stock purchases in August, there was $31 worth of sales.

They went on to report that, “execs at U.S. public companies have been net sellers of $105 billion worth of stock over the last four months. That’s the most aggressive insider selling since the summer of 2007.”

That to me is a flashing red light.

I sometimes think we tend to be too inward looking here, concentrating on our own problems/likely scenarios without regard to the bigger picture.
Of course we have to, but we do not trade in isolation.

Another piece of news that does not seem to have been picked up here, was the announcement earlier in the week that China is to issue bonds in their own currency for the first time ever.

According to the FT
Beijing has taken a number of steps in the past year to encourage greater use of the renminbi in international transactions, beginning a process to decrease its dependence on the US dollar. Senior government officials, including Premier Wen Jiabao, have expressed concern that the value of the dollar will decline, which would erode China’s $2,100bn in foreign exchange reserves, mostly held in US government bonds.

Is this the first sign that China is getting tired of buying US bonds?

@John
I tend to be very pragmatic.

You have shown regularly that our exports have held up well over 2009 while our EU partners and others have collapsed. Good in one way but they at least can hope when the good times roll their exports will take off again and drive their economies forward.

If our exports have done well relatively it is unlikely they will see the upswing of other countries as the world recovers. Pharma doesn’t seem to get hit by recessions (maybe demand increases!).

Where does our growth come from? It won’t be construction. I do wonder if we will get left behind as the recovery takes hold.

As Kieran says
“What matters is creating a strong, healthy economy with sustainable growth.”

I totally agree but apart from the rather vague “smart economy” tag I don’t see the programmes or initiatives coming through to develop this.

PS In case you lump me in with the group that wants Ireland to go down the swany I definitely am not. My son starts Engineering in University soon while my daughter has 2 years to go to the Leaving. I want them to stay here and live here but for that we need that strong and healthy economy. I saw too many of my peers emigrate in the 1980s after school, college and professional exams.

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