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Economy is expanding but don't rely on GDP data

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Michael Noonan

Michael Noonan

Michael Noonan

The words "fastest growing economy in Europe" can send a shiver down the spine of anybody who lived through the Celtic Tiger. We've been there and done that and we all know what happened.

So should we be celebrating or worrying, and is the sort of growth we are experiencing sustainable?

The simple answer is that yesterday's growth figures for 2014 are a cause for mild celebration and further growth is both possible and likely.

The reason why celebrations should not be too raucous is simple; the headline figures flatter to a degree that almost deceives.

Trying to capture what's happening in a complex economy with a single number is always going to be absurdly ambitious. Imagine if somebody tried to summarise your personal situation with a single number and you get some idea of how absurd the whole thing is.

Still, we need to keep track of economies and assess whether we are heading in the right direction. That's why every country does it, bar the small Himalayan kingdom of Bhutan which rather wonderfully measures happiness instead.

Of all the various measures, gross domestic product is the most popular measure of economic growth but it cannot possibly hope to do more than paint a broad picture of economic performance. GDP works best in economies, like the United States, which have large internal markets, but tends to work rather less well for countries such as Ireland which have economies that are export dependent.

It has been known for a long time that Irish growth figures should be treated with caution because they are so distorted by the multinational sector, as well as aircraft leasing and technical issues such as contract manufacturing.

Those distortions may well have over-stated the scope of the bust and may well now be exaggerating the scale of the rebound. We would be unwise to throw caution to the wind now just because the latest figures are so good.

That's not to say the economy is not doing well; the economy is quite clearly in recovery mode and firing again on all cylinders. It probably just isn't growing at five times the Euro zone average.

We know the economy is doing well thanks to a dozen other indicators that present a much more focussed picture of the economy than GDP. Employment is rising and unemployment is falling. These two indicators combined with higher sales of everything from BMWs to Dominos pizzas show that the economy is back on track. While the GDP figure is of little significance, almost all data point to further economic growth this year. That growth could continue for several years if, and only if, unions and governments don't make the fatal mistake of believing the GDP figures and introduce kamikaze economic policies such as benchmarking public sector salaries against GDP growth.

Irish Independent