Economists will just have to give up crunching numbers
Published 14/07/2016 | 02:30
'Output and employment'. 'Employment and output'. 'Output and employment'. This is the mantra of economists when talking about how an economy is performing. Employment is measured by counting the numbers at work. If that seems easy, it's not. In modern, fast-paced economies with constantly churning labour markets, even getting those simple-sounding sums right is a challenge for number-crunchers.
Getting the sums right on how much all of the people working in an economy produce is a challenge of an entirely different order. As economies everywhere become more complex, it is getting harder to measure output. It has become utterly impossible in Ireland.
That was demonstrated by Tuesday's jaw-dropping figures for the economy's GDP, the most commonly used measure of output internationally.
Just three months ago, when the first estimate of output in 2015 was published by statisticians, they thought that GDP was €15bn higher last year than a year earlier. That translated into an already spectacular - and exaggerated - growth rate of 8pc.
This week, the State's statisticians sheepishly published their second guess. Now they say that GDP in 2015 was a mind-blowing €50bn higher than in 2014. That represented the, by now, infamous 26pc annual increase, a figure that had economists around the world pulling faces and scratching their heads.
But that's not all. What got much less notice was that they also changed their figure for 2014. GDP for that year is now estimated to be much higher than previously thought.
Taking 2014 and 2015 together, GDP grew by 37pc in just 24 months. Some of our peer economies in Europe haven't grown by that much in 24 years. It is obvious nonsense.
It is important to say, in these cynical and suspicious times, that nobody in officialdom is pulling a fast one here. The statisticians are merely adding up the numbers as international accounting conventions demand.
But because the Irish economy is more like that of a mega-port city of the likes of Rotterdam than a national economy, the standard way of measuring output - using GDP and GNP - has broken down entirely. The activities of mobile multinationals have long made Irish numbers harder to read. More recent developments, including but not exclusively newer and bigger forms of tax avoidance, have rendered them meaningless. As with a faulty speedometer in a car, the best thing to do is ignore GDP and focus on the indicators that are reliable.
That brings us back to employment. The numbers at work are the other big-picture indicator of what is going on in the economy. As the chart shows, employment growth was a fraction of the GDP and GNP growth rates over the past two years (in most economies, most of the time, employment and output evolve in similar ways).
But if employment growth looks small, it isn't. Compared with the European average, it has been expanding rapidly. In the first three months of this year, each week saw well over 1,000 extra people gainfully employed across the country.
Another important and reliable measure of what is happening in the economy is the amount of money spent on goods and services by consumers (companies and the State are not included in this figure). This is known in the jargon as 'private consumption', and is a part of the GDP/GNP numbers. But, importantly, it is not distorted by the factors that have messed up the overall figures.
The recovery in consumer spending is much more recent than the jobs recovery. In fact, it has only really got into its stride in the past two years. Last year, it caught up and overtook the rate of jobs growth. In the first three months of this year, it grew at its fastest clip since the crash. That reflects a range of factors: higher pay, lower taxes and a public which has grown in confidence and is therefore more willing to spend.
Looking at all the other reliable indicators of what is going on in the economy gives a pretty rosy picture. As ever, though, there are points of weakness. One is exports to Britain, which, as last week's column discussed, account for more economic activity in Ireland than any other EU country bar Luxembourg. On this front, things look gloomy. Last autumn sterling started to slide. That made Irish exports more expensive in pound terms. The result was a fall in the value of goods being shipped to the UK up to April (the most up-to-date figures available). As that was well before the Brexit referendum, there is almost certainly worse to come. Given a range of factors in the British economy, sterling is likely to fall by even more than it has since the referendum.
But it is now only the competitiveness-sapping effects of a weak pound that exporters have to worry about. Most indicators over the past week point to a weakening in the real economy in Britain. That will dampen demand for Irish goods regardless of what happens to the exchange rate. In other words, Irish exporters are being whammied on the double. And that is only in the short term.
If the UK ends up outside the European single market, there will be another and much longer-term blow to traders. Alas, all the signs from the new British prime minister point to that. Buckle up.
At 11am this morning, the first results from Census 2016 will be published. This twice-in-a-decade event will show how the population has changed since 2011. It will tell a great deal about what has been happening to emigration and immigration. I'll be tweeting on what the figures mean throughout the morning at @danobrien20