Recession
GDP rises by 0.3% in Q3 but little evidence of an end to recession
By Simon Barry & Lynsey Clemenger - Ulster Bank
Dec 22, 2009 - 2:35:23 PM

Today’s National Accounts data sent mixed signals about the recent performance of the Irish economy.  No doubt there will be considerable interest in the fact that the CSO have estimated that the economy expanded in the third quarter in GDP terms, albeit that the increase was a modest one at 0.3%.

GDP is the international benchmark for measuring economic activity, and the resumption of positive quarterly growth has been used as a signal that recession has ended in many major economies over the past quarter or two.  However, we believe that it is premature to use these data to declare that the recession has ended here in Ireland. 

For one thing, looking at the breakdown of the numbers, every category of spending fell between Q2 and Q3.  Spending by consumers fell by 0.7%q/q; government expenditure was down 0.9%; investment fell by almost 10% while spending by foreigners on Irish exports was down 0.6% relative to Q2.  Thus, these latest numbers are still pointing to broad-based weakness across all categories of spending.

Table: GDP expenditure breakdown, q/q % SA

For comparison purposes, it is worth noting that the 0.7% increase in GDP in the US in the third quarter was supported by an increase in every category of expenditure, thus providing meaningful evidence of turnaround – evidence which is just not there in the Irish numbers, yet at least.

All areas of spending fell in Q3; GDP boosted considerably by a very large fall in imports

The main reason why Irish GDP increased in the third quarter is because of a huge 4.5% drop in imports.  Irish spending on imports is a leakage from the economy and so such spending is subtracted from GDP; the greater the weakness in imports the greater the boost to GDP.

So while we welcome the fact that today’s GDP number is a bit better than the flat reading expected by the consensus, the detail of the release is simply not as favourable as the modest increase in headline GDP on the quarter would suggest.  Indeed the alternative measure of growth, GNP, paints a much weaker picture, with output down 1.4% q/q.  While such a decline is still considerable, there is some modest encouragement to be taken from the fact that the rate of decrease in GNP is easing back; the 1.4% decline in Q3 is considerably better than the 5.2% collapse seen in Q1 and is the smallest decline since the first quarter of 2008.

The difference between GDP and GNP is what the statisticians call “Net Factor Income (NFI) from Abroad”.  These flows have been very large and very negative in an Irish context for years, mainly related to the large-scale outflows of profits earned here by foreign-owned multi-national corporations (MNCs) but repatriated back to the parent companies.  Thus, while the activity takes place in Ireland, the associated profits don’t accrue to Irish residents.  GDP is a measure which includes all such MNC activity but repatriated profits are then deducted in arriving at GNP.  NFI flows hit a record level in Q3 reflecting MNC profit outflows as well as other factors including higher government debt service outflows and lower profits earned abroad by Irish companies.  And this latest spike in NFI explains why the GNP measure is some way weaker than GDP.

 Two-speed economy in operation: Improvement in the economy is being dominated by the MNC sectors while domestic sectors still very weak

This difference also serves to highlight another important theme at play in the Irish economy at present.  That is, the wide divergence between what’s happening in the MNC sectors compared to the more traditional domestic sectors.  Previously-released data on exports and industrial production point to a two-speed economy in operation at present in Ireland.  Thus, over the past year the output of the modern sectors within Irish industry (a MNC-dominated sector including areas such as Chemicals, Pharma and ICT) have seen a 6.5% increase in their output levels, whereas other more ‘traditional’ sectors have experienced a 15% fall. 

That is not to say that the positive output trends of the MNC sector should be dismissed; such activity does make an important contribution to the overall growth dynamic in the economy.  But rather we highlight this point to underscore the relatively narrow source of improvement in today’s GDP numbers.

To sum up, the increase in GDP recorded in today’s Q3 National Accounts data is not representative of the overall state of the Irish economy.  While it might be tempting to draw the conclusion that recession has ended, such an interpretation is not appropriate in our view given the evidence of widespread ongoing declines across all categories of spending, and the narrow (MNC-dominated) base of outright improvement in output.  The 1.4% drop in GNP is probably a more accurate guide as to the underlying picture at present.  And while output is still falling on this measure, we do take a modicum of encouragement from the fact that the rate of decline is easing.

Simon Barry                                                                 

Chief Economist Republic of Ireland, Ulster Bank        

Tel: 0 1 643 1553

Lynsey Clemenger

Economist, Ulster Bank

Tel: 0 1 643 1565

Group Economics