Thursday, 23 June 2011

Headline growth

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.


Billy said...

Hi Michael,

you say, "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."

However as Michael Taft makes clear ( in 2009 the MNC sector was actually worth slightly more to the real domestic economy that all indigenous corporations combined.

People familiar only with headline figures for exports of MNCs versus indigenous sector may well be surprised at how 'small' the MNC contribution is but I think those reading only your article post may be surprised at how large it is.


Billy said...

Update: as per Michael Taft's article that is all Forfás assisted (ie exporting) indigenous corporations.

Michael Taft said...

Billy - just to clarifiy as, from my perspective, I don't think Michael and I are saying anything different; indeed the two posts complement each other. The point I was making was that to rely on MNC-led export growth will do little for the domestic economy as these companies (a) dominate capital-intensive sectors, and (b) source very little from the domestic economy. This latter is important. If industrial production / exports rise but most of the inputs are imported - then a strong Irish export performance will merely increase employment somewhere else. In this sense, just as the IMF has done, to describe the MNC sector as an 'enclave' is apt. This is not to dismiss it; rather it should point us to alternative indigenous-based strategies.

Michael Burke said...

Hi Billy

thanks for the feedback. I think Michael T has dealt wih the discrepancy between the two posts, which is more apparent than real.

But the issues raised do highlight an important point about the growth model. 'Export-led', in fact export-only growth addresses none of the pressing issues of the economy, unemployment and the deficit.