Treading Water Beneath the Surface

From its peak at the back end of 2007, the Irish economy sank like a stone for two solid years, seasonally-adjusted quarterly GDP falling 10.7% in real terms. Ever since, it has seemed alternately to be sinking more slowly or rising gradually. In reality, for two and a half years it has been treading water beneath the surface.

Between the first three months and the second three months of 2012, estimated GDP was within a rounding error of zero growth, avoiding a technical recession – two quarters of successive GDP contraction – by less than one euro for every person in the country. In the 10 quarters since end 2009, GDP has increased just 2.6%, barely keeping pace with population growth. The unemployment rate remains stranded at 14.8%.

The domestic economy is starved of the oxygen it needs to grow: consumers are overburdened with debt; businesses are either afraid to invest because of weak demand or unable to invest due to lack of credit; government is reinforcing the problem through ongoing, enforced austerity.  The one bright light is Ireland’s continuing strong export performance, even in the face of a challenging external environment.

Those who until recently were writing Ireland off as an ‘export laggard’, in need of aggressive austerity to restore competitiveness, must now surely see that the opposite is in fact the case. Cost competitiveness has been largely and painfully restored, and exports remain robust, but austerity is undermining confidence at home and sapping domestic demand.

The CSO’s mid-September data dump tells us the following:

• GDP was flat in the second quarter, but is half a percent lower than it was a year earlier.
• GNP increased unexpectedly by 4.3% in the second quarter, clawing back some of its recent losses to reach almost exactly the same  level it was at in Q3 2010.
• The unemployment rate remained flat at 14.8%, but there were 13,700 fewer people employed than three months previously, and 33,400 fewer than a year ago.
• Long-term unemployment surged to 8.8%, from 7.7% a year earlier, now accounting for 6 in 10 of all people unemployed and 1 in 11 members of the labour force.
• The labour force – the number of people available for work – fell by 29,500, or 1.4%, due to a combination of increasing emigration and declining participation (i.e. people giving up on finding a job).
• 1 in 4 members of the labour force is now either unemployed or under-employed, working part-time because they can’t find a full-time job.
• The Current Account hit a record surplus of   EUR 3.2bn in Q2.
• The Trade Balance for goods hit a record surplus of  EUR 10bn.
• The Trade Balance for services hit a record – and rare – surplus of  EUR 1.3bn.

Quarterly national accounts are often an imperfect guide to the state of the economy. Quarterly numbers are volatile, and the latest data points are estimates subject to – sometimes substantial – revision. GNP figures, often labeled a convenient proxy for the domestic economy in Ireland, are notorious in this regard.

While the debate on whether GDP or GNP is the best measure of wealth, output etc. may never be settled – in most economies they are near identical, but the large multinational presence in Ireland means they differ by about a fifth – but at least quarterly GDP figures are not susceptible to the profit repatriation policies -and their execution – of the multinational sector.

One can argue the toss as to whether the economy is still sinking or slowly rising, but it’s crystal clear that the surface is still a long way off.