Patterns of Investment

For the past four years domestic economy has been in freefall, which has resulted in nominal domestic demand falling from €172 billion in 2007 to €126 billion last year.  This massive drop has been spread unevenly across the three components of domestic demand:  consumption expenditure is down €11 billion; government expenditure on goods and services is down €2 billion while investment in fixed capital is down €30 billion.

The fall in the domestic economy has been led by the fall in investment, which in just four years has fallen 63% from €48 billion to €18 billion in nominal terms.  The real decrease has been 52%.  There is nothing in this snapshot that we don’t already know.  The pattern of the four components of nominal GDP since are shown here.

 

Investment rose strongly up to 2006.  It was largely unchanged in 2007 but the rapid fall since then is clearly shown.  Table 15 in the National Income and Expenditure Accounts provides a breakdown of the investment by type.

In 2006, investment was €48.3 billion and €38.0 billion of that was accounted for by the construction and property sectors; dwellings (€22.6 billion), roads (€2.0 billion), other construction (€8.8 billion) and also costs associated with transfer of land and buildings (€4.5 billion) which makes up the bulk of the ‘other’ category in the above graph.  By 2010 these four categories made up €10.7 billion of the €18 billion total. 

The domestic economy has seen a nominal fall of around €46 billion – unsurprisingly 60% of this is due to the collapse of the construction and property sectors. 

The Non-Financial Institution Sector Accounts gives an insight into the breakdown of investment by sector.

The household sector has gone from the largest source of investment as recently as 2008 to the smallest in 2010.   If we use the figure for Consumption of Fixed Capital as provided in the Non-Financial Accounts we can get a measure that could be considered a form of Net Investment.

For the economy as a whole gross fixed capital investment exceeded consumption of fixed capital by less than €2 billion in 2010, with firms having an outturn of negative €2 billion. 

We will get revised macroeconomic projections from the DoF as part of the forthcoming budgetary process.  Their most recent projections are from April’s Stability Programme Update.  Investment is expected to continue to decline in 2011 with a real drop of 11.5%, but minor growth is forecast for 2012.  This growth is expected to quickly accelerate with real growth in investment of 4.5% projected for 2013 increasing to more than 5% for both 2014 and 2015.

There is little sign of this.  The Q2 National Accounts show that real investment in the first half of 2011 was down 11% on the same period last year.  This is in line with DoF projections but there is little to indicate that a turnaround in investment will occur in 2012.  The collapse in household investment has eased but that was all that could occur as the overall drop now exceeds 80%.

The scope for further declines in investment is limited but absent both a willingness to borrow and a willingness to lend the scope for a return to 5% growth rates also appears limited.

Final Reminder – European Sovereign Debt Crisis Roundtable on Tuesday

Please note the change of venue (extra capacity can now be accomodated)

Henry Grattan Lecture – The European Sovereign Debt Crisis

Speakers: Peter Boone, Mike Dooley, Jean Pisani-Ferry and Ciarán O’Hagan

Date: Tuesday 25 October from 4.00 to 5.45pm

Venue:** Tercentenary Hall, Biomedical Sciences Institute, Trinity College Dublin, Pearse Street

** Please note NEW VENUE

This public lecture will discuss the European Sovereign Debt Crisis one year on from Ireland’s €85 billion bail out by the European Union-International Monetary Fund. This lecture is part of the 2011-2012 Henry Grattan Lecture Series which will address the theme of The Debt Crisis: Causes, Consequences, Controls.

The lecture, which is being jointly organised by the Policy Institute and the Institute for International Integration Studies (IIIS), will be chaired by Philip Lane, Head of the Economics Department, Trinity College Dublin.

Speaker Biographies
Peter Boone
Mike Dooley
Jean Pisani-Ferry
Ciarán O’Hagan
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Registration
Speaker Biographies

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VOX article on longrun determinants of health

Here is a VOX article on my joint work with James Smith and Mark McGovern on long-run determinants of health in Ireland. The extent to which decisions made in one decade have impacts on later ones is an important area of economics in terms of examining theoretical mechanisms and working out discounted values of public policies. The extent to which modern national policy-makers can target such obvious problems as infant deaths due to gastroenteritis is limited. However, there is still a strong role for looking at the long-run effects of policies aimed at improving, in particular, childhood mental health.

Anglo Bonds: Not Coming From the Taxpayer

Via NAMA Wine Lake, I came across this very important statement from An Taoiseach on September 28 about repayment of Anglo bonds

If the Anglo bondholders are paid, they will be paid from their own resources. This will not come from the taxpayer. The Minister for Finance has been dealing with this situation at the ECOFIN meetings.

This is really good news. I had been under the impression for some time that all of the funds used to pay Anglo bondholders came from the taxpayer. But apparently that’s not the case. Phew, that’s a relief. Hats off to the Minister for his excellent work at those ECOFIN meetings.

Update: In case anyone thinks Enda’s on his own here with this idea of Anglo bondholder payouts not coming from the taxpayer, listen to Leo Varadkar on RTE’s This Week today (32 minutes and 25 seconds in). When asked about the looming payout to bondholders, Leo says

Well that’s not quite the case. What’s happening in relation to the Anglo bondholders is they’ll be paid from Anglo’s own resources, from the sale of its own property assets, for example. The only money that is being put into Anglo Irish by this government is the promissory notes, the €3 billion a year that we are required to give to Anglo, or what is now the IBRC, as a result of the deal made by Fianna Fail and the Greens, and we are trying to have that changed. That is our major objective at the moment.

I recommend strongly that the government retire this particular piece of spin immediately. Every cent that is given to bondholders is an additional cent that will have to be poured into Anglo by the Irish tax payer, whether as promissory note payments or some rejiggered version of these notes.

Ireland and Iceland: One Letter, Six Months, Three Years On

Reading Paul Krugman’s recent posts (here and here) reminded me that I forgot to write a post about my recent trip to Iceland. I presented at a very interesting conference on sovereign debt organised by Reykjavik University. Here is a link to slides and papers, which were presented on October 7 and 8.

My presentation was titled “One Letter and Six Months? Ireland and Iceland Three Years On”–the slides are here. One issue I discussed was whether Euro membership ultimately helped or hurt Ireland.

Much of the discussion surrounding Iceland in 2008 focused on the fact that they were outside the Eurozone and so could not obtain liquidity support from the ECB. While this was viewed as a negative factor, one could argue today that the (enforced) Icelandic approach avoided the mistakes associated with confusing a solvency crisis with a liquidity crisis. My conclusion: Without a clear policy on bank resolution, the Eurozone is not a good place to have a systemic banking crisis.