Business Irish

Monday 21 January 2019

Growth figures disappoint, but everything else is now pointing to a solid recovery

Dan O'Brien
Dan O'Brien
Dan O'Brien

Dan O'Brien

The dampest of squibs: that is how best to describe yesterday's GDP numbers.

Their publication was the last of the big economic indicators to be released in 2014. They were expected to show that the economy was motoring along nicely in high summer.

That expectation existed because it was what nearly every other indicator pointed to. Instead, the GDP data showed that the Irish economy stalled in the July-September period.

GDP, the widest measure of economic activity, was essentially unchanged in the third quarter compared to the second quarter. Most unusual was the across-the-board flat-lining. Across all industry sectors - from agriculture to services - there was no significant growth in activity over the two middle quarters of the year.

When the GDP numbers are broken down by spending, rather than by industry sector, they show the same pattern. Spending by government and spending on investment were both down a smidgen. Spending by consumers was as flat as a pancake. Spending by foreigners on our exports rose.

As the growth components cancelled out the contracting components, the net effect was neutral, ie no growth. Hence the very damp squib. For a cheerier picture, one needs to look at all of 2014 up to September.

The most encouraging part of that picture is that the domestic economy grew by 3pc in the first nine months of the year compared to the same period in 2013. This is not only strong growth, but it is the sort of growth that has more effect on people's lives than the export-skewed headline GDP figure.

If you feel a bit perplexed by all this, you are right to be. Ireland's GDP figures are funny. Sometimes they soar skywards and sometimes they slump frighteningly.

That is not just because the economy has experienced the best and the worst of times over the past 20 years or so. It is also because of the unusual structure of the economy.

We have a massive multinational sector which is without parallel in the developed world (and most probably anywhere in the world). The foreign companies based here move billions of euro in and out of the country every month. This complicates the measurement of economic activity, overstating it considerably.

This is clear from the chart. Look at exports. The line representing foreign sales of goods and services has been on a stratospheric trajectory since the beginning of the year. But we know this is not the good news story that it might appear at first sight.

Other figures that statisticians compile, which effectively involve counting the number of shipping containers moving in and out of ports, point to a much more modest increase in goods exports over 2014.

The reason for the discrepancy is "contract manufacturing". This involves a manufacturer based here supplying a foreign customer with goods it has contracted a third party foreign manufacturer to make.

Even though the goods it supplies its customer has never passed through Ireland, they appear on the export side of the GDP numbers. But they do not show up on the numbers measuring what goes out of Irish ports. Hence the discrepancy.

If this anomaly is unwelcome by all those who try to analyse the economy, the stagnant headline GDP figure was surely not welcomed by the government parties.

After the figures came out yesterday morning, a statement from the Department of Finance quickly followed. It aimed to sound reassuring. Whether the Government was trying to reassure itself or others is not clear.

In October, the coalition took a risk by ending austerity early. Its 2015 budget is predicated on some of the strongest rates of growth in Europe swelling its coffers. But if those growth targets are not met, its budgetary arithmetic could unravel. In the unlikely event that there are another two quarters of stagnation, there will be reason to start panicking in Government Buildings.

Despite the Taoiseach's assurances this week of no election next year, the column will make an early 2015 prediction: if growth stalls and an austerity budget becomes unavoidable in October, neither coalition partner will have the stomach for it and there will be an election.

But that is to get ahead of ourselves. The GDP figures were not the only ones published yesterday. The state's statisticians launched a barrage of economy-relevant numbers. They offer reassurance to everyone - the Government included - that the recovery is on track.

The tourism figures were excellent. In the peak season for that industry - July, August and September - the number of visitors arriving was not far off 2.5 million. That represented growth of 8pc on the same period a year earlier. Given the sluggish state of many important continental markets and the facts that The Gathering took place in 2013, it was impressive. The jump in visitor numbers was reflected in foreign earnings from the tourism and travel sector. They registered a year-on-year increase of 10pc in the third quarter, according to yet another set of numbers - the international balance of payments figures. Those figures had yet more good news. The gap between what Ireland Inc earns from the world and what it pays out widened further in the third quarter.

This growing surplus points to a regaining of competitiveness - vital for an open trading economy whose prosperity depends on pricing itself in the global marketplace.

The only (minor) cause of concern from yesterday's data blizzard was inflation. In November, consumer prices fell for the third consecutive month. The decline over the past three months has been almost 1pc. While that might sound small, it is very big by any historical standard going back over a century.

Many people will instinctively welcome lower prices, and in many ways they are right to do so - on a given income you will be able to afford more if prices fall. But the concern across Europe is that weak inflation or outright deflation could suck the continent into deflationary trap. This column has argued a number of times before that these fears are overdone. Only if the sharp falls in prices over the past three months were to get bigger and last a protracted period of time would there be cause for major concern.

It is one to keep an eye on in 2015.

Irish Independent

Also in Business