If the economy expands through a new year by, say, 1% each quarter from the previous Q4 number, the growth rate on an annual basis will be about 4%, right?
Wrong. It depends on the intra-year pattern the year before. If the previous year saw quarterly improvements, with the Q4 figure ahead of the year’s average, a flat performance in the new year will yield apparent year-on-year growth, even though the economy is not expanding.
The seasonally adjusted GDP numbers for 2016 were released on March 9th, also and not coincidentally the data cut-off for the ESRI forecast of year-on-year growth in 2017 of 3.8%. Subsequent forecasts from the Central Bank and the Department of Finance came in at 3.5% and 4.3% respectively.
The sum of seasonally adjusted GDP for the four quarters of 2016, according to the CSO, came to €256.3 billion. But the Q4 number was 26% of the annual total at €66.6 bn. A flat performance from Q4 through each quarter of 2017 would yield an annual growth rate of 4%. So the ESRI projection is consistent with no improvement, indeed a slight decline, from Q4 last year. The CB projection implies a bigger decline, the DoF a tiny increase. All three sets of projections were heralded in the press coverage as signalling continued economic expansion through 2017.
The problem is the so-called ‘carry-over’ effect – Joe Durkan has been on about this for aeons. The CSO has been publishing quarterly macro data for over twenty years. Perhaps it is time for forecasts to be done on the same basis.
For the record, if you expect GDP to grow 1% per quarter from the Q4 2016 base through 2017, the year-on-year growth rate will be 6.6%. If the forecasters feel the Q4 figure was odd, and that there will be a dip for Q1 2017, better to say so.
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Some readers might be interested in this post/article just published in Nature – Human Behaviour. The title is “Why People Prefer Unequal Societies” (a slightly misleading title), and the main findings are:
Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality.
Figure 1: Income inequality in Europe and the United States, 1900–2010.
Figure 2: The actual US wealth distribution plotted against the estimated and ideal distributions across all respondents:
Figure 3: Percentage of children earning more than their parents, by birth year.
The video of Professor Cass Sunstein’s recent talk “New Directions in Behaviourally Informed Policy” at UCD is available, along with links to papers and other reading, at this link. The event was hosted jointly by the UCD College of Social Science and UCD Geary Institute for Public Policy in conjunction with the Irish Behavioural Science and Policy Network. The talk is followed by a very wide-ranging Q+A and also includes a number of observations about this area of policy in Ireland.
The new edition of the ESR is online now with the following papers:
The changing nature of Irish wage inequality from boom to bust by Niamh Holton and Donal O’Neill
Understanding Irish labour force participation by Stephen Byrne and Martin O’Brien
Addressing market segmentation and incentives for risk selection: How well does risk equalisation in the Irish private health insurance market work? by Conor Keegan, Conor Teljeur, Brian Turner and Steve Thomas
Are perceptions of greatness accurate? A statistical analysis of Brian O’Driscoll’s contribution to the Irish rugby team by Peter D. Lunn and David Duffy
The ESRI’s Pete Lunn and David Duffy apply some fairly fancy econometrics in the latest issue of the Economic and Social Review to show what Leinster supporters like myself know simply by looking into our hearts. BOD is the greatest.
Nobody show this to Ryle Nugent.