Some thoughts on the QNA release
This post was written by John McHale
With all that was going on in Brussels, the fourth-quarter QNA release got less attention than might have been expected. As usual, the numbers don’t all point in one direction. And also as usual, the quarterly numbers must be treated with caution given their volatility and propensity for revision.
The annual declines in real GDP (1 percent) and real GNP (2.1 percent) received the most coverage. But the annual numbers can give a misleading picture when the economy is at a turning point. A better measure is the percentage change over the same quarter of the previous year. I linked to these graphs on the thread following the release. The noticeable turnaround in real GNP is encouraging (up 2.7 percent on quarter four of 2009); less encouraging is the 0.6 percent decline in real GDP, with the overall performance dragged down by a poor final quarter.
The final graph in the set shows again the “two economies” reality of recent Irish growth performance. The only thing that I would add is that the underlying potential growth of the economy is a critical factor for our capacity to pull out of the debt crisis without default. Recognising the likely impact of the austerity measures on domestic demand, I think the picture is consistent with the (ESRI) view of solid underlying export-driven growth potential.
The main bad news in the release relates to the performance of nominal GDP. The Budget 2011 forecast for nominal GDP in 2010 was €157.3 billion. The actual nominal GDP turned out to be €153.9 billion – a 2.1 percent shortfall over the budget day forecast. Readers might recall that the €157.3 billion was itself the result of an earlier downward revision (see Philip Lane’s explanation here).
If that nominal shortfall carried over to 2014, the deficit would have to be reduced by an additional €94.1 million to meet the 2.8 percent of GDP deficit target for that year. This back-of-the-envelope calculation ignores the impact of any additional deficit reduction on GDP. Of course, there are even more severe implications if we are required to hit the higher intermediate targets along the way (for these targets see Table 6, p. D19 here; see p. D9 for the Budget 2011 nominal GDP projections). For example, an extra €316 million would have to be taken off the deficit to meet the 9.4 percent deficit target for 2011. It should be noted, however, that the poor performance for nominal GDP mainly reflects an eyebrow-raising quarter-on-quarter drop in the final quarter (down 6.6 percent, seasonally adjusted), and could be even more than usually subject to revision.