The sputtering foreign engines of assumed Irish growth

The four-year plan assumes that Irish GDP will grow in real terms by around 2.75% per annum over the next four years. For good measure, it throws in a little bit of assumed inflation as well (0.75%, 1%, 1.25%, 1.5% — a suspiciously smooth progression, would you not say?).

In the context of the proposed austerity package, this seems wildly over-optimistic to me, and it would appear that several market analysts hold the same view. Here’s one quote from the foreign press, but you can easily find more of the same:

Analysts questioned whether the plan was credible. Stephen Lewis, chief economist at Monument Securities, said: “It doesn’t seem all that realistic to me. It seems they’re planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely.”

Needless to say, I would love to be proved wrong, and the third quarter GDP statistics will be revealing one way or the other.

Optimists point to the growth in Irish exports as the route to our recovery. Since we can’t devalue, we will be relying on foreign income growth more than on relative price shifts to achieve this happy outcome. So it seems worth pointing out that the Dutch CPB’s September data on world trade and industrial production were released yesterday. They confirm a trend which has been there since January: the momentum of the world recovery is steadily decreasing.

41 replies on “The sputtering foreign engines of assumed Irish growth”

Suppose the economy is €160bn, and exports are 90% of GDP. We take out €6bn from GDP (3.75%). So exports must increase by €10.4bn next year, ie 7.2%.

I’ve ignored the multiplier effects, which could bring this up 10%.

We are one foot in the grave. I don’t believe it.

this is on the http://www.ft.com website
it is legally on the record

‘bullied into a bail-out. As Brian Lucey, a Trinity College economist, put it in a much circulated blog: “This is geopolitical hardball: Brian Lenihan from Castleknock versus the heirs of Bismarck and Cardinal Richelieu.’

Gladiator, 2000
Quintus: People should know when they are conquered’
Maximus: ‘would you Quintus, would I?’

James Joyce observed that ‘if you wrote real life down nobody would believe it.’

The simple reality is that “official” Ireland has been humiliated in front of the world.

In literally a matter of HOURS of arriving in Dublin, the analysts and commentators from the international media organisations were able to dig through the hype and crap of the last 10 years and comprehensively understand the real problem, its root cause AND how hard, if not downright impossible, it will be to resolve it, 4 yr plan or not.

The rest of the world now knows that the so-called 4-year plan is not worth the paper it’s written on.
Hell we could cut fiscal spending down to ZERO and it STILL wouldn’t be enough to fix the problem.

The government, its civil servants and the rest have been proven to be a crowd of chancers who played hooky with the nation’s and the world’s finances.
Their spoofing is simply a national embarrassment: A barrister as minister for finance and a moron as Taoiseach, along with all the other half-wits, have simply served to reinforce the international Irish stereotype with gusto.
I suppose you have to admire them in a weird way though – can you imagine being as ignorant and misguided as they are, having to face the scrutiny of the rest of the world’s press knowing they know you are a moron with moronic “plans” and “statements” ? Takes some thick neck, so fair play to them for that !!! Yeah, right !!!!!!!!!!!!!!

The people who keep pointing out that the Irish are inherently thick might actually be right!
After all, who in their right minds would elect a bunch of morons who can’t/won’t grasp basic mathematics never mind grasp/act in the national interest? Can you believe 17% of people still support them? Like WTF?

At the end of the day, the prawn sandwiches are going in the bin, the nation is going in the toilet, the spoofing will continue all the way to the cess pool. Sweet suffering Jesus !!!

@Rory
“Suppose the economy is €160bn, and exports are 90% of GDP. We take out €6bn from GDP (3.75%). So exports must increase by €10.4bn next year, ie 7.2%.”
If exports are 90% of GDP, then the 6 bn reduction of 72 bn overall spend is an 8% reduction of the 10% or 0.8%

So I don’t accept your headline numbers! Indeed, since tax raises seem to form a large part of the 2011 adjustment, 6 bn isn’t being taken out of spending…

To properly calculate:
What proportion does exports count for in the GDP figures?
How much of this is balance rather than gross exports?
How much is government spending in GDP?
How much of the reduction in spending goes on imports?
How much of the reduction in borrowing is from external sources? (6 bn reduction, 80/20 split – foreign/domestic, so 4.8 bn less coming into the economy in the form of government borrowing next year).
How much is future growth benefitted by having a lower interest/capital repayment bill in years to come? The medium term doesn’t go away…

As you can see, I don’t have the answers and there are probably more questions…

The reduction to absurdity of the cut in spending/raise in taxes is totally unhelpful. It is economic soundbite spin of the lowest sort.

Some measures in the plan will not impact on current growth much, if at all, for example, the change to pension tax relief. Yes, it will leave a problem to be addressed in the future…

Others have the potential to have a positive effect on growth – the rise in the VAT rate *could* have the effect of making imported goods less desirable and/or increasing the government’s share of spending on those items. Most items that are essentials are currently exempt… will that continue?

I think we still make all the botox, viagra and prozac in the world here.

That should guarantee us a smooth vertical ascent out of depression!

Seriously though, Pharma and IT have reached a tipping point here, real reason for the tiger. The cluster effects (a la Porter) combined with continued support from government* means they are the leading lights. Sad thing is they may make billions, but they employ only thousands. We need to mix our economy up slightly and not look outside for inspiration. FDI has been climbing solidly (viagra again!) but why don’t we have the capital after all the years of so called excess?

Many have asked it but Where are Irish investors? Still trying to build golf courses in Hungary on leverage from Dubai?
Ireland as a nation will lift its head up when the right people are jailed, not just disgraced, for the disasters that befell us.

*(among them cheaper power, which galls me, people on the dole subsidising Intel, you can’t make it up. ESB clearly don’t negotiate like any deregulated company would with large users. That the government have to step in and legislate terms is as disgusting as ripping off householders who don’t have the capacity for efficiency multinationals do)

I would just like to point out that the 4 year plan was not made up by FF or the brain child of the two Brians. It comprised of inputs from the Irish Institute of Taxation and civil servants in the Dept of Finance.

The current Govt are just the front cover of the 4 year plan / document.
Changing the front cover (i.e. general election in 2011) does not mean the plan will radically change. No doubt FG and or Labour will make some changes when they are in the driving seat, but its akin to moving furniture around the room, but no matter how much you adjust the layout of the furniture in the room, you are still stuck with the same furniture in the same room. Your hands are tied in a lot of respects.

Interestingly enough the document mentions several times about considerable misinformation being present in the public domain in relation to certain areas of taxation, pensions and such like. I am not suggesting the document refers to this site, most probably it’s just a general comment about Irish media.

Cutting and cutting is one option, but we need to get this country competitive again. There are still things being made in the world, lots of problems to be solved, ie Malaria control methods. New technologies are arriving ie Nano Technology. We need to get active again in targetting these areas and offering solutions to the worlds problems.

If Global economic growth is to remain feable as Mr Kevin O’Rourke suggests then Ireland will have to redouble its efforts to become attractive and muscle in on areas which are productive.

My feelings on the massive debt Ireland has taken on is that if we are going to pay it all back then we require a massive loan at a very low interest rate and spend the next 100 years paying it back. If that is not possible then perhaps instead of default I would rather give the bondholders the items which were bought with their money, marinas, numerous apartment blocks, property in Dubai and elsewhere, the Irish glass bottle site, shopping centres etc.

Its not a conventional or normal suggestion but it is better than outright default.

This is my favourite paragraph of the 4 year plan.

“The macroeconomic forecasts which underpin the plan envisage GDP growth averaging 2.7% between 2011 and 2014. This pace of growth is expected to lower unemployment from its current rate of 13.5% to about 9.8%. These forecasts are based on the assumption that all the measures set out above are implemented and make some prudent allowance for the positive effects expected to flow from them. It is possible that the effects of the measures will be greater than has been incorporated in the forecasts.”

Stephen Kinsella (from UL) was saying on the radio last night that the growth figures are being forecast based on wildly optimistic forecasts for investment and resulting jobs growth. This plan is a work of fiction.

The outgoing government try to force their agenda on the new government so that they in fact control all income and expenditure for the next four years even though they have been thrown out of government. The bloody arrogance of them is just off the charts.

Here we go again, getting hung up on forecasts.
1. Macroeconomic forecasting is impossible to do well, consistently. Not possible, never ever been done.
2. If the DoF changed the word ‘forecast’ to ‘assumptions’, would that do?
3. The Plan kindly provides sensitvity analysis if those forecasts/assumptions turn out to be wrong.

@Kevin
I’m mildly surprised by those Dutch conclusions. Other data (US, UK, German, Japan: GDP, PMIs, employment, LEIs company profits) suggest that growth has picked up over the past 2 months. My guess is that the world economy will have grown by around 5% in real terms this year and has quite reasonable momentum right now.

@KOR

To the market analysts you mention I would add S&P, who unlike the Irish Government certainly has no motivation to indulge in wishful thinking:

Standard & Poor’s now expects close to zero nominal GDP growth for 2011 and 2012. We do not envisage GDP exceeding 2% a year in real terms before 2013.

http://www.irishtimes.com/newspaper/breaking/2010/1124/breaking2.html

Besides, factor in the huge gap between Irish GDP and Irish GNP (the country’s taxable output), the possibility of yet another oil crisis and/or a collapse in the dollar, and growth might well turn out to be negative from now until the end of Western Civ.

Thinking about the position, I can’t see beyond a kind of hollow recovery, where more and more are left behind.

If 10% are to remain jobless after a “best case possible” 4 years of 2.7%+ growth, mass emigration and rapidly increasing numbers dropping out of the system (A la Japan) we can only generate GDP growth not GNP growth we need in the country.

I see what equality we are left with, already heading in the wrong direction for the past 10 years, accelerating away to 80s dictator land.

Remind me again what generally comes with naked, crushing inequality?

This plan is not what most people seem to think it is… a plan drafted by intelligent honest realistic people to solve our problems. (Problems created and worsened by the same people who have drafted this plan).

This plan is closer to the type of business plan submitted by companies looking for state funding on innovation or R&D, getting the funding is the real goal of the plan, not the stated objectives.

I’m sure the IMF have enough experience to recognize this.

According to the OECD’s latest Outlook, world trade growth is expected to slow (from a relatively robust rate) over the next couple of years. The National Recovery Plan projects a decline in Irish export growth over the period 2011-2014, to an average of around 4.5% a year from (an expected) 6.3% this year. In 2010, net exports are expected to contribute 3.5% points to GDP growth (which seems reasonable on the actual H1 data and the likely outturn in Q3), just about offsetting the negative contribution from domestic demand (-3.25% points), the latter reflecting, according to the estimates in the Plan, a fall in consumer spending of 1.3%, a decline in government consumption of 4%, and a (further) plunge in investment of over 21%. In 2011, net exports are again expected to make a positive contribution to growth, of 2.5% points, which again offsets a (smaller) negative contribution from domestic demand. Consumer spending is expected to be flat in real terms in 2011, which admittedly may be optimistic (though if it is, import growth may be weaker than expected), government consumption falls again, but investment is expected to fall by much less than in 2010 (house-building can hardly fall much further after all), so the drag from domestic demand is not expected to be as great as this year. Beyond 2011, the contribution from net exports diminishes, while the contribution from domestic demand turns positive. There are downside risks to the forecasts, certainly, but they don’t strike as “wildly optimistic”

“The outgoing government try to force their agenda on the new government so that they in fact control all income and expenditure for the next four years even though they have been thrown out of government. The bloody arrogance of them is just off the charts”

Noonan says that Rehn agreed that the quantum of cuts is set but not the breakdown of them. So the budget is meaningless.

All this talk of “exports” is getting a little tiring.

Ireland is a re-exporter. Will people eventual begin to understand what that means if exports go from 90% of GDP (our national output) to 110%?

Do people here even understand it?

Try this. If Mark Zuckerberg was a lodger in my house back in the day when he invented Facebook, how much better off would I be today, given that this resident of my house is now a billionaire?

To spell it out, my income will not have risen by the amount that Mr Zuckerberg’s output (income) has risen, it will go up only by any increase in the amount of rent he is paying me or any odd jobs he will pay me to do for him, like clean his shoes.

@ Frustrated Freddie

‘The people who keep pointing out that the Irish are inherently thick might actually be right! After all, who in their right minds would elect a bunch of morons who can’t/won’t grasp basic mathematics never mind grasp/act in the national interest?’

You are clearly no moron yourself but your thinking is clouded by your frustration. Angry players don’t play as well as those who are in a calm frame of mind.

Consider for a moment what sort of political and institutional system in our politicians have to compete. Success is about getting elected and staying in power as long as you can. Isn’t that what politicians are supposed to do ? Is there any other kind of politics ?

I put it to you that our politicans are as capable, as individuals, as those of any other country. They are are no more corrupt, as individuals, than the European norm. Many would do well in other careers, or have done, but politics is the trade chosen by them, and usually the trade of their clan.

We can’t do without profesional politicians, but the problems we have are the problems we inherited. We won’t fix em until we understand em. At the risk of boring readers, I again refer to Joe Lee’s seminal history of Ireland.

@Paul Quigley:
“We can’t do without profesional politicians ….”

“The most important thing in life is to do things about things, not to speculate about possible outcome.” (Éamon Ó Cuív TD, Minister, RTE Radio 1, 25 November 2010, 13:18)

Might it not be better to have an amateur politician who thinks about things, and considers the possible outcomes of policies, instead of rushing about like a headless chicken?

bjg

@hoganmahew

I think the 43% was on the islands, turnout for the whole wont be avaiable for a little bit….
The islands figure was attributed to problems with the register, I believe, very out of date etc.

@Highway61
I hope so, because the bit I’ve just heard on Newstalk suggests that polling is slow and that the belief is that the islands will once again indicate the mainland turnout.

Why IMF has the same “bailout” plan for Ireland with Greece’s plan?Greek crisis is financial, Irish crisis is banking. Greece after 7 months in IMF will goes for bankruptcy! The last 7 months we have big depression, no growth , 4.500 companies closed. Now they will privatisation 7billion of greek public property. Now 40.000 civil servants will lost their job.

what IMF means with “flexible working hours “?
they mean that every company private, can reduce’s wage without problem. Also they can change “house working” from 8 hours to 10 hours with the same wage. Chinesation of Europe.

IMF’ ‘s logic is to destroy economies.

7 months now the the greek GNP growth 7% but greek debt proliferated 20 billions! The GNP is easy to grow without IMF , but the debt of a country is difficult to repaid. That’s the problem.

see here what happend with IMF in Argentina

http://www.youtube.com/watch?v=9loPiyKm-z8

At the end: Why frau-Merkel says every time says for an “adequate participation of private creditors” to the so-called bailout ?
Bacause when Merkel say’s that, irish, portugal etc spreads grow, the euro falls, and gremany has more and more exports to all around the world! Just googling the “german exports” to google news and see.

Sorry for my poor english.

@Gecko
Will people eventual begin to understand what that means if exports go from 90% of GDP (our national output) to 110%?
Nice.
The answer is no, they won’t understand it — and quite ‘understandably’, because most people don’t study economics and most of those that do forget it pretty soon after they leave university and join the dole queue.

People don’t even understand the difference between GDP and GNP, which explains why so many didn’t believe their lying eyes but believed the bullshit statistics instead when they gasped and ooed and awed about Ireland’s being the country with the world’s greatest per capita income.

The Economist explained it all here (way back in 2004, avant le deluge):

As the Irish economy develops, GDP and GNP might be expected to converge, but instead the gap seems to have widened recently (see chart 3). That is largely because American multinationals have been racking up (or at least recording) such big profits in Ireland. In some ways, this is a mark of the country’s economic immaturity, and its failure to nurture indigenous industry. Chris Coughlan, a vice-president of HP Compaq and chairman of the Galway Chamber of Commerce, suggests that Ireland’s future success could be measured in part by whether GDP and GNP converge, which would indicate that home-grown industry has matured. That might, sadly, put an end to another splendid quirk with which to confuse those first-year students: that Ireland’s total exports exceed the country’s national income

http://www.nber.org/~rosenbla/econ110/lecture/ireland.pdf

@Carolus:
“… most people don’t study economics and most of those that do forget it pretty soon after they leave university and join the dole queue.”

Happily, not all those who study economics join dole queues, thanks no doubt to your namesake:

“Laudamus te, benignissime Pater, pro serenissimis, regina Elizabetha hujus Collegii conditrice, Jacobo ejusdem munificentissimo auctore, Carolo conservatore, caeterisque benefactoribus nostris ….”

bjg

@hoganmahew

I defer to your more current information, not having warmed up the valves on my wireless…..

If the turnout is that low, then we are in potential “FF hold” territory.

Transfers were always going to be critical, esp FG to FF numbers (if any and if rFG poll behind the Soldiers, as seemed likely).
Iknow FF put their shoulders to this over the last few days.

Frustrated Freddy writes:

The people who keep pointing out that the Irish are inherently thick might actually be right! After all, who in their right minds would elect a bunch of morons who can’t/won’t grasp basic mathematics never mind grasp/act in the national interest? Can you believe 17% of people still support them? Like WTF?

While it’s arguable that the IQ of the Irish may be somewhat below the European average as a result of dysgenic selection, I think that Schumpeter offered a better (or at least less offensive) explanation:

Thus the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again. (Joseph A. Schumpeter, Capitalism, Socialism, and Democracy).

But — tritely speaking — what strikes me in particular is just how much Irish politicians resemble the people who vote them in (or out). They quack like the Irish, they waddle like the Irish, they blarney and bullshit like the Irish, they are the Irish and indeed they are more like the Irish than the Irish themselves. There is no ‘they’. ‘They’ are ‘us’.

Sermon over. I don’t want to sound like Fintan O’Toole.

It seems to me that the Department of Finance are working on the bizzare assumption (which has zero credibility) that the proposed cuts will lead to 2.75% growth per annum.

Kevin,

Just been doing some additional sensitivity analysis on the new numbers released yesterday.

If we assume 2 percent nominal growth each year between 2011 and 2014 the debt to GDP ratio just fails to stabilise. However, with an additional 1 percent reduction in the primary deficit in 2014 (following the government’s target for the primary deficit between 2011 and 2013), the ratio stabilises at 113 percent of GDP. The required primary surplus in 2014 is then 2.9 percent of GDP.

Even with the lower growth, the ratio stabilises at 124 percent of GDP if we add an additional 10 percent of GDP to the starting debt ratio as an allowance of a higher bank bailout cost.

There is a feasible path through this even without the more optimistic assumptions on real and nominal growth.

Note: These calculations assume a starting debt to GDP ratio of 94.7 percent based on an end of year debt stock of €149 billion and nominal GDP for 2010 of €157.3 billion (all numbers from yesterday’s plan). I also calculate the implied stock-flow adjustment used in the Government’s calculations and use the same adjustment for the hypothetical simulations.

We spoof so often on the issue of exports and the FDI sector, we believe it.
Patrick Honohan said earlier this week it “is routinely forgotten by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland.

Whoever wrote Brian Lenihan’s speech for the FT, included another standard bromide on productivity – – being the second highest in Europe.

So why worry about low productivity in many areas of the economy when the data is so comforting?

IBEC, representing big public, indigenous and multinational firms also revels in pr/bs and recently Danny McCoy highlighted that outward FDI is bigger than inward FDI.

Of course the fears about a change in the corporate tax rate signalls which one is crucial.

One striking factoid for me in the past week is that Ireland accounted for three times as many exports from the UK as China in 2009 and more than the combined exports to the BRIC countries of Brazil, Russia, India and China.  Northern Ireland exports to the Republic are more than 40% of total exports.

We also have a very low presence in emerging markets and decisions regarding the destination of the output of many foreign companies are not made in Ireland.

I have often highlighted how exports at current prices jumped 50% from 2000 but there were no jobs added.

The chemicals sector accounts for 33% of FDI company sales, but it comprises only 16% of the employment in foreign-owned companies in Ireland.

The linkages of the declining electronics sector are likely greater and chemical import content is likely to be higher.

So the sector with the greatest export growth has limited marginal impact on the domestic economy.

Factors like this are ignored in economic models.

One issue about the type of recent inward FDI projects in recent times (most of the big US firms have already a presence) is the focus on localisation and tech call centes.

Because of the language requirements, many of the jobs are likely filled by overseas applicants.

@John Mc
If we take Prof H’s recent 25% difference between GNP and GDP, doesn’t this mean that we end up with a debt/GNP ratio of between 141% and 155%?

This sounds like it’s on the back side of the curve….the bad side.

There is a lesson to be learned from what has happened to Swiss banking over the past decade. A thriving economy based on catering to tax evaders/avoiders from around the world. As soon as the USA and the EU authorities zeroed in on the problem the Swiss suffered a series of defeats to the point that Switzerland is no longer a tax avoidance/evader haven. Ireland’s low corporate tax regime will suffer a similar fate. It will happen in foreign capitals with the Irish gov’t being a condition taker not a condition maker.

@Hugh

I take you point about GNP. But these calculations are also based on gross debt. They really should be on net debt. I have stuck with the GDP and gross debt conventions for comparability. If memory serves me right, the cash balances and the NPRF assets together amount to about 28 percent of GDP, roughly offsetting the impact of shifting to a GNP measure.

@Hogan

I wouldn’t be overly deterministic with that 80 percent number, which combines developing and developed countries. Having seen yesterday what it would take to reach the 1.9 percent number for the primary surplus, it is hard not to conclude that this is doable if we have half a will. And there more that could be done if necessary, as public sector pay and state pensions got off too lightly. The simulations show that even with nominal growth less than half of what the government assumes, a 2.9 percent primary surplus would have the debt ratio peak at 113 percent in 2013.

@John McHale
The NPRF is also set against a large liability, future pension payments, and is probably far too small to meet that liability – but you have a valid point. I’m pretty sure that the pension commitments will be welshed on eventually so we could count it.

However, am I correct in reading you as saying that we still come out at around 110-120% debt/GDP or unstable and growing debt/GDP on the basis on 1% larger deficit reductions than are currently targeted for 2014 and assuming 2% GDP growth for the next years?

That’s a real bad place to end up, particularly if we’re in a hard currency context and the debt payments will approximate perpetuities.

Perhaps the key issue really is the interest cost on the contingency money. We won’t be able to bear much for long before the camel’s back breaks.

@Hugh Just to clarify, those calculations are based on 2 percent nominal GDP growth, which I think even growth pessimists would see as being on the low side. I agree getting a decent interest rate is critical, and indeed it will quickly become apparent how serious our international partners are about helping us get through this without default.

@simpleton: I am relieved to see that I used the word ‘assumed’ in the title of the post!

The CPB data are authoritative. It is a backward-looking measure though: momentum is defined as growth between successive three-month periods, and the last month in this release is September. (They prefer to focus on momentum since monthly movements in the indices are volatile.) On the other hand, the OECD leading indicators are showing mixed signals these days, and the IMF is forecasting slower world growth in 2011, with risks to the downside.

@ Paul Quigley “I put it to you that our politicans are as capable, as individuals, as those of any other country”

This week’s cabinet spokesmen for PrimeTime, Vincent Browne etc?

Tony Killeen (who?), Pat Carey, Batt O’Keefe…..

’nuff said

@John Mc
Yep – I got that it was nominal growth.

Separately, on Paul Quigley’s assertion that “We can’t do without professional politicians”, we need to bring that debate to another place.

If politicians are being politicians professionally, then let us pay them for results and only for results.

Let’s adapt ideas from the Slovaks (adapt, not adopt..the specific idea is a tad silly) and do things like requiring election manifestos to contain legislative programs and only to pay ministers if the legislative program is achieved, etc.

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