The IMF has released the October 2010 World Economic Outlook. Chapter 3 studies the effects of fiscal consolidations on economic activity.
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The Minister for Finance has appointed the non-executive members of the new Central Bank Commission. The press release is below:
The Minister for Finance, Mr Brian Lenihan, TD, has today appointed five members to the Central Bank Commission with effect from Friday, 1 October.
As provided for in legislation, the terms of office of the first appointees will vary in length in order to ensure that future vacancies on the Commission will be staggered. The appointees and their terms of office are as follows:
Professor John Fitzgerald (5 years)
Mr. Max Watson (5 years)
Mr. Michael Soden (4 years)
Mr. Des Geraghty (4 years)
Professor Blanaid Clarke (3 years)They will join the ex-officio members: Professor Patrick Honohan (Governor), Mr. Matthew Elderfield (Head of Financial Regulation), Mr. Tony Grimes (Head of Central Banking) and Mr. Kevin Cardiff (Secretary General of the Department of Finance) on the Central Bank Commission.
The Minister said:
“These appointments to the Central Bank Commission will bring a wealth and diversity of talent and experience to the Commission and represents a very significant step in the reform process.”
I had decided last weekend to ignore Brian Lenihan’s comments about Irish economists being a cosy cartel unwilling to debate each other. We’d been here before: Recall Lenihan’s “national mediocrity” moment in which he implied that pro-NAMA academic economists were too scared of people like me come out and admit their views in public. And frankly, I’m more inclined to believe the Minister is engaged in PR spin with this kind of thing rather than expressing his true opinion.
However, I must point towards Fintan O’Toole’s discussion of Lenihan’s speech because whatever about being accused of being part of our national mediocrity or being part of a cosy cartel aimed at suppressing debate, I do feel compelled to clarify that I do not work for Trinity College Dublin but for Ireland’s leading Economics department, the UCD School of Economics. 😉
The post hoc attribution of market movements to specific events is always a bit speculative. But Thursday’s release of weak Q2 national accounts (Economy Shrinks Shock!) was headlined in Irish and international media and appears to have unsettled the secondary market in Irish government bonds. The 10-year closed around 6.65 on Friday, the worst close of the crisis to date and cue panic stations.
This makes sense if
(i) The prospective growth rate in 2011 and later is critical for fiscal sustanability, which is reasonable, and
(ii) A sensible person would have revised their expectations on the basis of Thursday’s release, which I think is not reasonable at all.
So far as I know, there have been just three technical studies of the Irish quarterly data since the CSO commenced publication in 1997 and which are relevant to this discussion.
In this paper, the conclusion here is that the Irish quarterly GDP and GNP numbers are very volatile, and considerably more so than is the case in other OECD countries, including smaller ones.
This study concludes that the seasonal adjustment procedure used by CSO is (probably) not the best, and that this can make a difference, in the sense that an alternative, and preferable, procedure can give results which sometimes alter the qoq % changes quite a lot.
The final study shows that revisions to the first-shot estimates, while no greater than elsewhere, can be substantial.
The economy sank like a stone through 2008 and 2009. The last three qoq % changes in real GNP, using the CSO’s seasonal adjustment, were -1.9, then -1.2 and just -0.3 for the most recent Q2 number. Using the alternative (indirect) seasonal adjustment, the most recent number was -0.1. A reasonable headline in either case would have been ‘Economy Now Flat’.
The reason for the Shrinking! headlines was the GDP numbers. The last three qoq changes read -2.5, +2.2 and -1.2. These are the qoq changes, not annualised. At seasonally adjusted annual rates (saar) the decline in real output in Q4 was -9.6%. It then grew at a saar of +9.1% in Q1 of 2010, relapsing to a saar of -4.7 in Q2. If you really believe this, maybe you could make it as a bond dealer.
The gyrations in the quarterly numbers are just not credible. Various people including Garret FitzGerald and Robbie Kelleher have speculated that real output measurement in the MNC sector is mainly responsible for the extreme volatility. There may be a bit of informal smoothing practiced by other countries too.
Forecasts of GDP growth for 2011 seem to be mostly in the 2% to 3% range. My point is not that these forecasts are likely or plausible. The point is this: given what we know about the behaviour of the Irish quarterly macro aggregates, whatever your figure was on Wednesday, there was no good reason for changing it on Thursday morning.
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