Economics 08/07/2009: We are not in a recession! Davy

Per Davy morning note last: "Whole economy no longer in recession, but employment-intensive sectors shrinking: Last week's national accounts figures for Ireland made a lot of intuitive sense. The output side of the accounts gets little attention but perhaps provided the best snapshot of what was going on in the economy. Construction (for a seventh quarter out of eight) and services declined (sixth out of seven) in size, but (multinational) industry and agriculture actually emerged from recession and grew quarter-on-quarter. Extrapolating ahead to the second quarter, those trends continued, except that construction and services contracted at a slower pace."

All is great, then, folks. No need to panic.

Forgive me for not repeating the trifle-stuff about unemployment rising, personal disposable incomes shrinking (unless you are a truffle-stuffed senior public sector manager), consumers staying off the high street and more businesses going into liquidation. But what on earth are they eating there in their offices on Dawson Street?

To be fair to Davy, the note does say that: "The problem is that the two parts of the economy that have improved account for less than one-third of output and a much smaller share again of employment. Multinational industry grew again thanks in part to its defensive nature: it is dominated by pharma and software (which has held up). But the rest of it also got a lift from cyclical improvement abroad. Agriculture returned to growth due to the lift in commodity prices from growth in the global economy in Q2."

But what does this mean? Gibberish, my friends.

Kick out to touch the 'return of' agriculture bollocks - how can anyone measure real output in a sector so vastly dependent on public transfers defies my understanding of economics.

Now, Pharma is not a pro-cyclical sector because recession or not, people need drugs and drugs purchasing is governed heavily by very long-term and sticky price agreements.

And when it comes to software - this is a sector also relatively better off in a recession: if demand for new hardware collapses, businesses and consumers are more likely to upgrade software then invest in new machines.

But at any rate, how important are these sectors to what matters most - our disposable incomes? Not hellishly important - total MNCs count for less than 12% of the national disposable income, when you consider their average earnings and share of employment.

Now, I am not saying these sectors can be forgotten. I am simply stating the bleating obvious. Recession is not a concept of the external economy. It is a concept of the domestic one. In other words, does any care about net exports if these are not leaving much of an impact in your and my pockets?

Take a closer look at the real data that Davy didn't bother to show in their note. Here is what CSO had to say:

• "Consumer spending (personal consumption of goods and services) in volume terms was 9.1 per cent lower in Q1 2009 compared with the same period of the previous year." Yeah, recession is not over for consumers (some 3/4 of this economy);
• "Capital investment, in constant prices, declined by 34.1 per cent in Q1 2009 compared with Q1 2008." Oh, it ain't over for investment either.
  
• "Net Exports (exports minus imports) in constant prices were €2,814 million higher in Q1 2009 compared with Q1 2008." But, hold on, they also improved in Q4 2008 - by €1,768 million. Was it the end of the recession then? Well, actually, errrr... this is not really true once you adjust for changes in the exchange rates, changes in prices and, crucially, seasonality. See charts below for the real picture.
  
• "The volume of output of Industry (incl. Construction) decreased by 10.5 per cent in Q1 2009 compared with Q1 2008. Within this the output of the Construction sector fell by 31.4 per cent over the same period. Output of Distribution, Transport and Communications was down 10.9 per cent while Output of Other Services was 3.5 per cent lower in the first quarter of 2009 compared with the same period of last year." So no end of a recession in sight in these sectors...

Here are few charts.To start with - seasonally adjusted, constant prices expenditure on GNP - the stuff we are made off sans transfer pricing. The main chart shows Q1 2003-Q1 2009 quarterly data and the insert blows up the current recession period. Not a single variable, save for Gov Expenditure, shows the end of this recession (not one variable is above the zero line for even the last quarter, let alone for two consecutive quarters - a standard timeline for calling recessions).

Couple more charts:
This takes a knife to the Davy-babble about our trade sector doing so spectacularly well...

I agree with Davy's note that Pfizer, Dell, Intel, and the rest of our illustrious MNCs pack are probably close to coming out of the recession. Hell, they might have never slid into one for all I know. But this is about as comforting to us all as a discovery of another mega crater on the Moon's dark side - we can't see it, we can't feel it, and worse of all - we don't really give a damn. Brian Cowen's hand in our pocket comes the tax day will be far more important.

But then again, Davy wouldn't have anything to say about that, would they?

PS: Oh, the would... Here is a comment on Irish tax policy given in 2008: "I would be surprised if Lenihan increased taxes," said White, economist with Davy. "Income tax, corporation tax and capital gains tax are unlikely to change. It would go against Fianna Fail's economic thinking. Given that business conditions are more difficult, I don't think Lenihan will go the stealth tax route." White said the Government was more likely to cut back on public spending than to cut taxes. "The first thing Lenihan will make sure to do is to limit future liabilities in current spending by keeping pay deals pretty tight. The Government will have to look at wages in the public sector." That was June 8 last year...