Is the Irish Economy At a Turning-Point?

Michael Burke12/07/2012

Michael Burke: There are a number of curious features of the latest quarterly national accounts data. Statisticians frequently warn that these are preliminary data and subject to revision. It may simply be that these data are likely to be subject to more revision than most. Therefore, identifying long-term trends in the economy may be more useful.

On the data discrepancies, in real terms (Table 6 of the CSO release):

• Net exports surprisingly fell in the quarter by nearly €1.8bn
• Equally, investment (Gross Fixed Capital Formation) rose in the quarter despite virtually unchanged government spending and falling personal consumption
• The price deflators are positive for consumption and government spending, but negative for investment (GFCF) implying renewed deflation in this sector and contributing to the real terms increase in reported investment
• As reported in today’s Irish Times, total domestic demand rose for the first time in 2 years in Q1- except that the totals given by CSO (in Appendix 3A & 3B) do not add up.

As a result the quarterly data may not be very robust. But the longer term trends cannot be invalidated by one quarter’s data. And these remain both stark and grim (all data seasonally adjusted in real terms, from Table 6):

• GDP has been contracting since the 1st quarter of 2007- a 5 year long slump and is now 8.2% below its peak
• GNP, which excludes the profit-booking activities of multi-national firms notionally based in Ireland, shows the Irish economy in a Depression - down 14.2% from its peak 1 year later in the 1st quarter of 2008
• The component of growth which led the slump is investment (Gross Fixed Capital Formation). It peaked in the 1st quarter of 2007 while all other components of the national accounts; personal consumption, government consumption, exports and imports all continued to grow into 2008
• Investment has also driven the slump. From peak, GDP has fallen at an annualised rate of €14.1bn and GNP by €20.7bn. GFCF has fallen by €21.7bn and thus accounts for the entirety of the economic collapse (even including the latest reported quarterly rebound in investment)
• By contrast personal consumption has fallen by €9bn and government spending by €4.6bn (and net exports have risen)
• The increasingly widespread notion that the rise in household savings is the cause of the economic crisis is false. The separate National Income and Expenditure accounts for 2011 (released alongside the quarterly National Accounts) shows that since 2008 profits have risen by 2.5% while wages and salaries have fallen by 16.4%. Profits are rising in an accelerating fashion, up 6.6% in 2011.

Despite all the earlier caveats, what if the data is accurate? It is always unwise simply to dismiss data out of hand. And surely the reported rise in investment is very welcome for those of us who have argued that this is the key to the crisis?

The question of who pays for the crisis bears on how it may be resolved. No-one believes that the economic crisis will last in perpetuity. Ultimately, there is no crisis of capital which cannot be resolved by reducing labour’s share of national income. At a certain point, when profits have recovered then investment may increase. Tentatively, this may be what has already begun to occur in the Irish economy, although the data discrepancies make that proposition doubtful.

Taking the data at face value, there is one reported quarter where investment increased by €1.5bn in nominal terms. This apparently required a rise in profits of €6.3bn over the preceding two years, facilitated by a decline of €5.7bn in the remuneration of employees. The rise in profits is achieved by reducing pay and only a fraction of the profits’ increase has been invested. It is easy to see that any recovery based on this model will at best be very sluggish and require the immiseration of the mass of the population.

The alternative remains state-led investment deploying the growing profits and large savings of the corporate sector. Only state-led investment can ensure a robust recovery which creates jobs and improves living standards, which ought to be the goal of economic policy.

Posted in: Investment

Tagged with: investment


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