Economics How can we obtain reliable forecasts of future economic activity when official statistics paint such a confusing picture of the state of the economy in the recent past?

According to the latest set of national accounts from the Central Statistics Office (CSO), the Irish economy has managed to do the logically impossible over the past two years: it has grown at a decent, if much diminished rate, and it has also contracted. How so? Well, gross domestic product (GDP) increased in real terms by almost 6 per cent between the first quarter of 2001 and the corresponding quarter of 2003, while gross national product (GNP) contracted by almost 1 per cent in real terms over the same period.

Talk about two-handed economists. This ambidextrous statistical output has permitted the respective advocates of two almost polar views of the Irish economy to claim vindication and the Government to claim that Ireland is still growing much more strongly than our European neighbours.

It all depends on which of two Irish economies you're talking about. Let's call them the domestic economy and the national economy. The optimists see the former; the pessimists the latter. Which group is right?

First, a word to the uninitiated about the distinction between GDP and GNP. GDP measures the value of all output produced in the State, regardless of who owns the factors of production involved in that effort. Thus, the value of all the output produced in the Republic by a US firm such as Intel, for example, is counted as part of Irish GDP.

GNP, on the other hand, measures the value of all output produced by Irish-owned factors of production, regardless of where they are deployed. Thus, the profits made by CRH from its US operations are counted as part of Irish GNP, while the profits made by Intel from its Irish operations are excluded.

Partly because the operations of overseas firms in Ireland are much more extensive than the operations of Irish firms abroad - there are other elements in the mix as well - Irish GDP tends to be considerably higher than GNP. Last year, for example, GDP amounted to €129 billion in money terms while GNP weighed in at just €103 billion.

Most Irish economists think that GNP is a more meaningful measure of overall economic activity than GDP on the grounds that it is a closer approximation to the aggregate income available to people living here.

That judgment is almost certainly correct. However, it doesn't necessarily follow that the change in GNP is always superior to the change in GDP as a measure of changes in economic activity over short periods of time.

Given how they are arrived at, there is plenty of scope for the GNP data to be distorted by the vagaries of timing.

In this connection, it is worth pointing out that a major source of the difference in recorded growth between GDP and GNP over the 2001-2003 period was a deterioration of almost €1 billion in the "other investment income" category of the balance of payments.

It is not obvious that this movement, which largely relates to the international interest flows of financial institutions, has much immediate connection with Irish economic activity.

The discussion so far leaves the question of who is right - the domestic economists or the national economists - unresolved.

For some assistance in this regard, we might consider what's been happening to employment. The latest available data (from the CSO's Quarterly National Household Survey) point to an increase in economy-wide employment of 3.6 per cent between the first quarter of 2001 and the first quarter of 2003.

On the face of it, this would seem to tilt the balance of the argument decisively in favour of the relatively cheerful commentators. Even allowing for time lags, labour hoarding and the like, it's hard to believe that employment would have grown at this sort of speed if economic activity was contracting.

However, the employment data, no less than the national accounts data, need to be interpreted with care, and there are two aspects of recent employment growth in particular that need to be considered before drawing anything like firm inferences about activity.

The first relates to part-time working, which has been increasing more rapidly than overall employment. Fortunately, we can readily correct for this because the CSO also publishes data on average hours worked. These data show a fall from 37.9 to 37.2 hours per week between early 2001 and early 2003. Combined with the employment figures, this indicates that aggregate economy-wide hours worked increased by 1.7 per cent over this period. Again, this is difficult to reconcile with the notion of an economy suffering from a contraction in activity.

The second aspect of employment growth that we need to consider is that most of the increase between the first quarter of 2001 and the same period in 2003 (48,000 out of 62,000) occurred in the public sector. Perhaps this can help reconcile the coexistence of an increase in overall employment with a contraction in overall economic activity? Not very easily.

In the first instance, the numbers employed in the private sector over this period did rise, even if at a lacklustre pace of only 1 per cent, and this is hard to square with recession. Secondly, even when allowance is made for a decline in average hours worked, the resultant estimate of a small fall (of 0.8 per cent) in aggregate private sector hours worked between early 2001 and early 2003 seems much too modest to be consistent with the kind of contraction in private sector activity that is implied by the GNP numbers. That is unless there was an unusual fall-off in productivity.

In fairness, it doesn't seem consistent with the kind of increase in activity suggested by the GDP data either.

The truth on this occasion, as on so many others, seems to lie somewhere between the two. The real economy if you will, as distinct from the domestic economy or the national economy, has probably been growing at an average annual rate of 1-2 per cent since early 2001.

The good thing about that is that, despite all the gloom and doom around, it has left intact the enormous gains in output chalked up over the Celtic Tiger period.

The bad news is that, however favourably it may compare with the recent performance of some of our EU partners (not quite spectacularly), it has not been enough and will not be enough going forward to prevent unemployment from rising.

Jim O'Leary is currently lecturing in economics at NUI-Maynooth . He can be contacted at jim.oleary@may.ie