As I prepare for a holiday that will involve a break from writing this column, I have been looking at the state of our economy in mid-year, and I have to say that up to this point there is still no sign of the forecasted recovery, writes Garret FitzGerald.
A key element in any economic recovery must be the manufacturing sector, which has provided the main impetus for our economic growth, and the industrial output series prepared provided by the Central Statistics Office offers up-to-date data on this sector. Thus, we now have detailed provisional figures for each manufacturing sector up to and including the month of April. These data show output in the three months from February to April running 5 per cent above the previous year's level, but I believe that so far as our domestic economy goes this is misleading, and that in reality manufacturing output during this period was running about 10 per cent below the level of the same months in 2001.
The fact is that there is a problem about our official industrial output data, which has not been sufficiently recognised. International convention, which the CSO has to follow, requires that when the data on the different sectors of industry are added up with a view to producing an overall picture for the whole of the manufacturing sector, the weight to be given to each industry for this purpose should correspond to its Gross Value Added.
The trouble with this is that in some of our largely foreign-owned industries, the Gross Value Added is hugely distorted by the scale of profits earned and subsequently exported - which are not relevant to the performance of our economy. For example, we know that in 1999 the production of "organic basic chemicals other than industrial gases, dyes and pigments", which includes Viagra, employed 4,750 workers, or less than 2 per cent of those engaged in manufacturing, although, because these workers were well paid, this industry accounted for 3.5 per cent of all manufacturing earnings.
However, because of the scale of profits earned, this sector's Gross Value Added was then 24 per cent of that of the whole of Irish manufacturing - and may since have risen to as much as 40 per cent. It is obvious that by according such a hugely disproportionate weighting to changes in output in this small sector, where output frequently fluctuates by over 40 per cent between one month and the next, we can end up getting a false impression of the overall trend of industry activity.
For example, much the greater part of the drop of 16 per cent in industrial output that has just been reported by the CSO for the month of April was accounted for by this over-weighting of a drop in production in this Viagra sector. I estimate that the scale of this April fall in total industrial output was exaggerated threefold by the weighting system employed by the CSO. If the weighting given to this industry had been more appropriate to its impact on our economy - for example through weighting its output by its pay bill instead by its profits-dominated Gross Value Added - the drop in total industrial output in April would have emerged as about 5 per cent rather than 16 per cent.
But if the weighting system employed by the CSO greatly exaggerates the scale of month-to-month fluctuations in manufacturing output, it has also tended to under-estimate the overall decline in output that has taken place since early last year. It is for this reason that the CSO index shows manufacturing output in the three months to April last as having been 5 per cent higher than a year earlier, whereas if the outputs of the various industries were weighted by reference to their pay bills rather than to their exported profits, I believe it would then emerge that manufacturing output in recent months has in fact been 10 per cent lower than at the start of 2001.
I fear that many commentators may not appreciate the extent to which this technical problem with our industrial statistics is giving a misleadingly optimistic impression of the current trend of output in our industrial sector. On the demand side of our economy, it is clear that the volume of retail sales has been static throughout all of the past 12 months. The small increase in current spending over this period was accounted for by a rise of just over 3 per cent in retail prices.
IN THE meantime, unemployment has risen. Foreign firms have cut back their workforces in the light of lower global demand for their products. However, it still remains low, at 4.2 per cent, and during the past six months the earlier rise in unemployment slowed down. On the public revenue side there is nothing to suggest an imminent recovery in income tax receipts.
This shortfall, in conjunction with the loss of control over public spending, has been pushing our public finances into deficit. Charlie McCreevy's Dáil statement last Wednesday that he expected income tax receipts to recover during the remainder of the year because "most of the distortions caused by the changes in the income tax year will be washed out of the system" was unconvincing. Richard Bruton was right to point out that for income tax to yield the amount predicted at the time of the budget it would need to grow by an improbable 20 per cent during the rest of the year.
This evoked an admission from the Minister that in fact income tax receipts this year are likely to fall short of the budgeted figure. The Minister's prediction that VAT receipts will be higher than expected may owe more to hope than to economic analysis, as up to the end of May VAT receipts were in fact running somewhat below the budgeted level. But perhaps the most significant part of Mr McCreevy's performance on Wednesday was his refusal to rule out tax increases as part of the process of recovering from the financial mess he has left behind.
There will be a general welcome for the report that, at the Taoiseach's suggestion, the Minister for Finance is to have an economic adviser. The Taoiseach must have felt that he had no alternative but to re-appoint Mr McCreevy to the Finance portfolio, But, from the Taoiseach's point of view, the Minister's embarrassing budgetary mistakes, now coming home to roost, together with the shortage of economic expertise that Mr McCreevy has allowed to develop in his Department, must have become a cause of real concern.
But the Taoiseach should ensure that he himself is regularly briefed on the advice given. For nothing in Mr McCreevy's career suggests he will be an easy person for an adviser to convince.