Some thoughts on the QNA release

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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. 

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7 Responses to “Some thoughts on the QNA release”

  1. DOCM Says:

    “..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 effect of the austerity measures on domestic demand, I think the picture is consistent with the (ESRI) view of solid underlying export-driven growth potential”.

    This is obviously the key consideration and, I suggest, what distinguishes Ireland from Greece and Portugal. In particular, the fact that both the euro and Spain – if exchange rates and spreads are any guide – seem to have decoupled from the three countries at risk of insolvency seems worthy of attention. If this is in fact the case, the key question then becomes whether Ireland can decouple from Greece and Portugal.

    In my view, the answer is an unequivocal yes provided there is wider acceptance that there is no such thing as a free lunch.

    The Independent in its editorial today still seems to think that there is.

    “When a borrower gets into financial difficulty one of the fundamental principles is that the lender shares some of the pain”.

    This is a new principle for me but I am willing to be persuaded of its existence.

    cf. http://www.reuters.com/article/2011/03/26/us-ecb-liquidity-idUSTRE72P0U320110326

  2. Eureka Says:

    @DOCM
    It is very difficult to discuss the dynamics of the Irish economy and GNP/GDP without taking the debt issue into account.

    I don’t think that money lending is wrong but it is definitely controversial and a question which humanity has always grappled with.
    Aristotle:
    “The most hated sort [of moneymaking], and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term Usury which means the birth of money from money, is applied to the breeding of money, because the offspring resembles the parent. Wherefore of all modes of making money this is the most unnatural”

    Money lenders don’t occupy a moral high-ground and the practice must be strictly governed by law for the protection of all. Part of that must be making the money-lender accountable for the risks they take. If that is taken out of the equation we end up with the disaster we have.

    Bankers lent money that never existed to people who could never pay it back. It was foolhardy and stupid.

    Back to the point of this post – Ireland is a healthy economy. There should be no surprise the the domestic and export economy have decoupled. The benefits of the economic activity are not circulating back into the Irish economy but are rather being artificially being siphoned off to pay off banks. In effect Irish people are “making” the money that was never really there. It will always feel as if we are running to keep still unless there is some form of default and unless a credit stream with an interest actually tied into GDP/GNP is introduced. (i.e. the interest charged should be as a fixed percentage of GDP as opposed to an absolute rate).

    We will not be able to decouple from Greece and Portugal as long as this situation exists because it leaves our economy incredibly vulnerable to any outside shock (two very likely ones are oil price rises and ECB interest rate rises). How can the government reduce the duty on petrol, for example, when it is so dependent on that revenue to pay off the bankers?

    This is a situation where decoupling will only occur once the money lenders take the consequences of their stupidity

  3. Brian Woods Says:

    @Eureka: “This is a situation where decoupling will only occur once the money lenders take the consequences of their stupidity.”

    How about the owners of this blogsite put your quote into the masthead. How many time has this matter of debt cramdown to be shouted at folk before it penetrates the armour-plate of delusion shielding their frontal-lobes?

    Oil price increases will doom us (and other developed economies). Actually its the supply, rather than the price. You can fiat up all the money you need to pay, but not so with a physical entity. God forbid there is a concerted switch from oil to gas to provide our base-load electricity demand. Once that happens, and it will, that’s it, game over!

    I hope our great export inductries can run on steam ;-)

    BpW

  4. Seamus Coffey Says:

    The big issue with interpretating our National Accounts is the impact some of the large MNCs have on the figures. GNP has been rising recently because of changes in the profit outflows from these companies. GNP rising because of falling exports and lower profits is not the type of growth we are hoping for.

    The Q4 drop in nominal GDP was alarming. Again it is probably due to a small number of large MNCs firms. Seasonally adjusted nominal exports fell by more than real exports (-2.6% versus -1.4%). In the same terms, nominal imports rose but real exports fell (0.4% versus -0.1%). These suggest falling export prices and rising import prices. The differences in these quarterly changes may not appear that large but with the sum of imports and exports coming close to 175% of GDP the impact of them is magnified on the overall figure.

    According to the CSO just 10 companies account for 34% of total Irish exports (the same companies account for 33% of Irish imports). The CSOs “large case unit” has a good idea what is happening within these companies but for obvious confidentiality reasons are not at liberty to say.

    As John McHale has started further data points from some of these large companies could result in a revision of the figure but for the moment we have a nominal GDP figure of €153.9 billion to work with. With our deficit and debt targets calculated as a ratio of this figure it will make hitting particular targets harder. Eurostat will wait until the final 2010 figure is released in June before calling it.

  5. michael burke Says:

    There is an apparent contradiction in the ’2 economies’ notion.

    GNP is growing and GDP is contracting, while at the same time net exports make a postive contribution to growth whereas domestic demand is still contracting.

    The discrepancy arises from the declining outflow of ‘Net Factor Income From Abroad’, the activities of foreign companies’ financial transactions. All components of domestic activity continue to contract, led by investment but including personal consumption, government spending. The build-up in unwanted inventories in Q3, which led to so much talk of corner-turning, has also been reversed.

    The data are subject to revision. But it is the continued decline in all components of domestic activity that should cause a rethink since these are the sources of tax revenues.

    While all these key indicators are at new lows, it is the collapse in investment which is equivalent to the decline in GDP. Many are inclined to dismiss all of this airily with the lazy notion that ‘it was all just construction’, as if this economy needs no new physical infrastructure or housing.

    But it is also untrue. Even in the boom year of 2007, construction accounted for under 12% of the total domestic supply of goods and services and just over 9% including international supply. Its fall since implies a contraction in GNP from this component of 6.6% whereas total domestic demand has fallen by over 24%. This is borne out in the employment data, where the labour-intensive construction industry accounts for less than half the total of jobs lost.

    It has been argued that cuts in government spending would restore confidence in both domestic and international markets. This would restore growth and lead to an improvement in government finances. It is a policy which has failed on every count. For 3 years.

  6. Donogh Diamond Says:

    Maybe I’ve missed something here, but how much of the poor Q4 GDP performance can be put down to the extraordinary weather, during what should have been the busiest period of the year? As far as I remember, it started in mid-December and caused a a collapse in the retail and hospitality trade for a fortnight. It also made deliveries difficult if not impossible, and i presume dramatically affected absenteeism.

  7. Rory O'Farrell Says:

    I find the data on exports most interesting, and services in particular, as we are supposedly in an export boom.

    Exports of computer services seem to be doing well, but the trend seems to match imports of royalties/licences very closely.

    Is there a way to reliably see how much of our exports is genuinely Irish based activity and how much is simply booking of profits from abroad?

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