Bad Weather and Q4 2010 GDP

The estimate for Q4 GDP in the UK has come in at negative 0.5 percent (well below expectations of mildly positive growth), with the deviation ascribed to the terrible December weather.

Ireland’s Q4 GDP number does not come out until March but we should not be too surprised if a similar undershoot happens here, in view of the similar weather in December.

Are the GDP numbers surprising?

The main article in today’s Irish Times highlights the gap between the GDP estimates in the December 2009 plan and current thinking:

The department confirmed last night that it believed gross domestic product (GDP) this year would be 2.5 per cent below its projected level at the time of the last budget.

In December 2009, the Government believed that spending in the economy, or GDP, would amount to €161 billion this year.

Owing to statistical revisions to GDP for 2009 and 2010, it now believes that the figure this year will be €4 billion lower, at €157 billion.

This means that without any change in the budget deficit in absolute terms, the deficit will be higher than projected when expressed as a percentage of GDP.

The department also confirmed that its July 2010 GDP growth projection of 1 per cent has been revised downwards to “marginally” above a no growth position of 0 per cent. Servicing cost of the bank bailout at about €1.5 billion a year will add to the problem.

What explains this gap?

1.  In December 2009, the plan forecast that nominal GDP would be €164.6 billion in 2009 and €161 billion in 2010.   These forecasts were fairly close to the projections in the ESRI’s Autumn 2009 QEC (released on October 13 2009).

2.  The first preliminary data from the CSO on 25th March 2010 put 2009 nominal GDP at €163.5 billion.

3.  The revised data from the CSO on 30th June 2010 put 2009 nominal GDP at €159.6 billion.  This is the ”news” event.

4.  The July 7 2010 mid-year update from the Department of Finance does not discuss the revision to the 2009 GDP figure.  In line with general views at the time, it improved its 2010 forecast for real GDP growth.  It also highlighted that the GDP deflator was undershooting and pointed out that nominal GDP growth would be adversely affected – but did not quantify this effect.  It also re-iterated that real GDP growth of 3.25 percent in 2011 was attainable and that an average real GDP growth of 4 percent during 2011-2014 was viable.  It did not discuss prospects for nominal GDP over 2011-2014.

5.  The Article IV IMF report on Ireland was published in July 2010.  It reported negative nominal GDP growth of 10.1 percent in 2009 and projected negative nominal GDP growth of 2.6 percent in 2010.

6.  The Summer QEC from ESRI was published on 14 July 2010. It projected 2010 nominal GDP at €158.9 billion.

7.  On October 4 2010, the Autumn Bulletin from Central Bank projected 2010 nominal GDP at €157.018 billion.

Summary:  the downward revision to 2009 GDP has been known since end June 2010.  The €157 billion projection for 2010 was announced in the October 4th Central Bank bulletin and is in fact a bit more optimistic than the nominal GDP projection in the July IMF report.

An central element in the new 2011-2014 fiscal plan will be to provide a reasonable estimate for nominal GDP growth over this period.  This involves two components – prospects for real GDP growth and prospects for the GDP deflator.  Providing a detailed explanation for these projections will be an important element in communicating the plan.

No Planned Revision to 2010 GDP

There have been a number of comments over the last few days regarding CSO revisions to nominal GDP.  This has been explained in the Irish Independent today as resulting from a change in the way CSO calculate the size of the economy.   Apparently, there were other comments at Kenmare over the weekend also
suggesting that a downward revision to GDP for 2010 is being contemplated by CSO.

I have been talking to CSO and they inform me that there has been no change in how they estimate GDP.   CSO has already published the first two quarterly estimates for GDP in 2010.  Q3 is scheduled for 16 December.