Growth Picture Getting Better
This article appeared in the Examiner July 4th 2014
Following the disastrous election results in May, the Government is now under considerable pressure with less than two years to go to a general election. The most immediate issue to be faced up to is the budget this October and whether an adjustment of €2 billion will be required or not. The next big issue to be then faced is seeking to ensure that the general economy and particularly the labour market are in a better place in the months leading up to the election. These are difficult questions to answer because the one thing we should have learned from recent experience is that the economic future is nigh on impossible to predict with any degree of confidence, and is always potentially vulnerable to shocks that we not yet have thought about.
Be that as it may, economic data releases over the past week will provide the beleaguered government with hope. The labour market is continuing to gradually move in the right direction; the public finances are better than expected; and the growth numbers for the first quarter of the year are certainly suggesting an improving picture.
Yesterday the Central Statistics Office (CSO) published revised historical data on the economy. This is normal because as the CSO gathers additional information from different sources on the millions of transactions that occur in the economy over the course of a quarter or a year, it will have to revise previous estimates. However, this time the CSO in line with new international standards, has sought to measure illicit activities such as drugs and prostitution, and also to change the manner in which it accounts for expenditure carried out by companies on Research & Development (R&D).
One of the many criticisms of GDP as a real measure of what is going on in the economy is that is does not capture the informal or ‘black’ economy, as it has traditionally been called. Whatever we may think about activities such as drug dealing and prostitution, they do represent economic transactions and should be measured for economic activity purposes. By definition, this is very hard to do, but the CSO yesterday sought to do so and this has added to gross domestic product (GDP), albeit in a modest fashion. However, the change to the treatment of R&D is more significant. Previously it was regarded as a business expense and formed part of intermediate consumption in the economy and did not really constitute GDP. Now based on international best practice, such spending is regarded as business investment, and hence contributes directly to GDP. In 2013 for example, illegal economic activities added 0.72 per cent to GDP, but the capitalisation of R&D added 4.1 per cent. As a consequence of these changes and other revisions, GDP actually expanded by 0.2 per cent last rather, rather than contracting by 0.3 per cent as had been previously suggested.
This is now of historical interest in the main, but the data for the first three months of this year are of more immediate interest. The good news is that all of the components of economic activity showed decent year-on-year growth in the first quarter. In real terms, consumer expenditure increased by 0.2 per cent, investment increased by 2.9 per cent; exports expanded by a strong 7.4 per cent; and imports increased by 5.9 per cent. This resulted in an increase of 4.1 per cent in GDP and 3.1 per cent in the more important measure of economic activity, gross national product (GNP).
Obviously these data are provisional and are subject to later revision, and quarterly data do tend to be very volatile from quarter to quarter, but the clear picture emerging is that the recovery which commenced in a very gradual and modest fashion during 2013, is now gathering some momentum.
The upward revision to historical GDP and the stronger than expected growth in the first quarter, when combined with the public finances for the first half of the year, are suggesting that Michael Noonan could actually bring in borrowing close to 4 per cent of GDP rather than 4.8 per cent this year. This in turn would suggest that a budget adjustment of less than €1 billion would be more than adequate to hit a borrowing target of less than 3 per cent of GDP in 2015. It is still too early to be too definitive about this, but the omens are getting better. How to translate this into political popularity is a different matter, however. Who would be in politics?