ANALYSIS:The current Irish recession is becoming one of the most severe in modern times, writes JIM O'LEARY
YESTERDAY’S NATIONAL accounts data confirm the severity of the current recession. They show that economic activity contracted sharply in the final quarter of 2008, falling from the previous quarter by 2.2 per cent according to the GNP measure and by 7.1 per cent according to the GDP measure. If these estimates were presented on the same basis as in the US (that is, at an annualised rate), the change in GDP would be recorded as a 25.5 per cent decline!
GNP has now fallen in three consecutive quarters and GDP in three of the last four. The cumulative declines in the two measures from their respective peaks have become substantial. By Q4 of 2008, GNP was almost 7 per cent below its Q3 2007 peak and GDP was almost 8 per cent below its Q1 2007 peak. By contrast, the declines from peak GDP in the US and UK in the period to Q4 of last year are estimated at 1.8 per cent and 2.2 per cent respectively. The Irish recession is now well on the way to becoming one of the most severe among developed economies in modern times. By way of benchmark, the devastating Finnish recession of the early 1990s saw a peak-to-trough fall in GDP of 13 per cent.
The sectoral pattern revealed by the data is unsurprising. The building industry endured a 9 per cent drop in output between the third and fourth quarters of last year. Construction output has fallen for seven consecutive quarters and currently stands almost 30 per cent below its Q1 2007 peak. Another sector that has suffered a more than average amount of pain is distribution, transport and communications (which includes retailing). There, output has fallen in four consecutive quarters and stands 8 per cent below its Q4 2007 peak. The most buoyant sector remains public administration and defence, where output edged lower in Q4 to stand just 0.7 per cent below its peak.
There are no great surprises in the expenditure breakdown either. Mirroring the collapse in construction, investment spending was down by 15.4 per cent in Q4 2008 to stand 37 per cent below its peak of early 2007. By comparison, the weakness in consumer spending and exports is mild. The volume of consumer spending is estimated to have fallen by 2 per cent in Q4 from the previous quarter, or by 4 per cent from its end-2007 peak. This is a good deal less steep than the 8.4 per cent volume drop in retail sales estimated for the same period.
As for export volumes, they fell 2.6 per cent in Q4 from the previous quarter and just under 5 per cent from their end-2007 peak. The one bright element in the rather bleak picture is that exports of services, financial and business services in particular, continued to defy a hostile trading environment and expanded through 2008.
Looking ahead, the first point to be made is that, even if the economy maintained its Q4 2008 level of activity throughout 2009, the annual average growth rate for this year would be negative to the tune of 3-5 per cent. This would accord with the forecast that underpinned the Department of Finance’s last published plan for the public finances in early January. But economic activity has already fallen from its end-2008 levels and is likely to fall further. If the pace of decline were in line with the average experienced in 2008 (ie, roughly 2 per cent per quarter), then GDP would fall at an average annual rate of more than 9 per cent in 2009 in real terms, with the fall in cash terms being around 11 per cent.
One implication of this is worth drawing out in the context of the crisis of the public finances. In early January, the Government set out a target deficit of €17.2 billion in cash terms for this year, or 9.5 per cent of what it was then projecting the money value of 2009 GDP to be. Since then, tax revenues have been tracking well below target and spending well above. Hence the rationale for April’s supplementary budget. However, even in the highly unlikely event that the April package contains measures that credibly re-establish the €17.2 billion cash target for the deficit, the target as a proportion of GDP will be substantially higher than 9.5 per cent. In the illustrative scenario I painted in the previous paragraph, a €17.2 billion deficit equates to almost 10.5 per cent of GDP. This is just one more reason why the Government should not impale itself or the economy on the 9.5 per cent figure.
