QNA Release for 2010:Q2

The quarterly national accounts for 2010:Q2 have been released. They show seasonally adjusted GDP declining 1.2% quarter over quarter and seasonally adjusted GNP down 0.3%.  Year over year, real GDP is down 1.8 percent and GNP is down 4.1 percent. Nominal GDP is down 3.6 percent year over year while nominal GNP is down 6.2 percent over the same period.

There were also revisions to the first quarter figures. Seasonally adjusted quarter on quarter growth in GDP was revised down from 2.7 percent to 2.2 percent, while the decline in GNP was revised from 0.5 percent to 1.2 percent.

All in a Day, a Guest Post by Ciaran O’Hagan

Ciaran O’Hagan is head of rates research at Société Générale in Paris

Risk aversion has picked up in Europe over the past weeks. The debate over the fiscal and banking outlooks in Ireland needs to be placed in this context. While Irish credit is under pressure, it is also against a backdrop that favours risk aversion.

The flavour of Wednesday’s press alone gives a good idea of the headwinds facing any country wanting to grow itself out quickly from public debt. 

The ECB’s chief economist, Mr Stark, is warning of a slowdown in growth,  Meanwhile the Bundesbank’s Weber is cautioning that the global financial crisis is not yet over and setbacks in financial markets cannot be ruled out.  Behind this talk is of course the cautioning of governments that they need to show long-term commitment towards fiscal consolidation, or else brave the consequences.

Unfortunately several governments are non-existent. Belgium’s mediators warn there will be no announcement in relation to a new government this week, and there is no quick progress in the Netherlands either. Italy’s finance minister affirmed that there’s no autumn emergency. In France, the unions are trying to complicate very necessary – if still modest – pension reforms.

Even what should just be simple procedure is becoming problematic. Comments from the ECB, as reported by government sources in Berlin, suggest ongoing frustration with the IMF over how to deal with the challenges posed by Greece. And Eurostat is reported as saying it is frustrated as it can’t get all the Greek documentation on debt that it wants.

Moreover in Brussels, we have the overriding impression of cacophony from the latest Ecofin and Eurogroup meetings. We had the spectacle of head of the Commission, Mr Barroso, calling on the governments to reform. That absence of reform leads to titles in the press Wednesday like “Europe is Acting as Though it Wants to be Left Behind” (the WSJ) and “Realisation has dawned that sovereign credits cannot survive unless banks are recapitalised (the FT).

Even in AAA land, we read titles like “German banks are in reality the Achilles’ heel of the European banking system” (FT). The Bundesbank’s Weber affirmed that higher capital requirements for banks won’t curb economic growth. However even Mr Weber would probably agree that without strong banks, there will be no robust recovery. Unfortunately Europe won’t allow banks fail, and yet at the same time, many governments treat them as taxable cash cows and excuses for a lame recovery.

Last but not least, Mr Lenihan, the Irish finance minister, extended the guarantee for deposits at domestic banks and laid out plans for the dénouement of Anglo. These were necessary actions. However they unfortunately raise the contingent liability for the Irish state still further.

All this is just in a day’s news. It provides an unfortunate backdrop for any country wanting to grow itself out of public debt quickly. Ireland’s growth rate is probably more elastic than most with respect to global prospects. Unfortunately fiscal consolidation elsewhere in Europe over 2011 and beyond faces strong headwinds. That is helping make investors ever more averse to taking on risk, even among sovereigns, traditionally regarded as among the strongest of all credits.

De Volkskrant on Ireland

De Volkskrant has a piece on Ireland, transgoogled here.

They start by saying that Ireland was a role model for austerity at the start of the year, but is now a reason for concern. They give two reasons, the first of which is the unknown but large cost of saving the banks. Secondly, they do not believe that the government will deliver in the next budget.

Fast-Growth Economies

Patrick Honohan’s Tokyo speech is a wide-ranging essay on different varieties of economic growth and the transition between fundamentals-based growth and unsustainable growth: you can read it here.

After catch-up

The Economist’s bloggers have a piece on China today which is relevant to Ireland. They ask what happens to an economy’s growth rate, in the long run, once it has caught up to the technological frontier. Their answer, correctly, is that “Historically speaking, the answer is clear—growth slows to 2-3% per year.”

This is a point which Cormac Ó Gráda and I made in a textbook chapter on long run Irish growth a decade ago. Very high growth rates characterise economies catching up to the frontier — Western Europe or Japan in the 1950s and 1960s, the Asian Tigers in the 1960s and 1970s, ourselves in the 1990s. Once you have caught up, 2-3% per annum is about as good as it gets. Allowing a bubble to inflate can obscure this reality over the short to medium run, but in the long run you won’t manage to grow more rapidly than the United States has done over the past century or so: to do so is a sign of an economy that is still in some sense backward.

These are relevant considerations when thinking about what sort of growth rates Ireland can reasonably be expected to achieve over the next decade or two.