ANALYSIS:The average contraction for 2009 as a whole was 11.3 per cent, the highest since records began, writes PAT McARDLE
A FEW months ago, there was a feeling that the economy had levelled out towards the end of last year. This feeling was added to by apparently strong tax receipts in December. One was sceptical, however, given that both PAYE and VAT appeared to be weak. These suspicions have been confirmed by the Quarterly National Accounts, released yesterday.
Seasonally adjusted, the figures show that the economy contracted by 2.3 per cent in the final quarter of 2009. Seasonal adjustment is a statistical exercise to remove the influence of factors such as the Christmas holidays when comparing a particular period with the preceding one. They are necessarily imprecise, which is one reason why growth figures are frequently revised after the event.
For example, three months ago, gross domestic product (GDP) was estimated to have expanded by 0.3 per cent in the third quarter of 2009. This has been revised to minus 0.1 per cent, mainly because of a recalculation of seasonal factors.
So there is a margin of error with the figures and it would be safer to say that the economy contracted by 2 to 3 per cent in the fourth quarter. Even this may be optimistic given the unusually bad weather after Christmas, which would not have been captured by the seasonal factors.
It is clear that the fourth quarter was relatively weak. In terms of gross national product (GNP) – our preferred measure as it is closer to national income and excludes multinational profits – the economy contracted by 5 per cent in the first quarter, 1.6 per cent in the second, 1.8 per cent in the third and 2.3 per cent in the final quarter.
The average contraction for the year as a whole was 11.3 per cent, the highest since records began in the late 1940s. In nominal terms, national income is back to where it was in late 2003. The fall from the peak is 21 per cent. Anyone who has taken a lesser reduction in income is doing better than the average.
Consumer spending on goods and services is the biggest component of national income, accounting for just over 60 per cent of GNP (see chart). Here there is some good news. Price-adjusted or volume spending has levelled off after a particularly weak period in late 2008/early 2009. Investment continues to be the main drag on activity. Declines in housing construction are the principal driver. But for this, activity would have been flat in the fourth quarter.
The other components of investment are other construction, which remains surprisingly buoyant, and machinery and equipment, which is well down. The only good news is that housing construction cannot continue to decline for much longer as new starts are virtually zero.
Government activity, mainly spending on wages and salaries, has held up well but is beginning to contract. It does not have much impact on growth given that it only accounts for one-fifth of total activity. Note that this does not include social welfare transfers, which are reflected elsewhere.
That leaves the external sector. In the chart, I have lumped together exports, imports and net factor flows. The usual thing is to look at net exports but this does not make a lot of sense in Ireland where multinationals are prominent. Last year, they boosted their output and exports but much of this was offset by the ensuing outflow of profits. At the same time, foreign subsidiaries of Irish companies were having a tougher time and their inflows of factor income have fallen back.
The aggregate income from the foreign sector, thus defined, is negative and has been since 1997. It was particularly negative in recent years but did recover somewhat in 2009. Nevertheless, it is clear that we have a long way to go if the recovery is to be driven by exports.
That is why the recent plans by the IDA and the Innovation Taskforce are important. They will only succeed if they are matched by an improvement in competitiveness. This is a challenge for all sectors.
