Saturday, October 10, 2015

10/10/15: IMF’s Macro Data and That “Iceland v Ireland” Question, again

Recently, I posted some data from the IMF Fiscal Monitor for October 2015 comparing fiscal performance of Iceland and Ireland and showing the extent tp which Iceland outperforms Ireland in terms of fiscal deficits and Government debt metrics. You can see the full post here.

Now, consider economic performance, especially of interest given recently strong performance by Ireland in terms of GDP, GNP and even Domestic Demand growth rates.

So let’s take a look at IMF's latest economic data and revisit that "Iceland v Ireland" question.

Let;s first take a look at the real GDP per capita, setting peak pre-crisis levels of 2007 (for both countries) as 100 index reading and tracing evolution of the real GDP per capita. Both countries are expected to regain their pre-crisis GDP per capita levels in 2015, with Iceland reaching 0.17% above the pre-crisis peak and Ireland reaching 0.29% above the same measure.

We are not going to dwell on the gargantuan (20%+) GDP/GNP spread or the fact that Irish Domestic Consumption per capita is nowhere near pre-crisis peak (see here). In pure real GDP per capita terms, Iceland is doing as well or as badly as Ireland so far.

The same applies to GDP per capita expressed in current prices and adjusted for differences in exchange rates and price levels (the Purchasing Power Parity adjustment). Iceland is at 112.9 index reading in 2015 forecast, Ireland at 113.1 index reading. For 2016, Iceland is forecast to be around 117.5, Ireland at 117.8. Neck-in-neck.

However, when it comes to the labour market performance, the close proximity between two countries vanishes.

Unemployment rate in Iceland rose from 2.3% in 2007 to a peak of 7.525% in 2010 and is expected to be at 4.3% in 2015, falling to forecast rate of 4.1% by 2016-2017 before rising to 4.4% in 2020. Ireland is faring much worse. Our unemployment rate was double Iceland’s in 2007 - at 4.67% and this peaked in 2012 at 14.67%. Since 2012, the rate fell, with 2015 outlook set at 9.58% - more than double Iceland’s rate, falling gradually to 6.9% in 2020 - more than 50 percent higher than Iceland’s.

Employment rate also tells the story of Iceland’s outperformance. And worse - dynamically, this outperformance is set to continue deteriorating for Ireland. In 2007, Iceland’s total employment ratio to total population was 57.5% against Ireland’s 49% - a gap of 8.5 percentage points. This year, per IMF projections Iceland’s employment ratio will be around 55.8% against Ireland’s 42.2% - a gap of 13.6 percentage points. In 2016 (the furthers forecast by the IMF), Iceland’s employment rate is projected to be 56.5% against Ireland’s 42.7% - a gap of 13.8 percentage points.

Since the beginning of the crisis, Irish policymakers extolled the virtue of our open economy and exports as the drivers for economic recovery. Aptly, we commonly regard ourselves to be a powerhouse of exporting activities. Which means that we should be leading Iceland in terms of our external balances performance. Reality is a bit more mixed. Iceland’s current account deficit stood at a whooping 22.8% of GDP in 2008 on foot of strong ‘imports’ of capital into the banking system. Ireland’s was more benign at 5.73% of GDP. However, since the peak of the crisis, both countries achieved massive improvements in their current account balances, with 2014 ending with Iceland posting a current account surplus of 3.41% of GDP and Ireland posting a current account surplus of 3.62% of GDP. However, in 2015, IMF forecast for current account balance shows Iceland pulling ahead of Ireland, with current account surplus of 4.61% of GDP against Ireland’s 3.2% of GDP. This gap - in favour of Iceland - is expected to persist (per IMF) through 2020.

Table below summarises the sheer magnitude of positive adjustments to pre-crisis and crisis worst points of performance on all metrics above, through 2015 for both countries:

In summary: 

  • In absolute terms, both Ireland and Iceland have made big adjustments on low points of performance pre-crisis and at the peak of the crisis through 2015. 
  • Iceland clearly outperforms Ireland in labour market terms. 
  • Ignoring the caveats on composition of Irish GDP, Ireland and Iceland perform basically in similar terms in terms of economic activity recovery. 
  • In terms of external balances, Iceland currently leads Ireland, after having lagged Ireland through 2012. 
  • Iceland solidly outperforms Ireland in fiscal metrics of Government debt and deficit dynamics.

The evidence above is sufficient to reject the claims that Ireland outperforms Iceland in recovery.

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