Monday, March 14, 2016
The economy is not growing by anything like 7.8 per cent
Ironically, by overstating economic growth the data over the past year or so may have actually hurt the coalition
At 11am on Thursday the Central Statistics Office published figures showing that the economy grew 7.8 per cent last year, and that the growth rate was running at an eye-watering 9 per cent-plus in late 2015.
Ireland, in the final quarter of last year, was the fastest growing economy in the world.
About 5½ hours later the Dáil voted down the nomination of Enda Kenny as taoiseach. If the growth figures were for real the resulting feel-good factor might well have swept the coalition back into office.
But GDP growth is a deeply-flawed indicator of what is actually going on in our economy.What we are witnessing is a decent economic recovery but not a boom.
When Bertie Ahern famously declared in 2007 that “the boom times are getting even more boomer” he was right economically, if not grammatically. Back then consumer spending had been growing annually at between 7 per cent and 10 per cent for three years and special flights to buy apartments in Bulgaria were booked out. Now consumer spending is rising at a more modest 3.5 per cent, and Bulgaria doesn’t even feature in the holiday brochures.
Ironically, by overstating economic growth the data over the past year or so may have actually hurt the coalition.
Voters looking at the figures will have felt that growth rates of 6-7 per cent were not reflected in their pockets. The inevitable conclusion was that somewhere else in the economy other people were making out like bandits. It all played into the “unfair recovery” narrative.
The economic reality is good, but it is simply much less spectacular than the figures suggest.
Ireland is growing strongly but the figures are subject to huge distortions from the operations of multinationals. These mess up the GDP totals, and make a lot of the breakdown of the figures completely meaningless.
Last year, for example, it appears a number of big multinationals moved their intellectual property rights to Irish legal entities as part of a clean-up of their tax affairs. This gave a massive €10 billion boost to investment last year, and also, because of the way the whole thing is counted by the CSO, pushed up imports.
When you have a once-off factor like sloshing around the figures it gets really messy. The combination of big multinational companies and a small economy make these distortions significant.
You could spend the day arguing about the “real” level of growth in the Irish economy. In terms of how growth affects people’s lives, there are a few places that are worth looking at.
One is total employment, which was 2.3 per cent higher in the final quarter of last year than in the same period in 2014.
Another is consumer spending, rising 3.5 per cent year-on-year, its highest growth rate since 2007.
A third is the amount people are earning, where the data has jumped around a bit, but suggests growth of about 2 per cent last year, with survey evidence suggesting something similar, or a bit more, is likely for this year.
You might conclude that the underlying rate of growth was somewhere in the range of 3-5 per cent. This doesn’t mean that the CSO data is incorrect – just that the GDP figures are now not a very useful way of measuring how our economy is doing. Ireland is doing well – euro zone average growth is just 1.5 per cent – but not anything like as spectacularly as the headline data suggests.
People intuitively understand this. Unless you work in professional services or technology where wages are soaring – or moved from unemployment into work – you are unlikely to be 9 per cent better off now than you were a year ago.
Consumers are finally feeling confident enough to spend a bit more. Earnings are starting to rise. There are jobs available. It’s a recovery – and a decent one – but it’s not an economic boom.
Most households are at least a bit better off, but for a significant minority the cost of the crash lives on in crippling debts. Mortgage arrears are in decline but 88,000 houses are still behind with repayments and many more who bought at the height of the boom are still struggling. Meanwhile, while unemployment is falling 190,000 are still out of work.
So the challenge for the next government is to build on a recovery, not rein in a boom. The rate of growth is probably still quick enough to raise questions about the scale of any tax cuts in the next budget and whether an economy growing strongly needs more cash. But we are not back in Celtic Tiger territory.
The scale of resources available to the new government will not be the tsunami of cash that allowed big tax cuts and spending hikes during the 2000s. And EU rules will limit room for manoeuvre.
If our politicians can actually form a government keeping the real rate of economic growth at 3-4 per cent would be a decent result. If Brexit does not happen it might even be possible to achieve it.
Then it will all come down to competent use of the resources this growth will make available to invest, spend and manage the tax system.
That is another story entirely.