Headline growth

Michael Burke23/06/2011

Michael Burke: Irish Economy Grows Fastest In Three Years, runs one headline on the Blooomberg news agency. It would be great to think that after all the sacrifices to date, their truly was a corner being turned at last.

But a closer inspection of the CSO report reveals a much less rosy picture. GDP rose by precisely €500mn in the Q1 (in real, seasonally-adjusted terms). Bu this was more than accounted by the rise in exports of €1,471mn. In addition, imports fell, as households are too impoverished and business too unwilling to invest. They fell by €106mn so that net exports rose by €1,577mn, or more than three times the recorded rise in GDP.

As we know, the export sector is an ‘enclave’ in this economy, employing relatively few workers and requiring even fewer inputs from the domestic sector of the economy. Indeed, some of the activity recorded as exports is not real economic activity undertaken here at all but simply foreign (usually US) Multi-National Corporations booking activity in Ireland t avail of the ultra-low taxes.
The domestic economy remains deeply in the mire. This is the sector that both employs the vast majority of workers and is responsible for nearly all the taxation revenues. GNP contracted by 4.3% in Q1 and is now 15.4% below its peak level.

Nearly all categories of the economy continue to contract. Household consumption and government expenditure both fell by 1.9% in Q1 and now stand 12% and 11.2% below their respective cyclical peaks. Inventories continued their decline.
The sole recorded rise was in investment (gross fixed capital formation), up €46mn in the quarter. That this now amounts to a 1.1% rise shows just how far investment has fallen. Even so the decline in investment still accounts for a total annualised loss of over €22.3bn in the course of the recession and is 59.2% below its peak. This is more than the entire recorded fall in GDP (because exports have risen) and 95% of the entire fall in GNP.

There can be no idea of a sustained recovery without a rise in investment. The latest tiny pick-up in investment makes barely a dent in that huge shortfall. If investment were to return to its pre-recession peak (which was a full one year before the recession began) then at this pace it would take 34 years to achieve it.
As this economy is gripped ever tighter in the ‘austerity’ vice it is perhaps worth recalling that the core countries of the Euro Area did not respond to their own economic and fiscal crises with the same medicine. Their strong growth at the beginning of this year is not the accounting tricks of US MNCs but real activity by their own producers, with the result that recorded growth has been accompanied by job-creation and a lower deficit.

Perhaps the Bloomberg headline should have read: US Accountants Create First Appearance of Irish Growth For Three Years.

Posted in: Fiscal policyFiscal policyInvestment

Tagged with: GDPgrowthinvestment


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