Michael Burke: The latest national accounts data are worse than they look. The headlines have been about a ‘technical return’ to recession with two quarters of negative growth at the end of 2011. But on two measures, the situation is much worse than the short-term occurrence of a double-dip recession.
• Measured by GDP the economy has been in recession since the end of 2007 and remains €21bn below its peak. This is a decline of 11.6%
• GNP, which excludes the profit flows of overseas multinational corporations, has fallen by €26.3bn, down 17.3%. This takes GNP back to the last century
It remains the case that investment (Gross Fixed Capital Formation, GFCF) is overwhelmingly the source of the slump, having fallen by €23.4bn. This is greater than the decline in GDP and accounts for over 90% of the decline in GNP. Clearly, there can be no recovery without a recovery in investment.
But, acknowledging that all these data are subject to revision, investment is not currently the motor force of the decline. Investment rose in Q4, as did household consumption, according to these initial data. Combined, they added an annualised €2.5bn to growth in the 4th quarter.
The motor force of the slump has become reduced government spending. In the 4th quarter of 2011 government spending fell by €1.9bn in the quarter which is a majority of the total decline of €2.8bn in the period.
The data show the dynamic of the economy. The investment collapse accounts for the slump as a whole. Yet even the tentative increase in investment currently recorded at the end of 2011 is unlikely to persist while there is a contraction in government spending.
The private sector investment strike is the cause of the slump. But government policy is deepening the slump, not alleviating it.