Are the GDP numbers surprising?

The main article in today’s Irish Times highlights the gap between the GDP estimates in the December 2009 plan and current thinking:

The department confirmed last night that it believed gross domestic product (GDP) this year would be 2.5 per cent below its projected level at the time of the last budget.

In December 2009, the Government believed that spending in the economy, or GDP, would amount to €161 billion this year.

Owing to statistical revisions to GDP for 2009 and 2010, it now believes that the figure this year will be €4 billion lower, at €157 billion.

This means that without any change in the budget deficit in absolute terms, the deficit will be higher than projected when expressed as a percentage of GDP.

The department also confirmed that its July 2010 GDP growth projection of 1 per cent has been revised downwards to “marginally” above a no growth position of 0 per cent. Servicing cost of the bank bailout at about €1.5 billion a year will add to the problem.

What explains this gap?

1.  In December 2009, the plan forecast that nominal GDP would be €164.6 billion in 2009 and €161 billion in 2010.   These forecasts were fairly close to the projections in the ESRI’s Autumn 2009 QEC (released on October 13 2009).

2.  The first preliminary data from the CSO on 25th March 2010 put 2009 nominal GDP at €163.5 billion.

3.  The revised data from the CSO on 30th June 2010 put 2009 nominal GDP at €159.6 billion.  This is the ”news” event.

4.  The July 7 2010 mid-year update from the Department of Finance does not discuss the revision to the 2009 GDP figure.  In line with general views at the time, it improved its 2010 forecast for real GDP growth.  It also highlighted that the GDP deflator was undershooting and pointed out that nominal GDP growth would be adversely affected – but did not quantify this effect.  It also re-iterated that real GDP growth of 3.25 percent in 2011 was attainable and that an average real GDP growth of 4 percent during 2011-2014 was viable.  It did not discuss prospects for nominal GDP over 2011-2014.

5.  The Article IV IMF report on Ireland was published in July 2010.  It reported negative nominal GDP growth of 10.1 percent in 2009 and projected negative nominal GDP growth of 2.6 percent in 2010.

6.  The Summer QEC from ESRI was published on 14 July 2010. It projected 2010 nominal GDP at €158.9 billion.

7.  On October 4 2010, the Autumn Bulletin from Central Bank projected 2010 nominal GDP at €157.018 billion.

Summary:  the downward revision to 2009 GDP has been known since end June 2010.  The €157 billion projection for 2010 was announced in the October 4th Central Bank bulletin and is in fact a bit more optimistic than the nominal GDP projection in the July IMF report.

An central element in the new 2011-2014 fiscal plan will be to provide a reasonable estimate for nominal GDP growth over this period.  This involves two components – prospects for real GDP growth and prospects for the GDP deflator.  Providing a detailed explanation for these projections will be an important element in communicating the plan.

16 thoughts on “Are the GDP numbers surprising?”

  1. Is it not time for the ESRI to gear up its HERMES and SWITCH models, extract the deficit reduction programme numbers presented by the EC officials last week from the DoF, test various combinations of expenditure cuts/tax increases and present the results?

  2. Philip,

    Could we get some plain, understandable details – from any source: We shall have …

    1. An increase in G*P above the 20** G*P value, or

    2 No increase in the value, or

    3 A decrease in the value.

    The *% is moot at this point. Its simply a prospective value based on some unstated assumptions, which may or may not have any physical reality. What is the probability of each event – or can these even be estimated?

    If the outcome is #2 or #3, which I suspect will be the case. Then where are we headed?

    Brian P

  3. @Philip
    Thanks for that, very clearly put.

    “the downward revision to 2009 GDP has been known since end June 2010.”
    The questions is, though, is there another revision to come? If so, could 2009 GDP be revised below 2010 estimates and so we will actually end up with growth this year?

  4. But, the whole analysis in relation to the budget deficit is nonsense, unless you allow for the effect of lower-than-predicted inflation across the economy (including GDP deflator) on government spending as well as on nominal GDP. I wrote at length about this on one of the other threads, so will not repeat it all here. But, basically:

    (a) Real GDP in 2010 is growing at a minimum of 1.5% to 2.0% faster than was forecast at budget time in Dember 2009. The D of Finance forecast -1.3% in 2010, the Central Bank forecast -2.0% in 2010. These figures are in the Stability Programme published in the December 2009 budget. The latest Central Bank forecast is for +0.2% in 2010. I think it will be a lot higher, but just going by the official forecasts, real GDP growth will be a minimum of 1.5% to 2.0% higher in 2010 than was forecast in the Stability Programme at budget time in December 2009.

    (b) Mainly due to the high value of the euro v sterling and the dollar in late 2009 and early 2010 (it has since come down a lot, and then gone back up part of the way) price inflation across the economy (including the GDP deflator) is turning out to be much lower in 2010, indeed negative, than was forecast at budget time in December 2009. Or, at least it was in Q1 and Q2. I think the opposite may be the case in Q3, but leave that aside.

    (c) The combination of (a) and (b) reduces tax receipts and nominal GDP, cancelling out the boost from the higher-than-predicted growth in real GDP.

    So far, so good. If you leave the analysis at this point, all the media commentaries this week make sense.

    BUT!

    The high euro/negative inflation also reduces the prices of goods and services purchased by the government. It also means that, to keep social welfare spending constant in real terms, nominal spending on social welfare can be less than it would otherwise have been. Unless this is all factored in to the various equations, you end up with the nonsensical analyses, which are what, I’m afraid, the Irish media have been serving up this week.

    As an indication, here the figures for tax revenue and government spending up to end-September, showing how much is each is behind the targets set in the Dec 2009 budget.

    end-March:

    tax receipts 3.6% behind target, or 266m euros behind
    expenditure 2.1% behind target or 225m euros behind

    net loss: 41m euros

    end-June:

    tax receipts 1.6% behind target, or 227m euros behind
    expenditure 2.3% behind target or 505m euros behind

    net gain: 278m euros

    end-September:

    tax receipts 0.2% behind target, or 42m euros behind
    expenditure 2.5% behind target or 833m euros behind

    net gain: 791m euros

    In other words, the budget deficit up to end-September is turning out to be lower than the government’s 2009 budget target, not higher, the main reason being lower-than-forecast government spending, which is at least partly due to lower-than-forecast inflation across the economy (including GDP deflator), which in turn is due to the higher-than-forecast euro exchange rate in late 2009 and early 2010, the very thing that has been reducing nominal GDP, realtive to real GDP, in Q1 and Q2.

    The idea that the D of Finance can forecast nominal GDP years ahead is laughable. They can’t even forecast real GDP one year ahead. In mid-2009, in common with all the other forecasters, they were forecasting that real GDP would fall by 3% in 2010. Now, all are forecasting positive growth in GDP in 2010, by how much we don’t as yet know. Nominal GDP is harder to forecast than real GDP because it involves an additional variable, namely the value of the euro v the dollar and sterling, which is the main determinant of the GDP deflator in Ireland. The idea that the D of Finance can forecast the euro v the dollar and sterling rates, and therefore the GDP deflator, years ahead is too ridiculous for words. To illustrate, I’ll stick my neck out and predict that they have got it all wrong for the GDP deflator and nominal GDP for Q3. I predict this because the euro fell against the dollar and sterling in the first half of 2010, resulting in the various price and turnover indices published for the Irish economy (eg export prices, agricultural output prices, manufacturing turnover etc) being much higher in Q3 than in Q1 and Q2 (when they were mostly negative). So, I predict that, because of these trends, nominal GDP, relative to real GDP, will be much higher in Q3 than in Q1 and Q2, although it may come back a bit in Q4, as the euro has gone back up somewhat against the dollar and sterling.

    Rather than wasting taxpayers’ money trying to forecast nominal GDP years ahead, which is beyond them, I suggest that the D of Finance concentrate on ensuring that the reduction in government spending, that is resulting from lower-than-predicted inflation (and GDP deflator), apparent up to end-September, is maintained up to end-December, and not blown away in a spending splurge in Q4. As the figures I posted above showed, government spending was 2.5% lower than the government target up to end-September (against a mere 0.2% shorthfall for tax revenues). If the D of Finance maintains this until end-December, and there is no reason why they shouldn’t, the budget deficit will be lower in 2010 than was forecast in the December 2009 budget, regardless of the fact that nominal GDP, although not real GDP, might also be lower.

  5. This is just a query in relation to the EU/IMF fund that many suggest that Ireland would need to borrow from should international markets turn further against Ireland.
    And my question is this: Is the presence of the fund itself causing markets to squeeze Ireland with further interest rates (which means a larger return for investors) because these markets know that Ireland has a bailout function in the form of the IMF/EU fund? Essentially, I am asking as to whether markets are leaning on Ireland (and Portugal) because they are aware that the chance of default is nearly zero thanks to the IMF/EU fund?

  6. @JtO
    And as I said on the previous thread only a small percentage of government expenditure is linked to inflation. The rest needs to be cut to get it to move in line with inflation which is why the absolute amount of cuts needed is increasing.

  7. @johntheo
    “real GDP growth will be a minimum of 1.5% to 2.0% higher in 2010 than was forecast in the Stability Programme at budget time in December 2009.”

    Mr. Lane wrote:
    “In December 2009, the plan forecast that nominal GDP would be €164.6 billion in 2009 and €161 billion in 2010.”

    Ah, now we have your base figures. So you are saying that your base figures are real GDP of 166 bn in 2009 and that you expect real GDP for 2010 to be between 168.8 bn and 169.7 bn?

    So far in 2010, real GDP has amounted to 82,964 (Q1+Q2). to reach even your lower target, that would mean hitting 85,876 in Q3+Q4, or growth of 3.5% after inflation (since inflation has turned positive). I think it is unlikely.

  8. Just completed a quarterly return for CSO that requires “total persons engaged in the enterprise” . The total was X but what was not required or asked was the information that 39% of X were on short time working. I am informed by the CSO that this, to me very relevant figure, is only updated on another report annually.

    One need to be very circumspect with CSO data, even when it is returned properly.

  9. Surprising for some and not surprising for others.

    For economists and people who make an effort to really ID these figures then its not surprising.

    For someone who might rely on RTE then it would be a surprise.

    The communication of the situation to the general public has been particularly bad with RTE noteably seeming to think being balanced includes not questioning the govt. line in any way.

  10. @hoganmahew

    You are switching about from real GDP to nominal GDP figures.

    Lets take real GDP first.

    Real GDP in 2009 was €166,345.

    In the Stability Programme:

    the D of Finance forecast it would fall by 1.3% in 2010 – ie toC164,183
    the Central Bank forecast it would fall by 2% in 2010 – ie to €163,018

    In 2010 H1, it was €82,964.

    Assume unrealistically no growth in 2010 H2 over H1 – leaves it at €165,928 for 2010 as a whole – ie 1.1% to 1.8% above these forecasts. However, I think there will be growth in 2010 H2 over H1, so these will very likely be underestimates.

    However, this is really separate from the main point of Philip Lane’s thread, which concerns nominal GDP, rather than real GDP.

    His main point was that, because of lower-than predicted, in fact negative, inflation across the economy, nominal GDP in 2010 will be lower than predicted, at around €157,018 in 2010, or 5.6% less than real GDP, and he was discussing the implications of that for the budget deficit.

    Actually, to digress for a moment, I think that the gap between real and nominal GDP will be less than this in 2010. The D of Finance seem to be assuming that the GDP deflator will be the same in 2010 H2 as in H1. But, if you look at the exchange rate of the euro and the various price and turnover indices in the Irish economy, they all showed a large increase in Q3 as compared with Q1 and Q2. This was on the back of the much lower euro in Q3. That may come back a bit in Q4, as the euro has gone back up a bit, although not back up to its Q1 level. However, that is a separate issue. Back to the main point of this thread.

    I totally agree that lower nominal GDP means the following statement from the Irish Times, quoted by Philip Lane in the opening thread, is true: “This means that without any change in the budget deficit in absolute terms, the deficit will be higher than projected when expressed as a percentage of GDP.”

    Of course it does. Simple arithmetic. No argument there.

    However, the key point, which no one has challenged, is that the very thing that causes the gap between nominal GDP and real GDP to be greater than expected, ie greater negative inflation than expected, also causes government spending to be lower than expected, and therefore there IS a change in the budget deficit in absolute terms. Any analysis which fails to take this important point into account is a nonsense. And I backed this theoretical point up with actual figures for tax revenue and government spending up to end-September showing that that was precisely what was happening.

    Would any of our esteemed economists, especially those who appear regularly on the media claiming that the budget deficit is going from bad to worse, care to deny my assertion that, based on the figures up to end-September, the budget deficit is so far in 2010 turning out lower than the government target, not higher, as the Irish media has claimed a million times this week? I notice that none of them have so far, which you would think they might have done by now, if my assertion was wrong. Deducing this does not require the brain of Einstein, a degree in maths or a degree in economics, merely the ability to work the ‘subtract key’ on a 2-euro calculator. Tax revenue €42m behind target at end-September, government spending €833m behind target at end-September. You can argue all night about what part real growth contributed to this, and what part negative inflation contributed, but these are the bottom-line figures. As I say, absolutely no one has challenged them. I can not and am not predicting what the situation will be at end-December. There is absolutely no reason why the figures then should not be better than at end-September. But, I can not peer into the mind of the D of Finance and predict what it will do with the €833m in below-target government spending up to end-September, that it is now in possession of, as a result of the lower-than-predicted inflation. For all I know, they might plan to blow it on Christmas parties or buy the Ark Royal, now that Her Majesty’s Government can no longer afford to keep it. But, if they maintain the same pattern of government spending in Q4 as in Q1 to Q3, the budget deficit will be lower than their target, not higher.

    BTW While Ireland’s budget deficit has at worst stabilised, and may be coming down, if the D of Finance takes the advice I gave them above in regard to spending in Q4, the UK deficit is soaring. According to figures just out today, it was up 10% in September as compared with September 2009.

  11. Should we all be very worried that FG and Labour seemed so surprised by the figures, which were available since the summer? Are they just politicking, or do they not understand the figures, or are they just too lazy to pay attention? One or both of these parties will be in charge pretty soon, and I would have hoped for better.

    Hopefully they’re just playing politics…..

  12. @JtO
    “But, I can not peer into the mind of the D of Finance and predict what it will do with the €833m in below-target government spending up to end-September, that it is now in possession of, as a result of the lower-than-predicted inflation. For all I know, they might plan to blow it on Christmas parties or buy the Ark Royal, now that Her Majesty’s Government can no longer afford to keep it. But, if they maintain the same pattern of government spending in Q4 as in Q1 to Q3, the budget deficit will be lower than their target, not higher.”

    All of the €833bn is on the capital side. And it seems they actually do plan a bit of a spending spree in the last quarter of the year.

    http://www.finance.gov.ie/documents/exchequerstatements/2010/endauginfonote.pdf

    From the August exchequer statement.
    “Net voted capital expenditure at end-August, at €2.6 billion, is down some €1.3 billion or 34% year-on-year. It is €803 million or 24% below target. A considerable portion of this shortfall is due to timing and operational issues and it is anticipated that capital expenditure will pick up over the remainder of the year.”

    As I have said many times before on various threads the vast bulk of government spending will not move in line with deflation unless the government enacts the cuts to force it to.

  13. @JohntheO
    Thanks for repeating my figures back to me without answering the question. Sorry, though, for the confusion. I left in Mr. Lane’s quote about nominal GDP.

    So I will repeat it:
    “So you are saying that your base figures are real GDP of 166 bn in 2009 and that you expect real GDP for 2010 to be between 168.8 bn and 169.7 bn?”

    I will ask another question: do you think real or nominal GDP is more important as an assessment of the economy? Do you think there is more economic activity in 2010 than there was in 2009?
    (Statistically speaking, that’s just one question…).

  14. Somebody I knew but did not know well killed themselves. Left behind a beautiful girl.
    Does a percent in GDP measure despair?
    Hard to remember when you’re struggling how others see us differently. Hard to remember our real value is in our hearts and not our pockets.
    Hard to remember that children will love you even if youre poor and actually love you even more if they know you’ve struggled. They just want you there.
    Hard to rmember that nothing is more valuable than the fire your smile or your kind word can light in another’s soul.
    In 30 years we will sit over pints and smile as we tell each other how we survived the Great Irish Depression of 2011 and we’ll all chip in to buy a bag of crisps. Life is a fight from beginning to end. But without the fights there are no victories and without the victories there are no joys. We will survive.
    Let’s fight on!

  15. The government has never articulated deflation as a reason to change anything. They could have said that we are determined to maintain the real value of pensions etc and so reduced them somewhat (for a year or so, anyhow). Nothing is related to any actual values be it GNP, inflation, revenue or anything else, but it is always portrayed as a “cut” to be subject to a political process rather than a technical one.

  16. I suggest that the government and opposition get used to using the term “deflation”.

    Communication of what has happened and what is clearly going to happen should be summed up by someone with a Ph.D and set out on this site? In the process, the areas of doubt about deficits etc might be set out also?

    Planning is involved in investment. Borrowing will only happen when people have an appreciated and digested idea of this new environment, uncluttered by spin. Then we may begin recovery and minimise overshoot.

    Anyone agree that this might be useful?

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