2010 Q4 GDP

Up, GDP by 0.7%, GNP by a bit less, maybe 0.6% (QoQ Seasonally asjusted current market prices (Table 5). Don’t ask me what that is in other measures!).

I certainly wouldn’t dream of attempting a forecast for a quarter, as there are just too many volatilities, seasonalities and uncertainties. For example, we have to date no published information at all on services exports and imports in Q4. We won’t get those until the GDP figures themselves are published. It is very likely that services exports will continue to show very strong growth, certainly on a y-o-y basis. However, the key is services imports. These have been amazingly high for a ‘depressed’ economy so far in 2010 (in contrast, merchandise imports haven’t risen at all), resulting in virtually no growth in net services exports so far in 2010 (in contrast, there has been very high growth in net merchandise exports). If growth in services imports were to moderate or be reversed in Q4, a very healthy rise in GDP would result, as we allready know from figures published that net merchandise exports rose by 8% to 9% in Q4. But, if growth in services imports continues to be high in Q4, any rise in GDP in Q4 would be much smaller and might even be negative (as occurred in Q2). It is simply impossible to predict this in advance.

In general, far too much attention is paid by economists and the media to the figure for the quarterly seasonally-adjusted increase or decrease in GDP. It is treated as a matter of life or death whether it is +0.5% or -0.5%. That may be valid in other countries. But, in Ireland the quarterly seasonally-adjusted figure has little value (unless exceptionally high positive or exceptionally high negative) because it is both prone to large revision and exceptionally volatile. It is more volatile in Ireland than in any other country because of the openness of the economy. In Ireland, both exports and imports are around 100% of GDP. So, exports growing by 1% more than imports adds 1% to underlying GDP growth, while exports growing by 1% less than imports subtracts 1% from underlying GDP growth. Yet both exports and imports are frequently affected simply by timing issues. Thus, GDP was estimated by the CSO to have risen by 2% in Q1, to have fallen by 1% in Q2, and to have risen by 0.5% in Q3, entirely on the basis of the relative growth in exports and imports in those quarters. The fall in Q2 caused an explosion of gloom in the media, but, of course, was reversed in Q3. Yet, the figures for employment, redundancies, vacancies, tax receipts, retail sales, tourism numbers, house completions, manufacturing and services PMIs etc, do not support the view that the volatility shown by the GDP figures for those quarters actually occurred. It is a myth. The reality on the ground was much less volatile. It is more likely that underlying GDP actually rose by about 0.5% in each of Q1, Q2 and Q3 (which gives the same cumulative figure for the those quarters as +2.0%, -1.0% and +0.5%). As an illustration of this quarterly volatility, between 1997 Q1 and 2007 Q4, GDP rose in total by 100%. Yet, of the 44 quarters in that period, GDP actually fell in 10 of them, in nearly all cases because of the growth in exports rising by less than the growth in imports, which was then reversed in the next quarter.

Much more important (in Ireland at least) is the y-o-y increase in the quarter, which eliminates lots of the seasonal distortions and volatilities. It will be very disappointing if this is not significantly positive for the first time since 2007 Q4. I will be particularily disappointed if it is less than the UK y-o-y figure for Q4 of +1.5%, as I put a £100 bet on last summer with my English cousin-in-law (who is a high-flyer in the City of London) that the Irish economy would be growing faster than the UK economy (on a y-o-y basis between quarters) by the end of 2010 at the latest.

As for the individual sectors that make up GDP, between Q4 2009 and Q4 2010, the wealth-producing sectors of manufacturing output, merchandise exports and services exports should all show very large volume rises, anything between between 15% and 20%. These should be on a par with the peak of the Celtic Tiger in the late 1990s. In addition, agricultural output should show a moderate to good rise, on the back of a very large rise in milk production last autumn. These are the positives. Against that, consumer spending and foreign tourism will probably show modest y-o-y falls, the former partly because of the cold weather in December which resulted in a slump in retail sales in that month (which was reversed in January). If those were the only sectors in the economy, GDP would definitely show a very healthy rise in Q4 2010 as compared with Q4 2009, as the positives greatly outweigh the negatives, and my £100 bet would be a guaranteed winner. Unfortunately for my bet, those are not the only sectors. Construction output is still collapsing on a y-o-y basis, It will probably show a y-o-y fall in the region of 20% to 30% in Q4. This will drag down the y-o-y rise in GDP in Q4 resulting from the growth in the wealth-producing sectors, putting my bet in some danger of being lost.

Looking further ahead, it should be noted that this rate of fall in construction output can not continue for much longer, because construction output is now getting close to zero as a percentage of GDP output. It has allready fallen by 75% since 2007. So, whatever the y-o-y GDP growth figure, excluding construction, turns out to be in Q4, that is a good indication of what the overall y-o-y GDP growth figures will be like in a year or so’s time.

A final point: I will be very surprised if there is any remaining deflation in the GDP figures in Q4 and would expect y-o-y nominal GDP to rise by a couple of per cent more than real GDP, whatever that turns out to be.

G*Ps: Another set of ‘meaningless means’ to add some kaleidoscopic confusion. How about a new(ish) set along the lines of the UN HDI? At least we might get a less distorted, a less uncertain and a less ill-informed idea of economic activity. But that might mean having to include info about ALL credit creation and debt levels, and whether they were on the up or the down.

BpW

Eh, so who was closest to -1.6%???

Full year GDP-1%
Full year GNP -2.1%