7/3/18: U.S. Economy: May Keynesian Economics and Fiscal Prudence R.I.P.

We've got an old problem, Roger. Deficits and their forward projections:

And the more detailed vision of the problem:

Now, keep in mind: we are accumulating these at the time of an expanding economy and continued accommodative monetary policies. In other words, the spring is being loaded on the double.

May both, Keynesian economics and Fiscal Prudence, R.I.P.

10/12/2016: Austerity: Three Wrongs Meet One Euro

"Is it the 'How' or the 'When' that Matters in Fiscal Adjustments?" asks a recent NBER Working Paper (NBER Working Paper No. w22863). The authors, Alberto Alesina, Gualtiero Azzalini, Carlo A. Favero and Francesco Giavazzi ask a rather interesting and highly non-trivial question.

Much of recent debate about the austerity in the post-GFC world have focused on the timing of fiscal tightening. The argument here goes as follows: the Government should avoid tightening the pursue strings at the time of economic contraction or slowdown. Under this thesis, austerity has been the core cause of the prolonged and deep downturn in the euro area, as compared to to other economies, because austerity in the euro area was brought about during the downturn part of the business cycle.

However, there is an alternative view of the austerity impact. This view looks at the type of austerity policies being deployed. Here, the argument goes that austerity can take two forms: one form - that of reduced Government spending, another form - that of increased taxation.

There is some literature on the analysis of the effects of the two types of austerity compared to each other. But there is no literature, as far as I am aware, that looks at the impact of austerity across different types, while controlling for the timing of austerity policies implementation.

The NBER paper does exactly that. And it uses data from 16 OECD economies covering time period of 1981 through 2014 - allowing for both heterogeneity amongst economic systems and cycles, as well as full accounting of the most recent Great Recession experiences.

The authors "find that the composition of fiscal adjustments is much more important than the state of the cycle in determining their effects on output." So that the 'How' austerity is structured is "much more important" in determining its effects than the 'When' austerity is introduced.

More specifically, "adjustments based upon spending cuts are much less costly than those based upon tax increases regardless of whether they start in a recession or not." This is self explanatory.

But there is an added kicker (emphasis is mine): the overall "results appear not to be systematically explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates -- that is outside of a currency union -- it appears to be able to dampen the recessionary effects of tax-based consolidations implemented during a recession." Now, here is a clear cut evidence of just how disastrous the euro has been for the real economies in Europe during the current crisis. As the authors note, correctly, "European austerity... was mostly tax based and implemented within a currency union". In other words, Europe choose the worst possible type of austerity (tax-based), implemented in the worst possible period (during a recession) and within the worst possible monetary regime (common currency zone).

In allegorical terms, the euro zone was like a food-starved runner starting a marathon by shooting himself in a knee.

20/6/16: Creating Fiscal Space. Or Money Growing on Trees

You might excuse an average punter for thinking things are going the beleaguered Irish Health Services ways with some EUR500 ml added to the spending bin (http://www.thetimes.co.uk/article/eu-ruling-means-extra-540m-for-health-fbpnqcqb8?shareToken=699206929a359223e8662e8ae88a18d2). After all, even the good folks of The Times bought into the positive story.

But, such a conjecture is wrong. What really is happening, thus? In simple terms, the Eurostat reclassification of the Government conversion of AIB preference shares into ordinary shares generates several implications:

1. Preference shares represent a preferred (or senior) claim on AIB assets in the case of default or dilution compared to ordinary shares. That is the basics corporate finance and as such implies that State conversion of shares adds new risk to the State holdings, as well as reduces the value of that holding. It does create a marginal improvement in the AIB’s outlook for selling shares in the markets, however.
2. The conversion also raises official State deficit and spending volume for 2015, which has no direct material impact on 2015 spending, except via two channels: Channel 1 is the impact that added spending has on future (2016) spending; and Channel 2 is the GDP effect - as AIB transaction added some EUR500 million to State official spending, that EUR500 million is now an addition to 2015 GDP.
3. Because State spending for 2015 is now EUR500 million higher, and because our 2015 deficit was still below the approved (by the EU) target, the State is allowed - by the EU rules - to spend extra cash this year.
4. Although Ireland has funds ‘available’ for such increased spending, the funding will come from borrowing. The reason for this is simple: Ireland is still running a general deficit. Not a general surplus. If the State were to spend EUR500 million of ‘added fiscal space’ on activities for which it is borrowing funds under pre-existent budgetary commitments, the deficit would have dropped - in 2016 - by, roughly, that amount. However, if Ireland were to spend it on a new spending line or to increase spending above previously planned, the funding will come via borrowing from some other activity, such as repaying Government debt.

In simple terms, there is no free lunch. Irish State does not have extra EUR500 million floating around that it did not have before. No matter what you classify things as, basic accounting means: unless you got paid by someone EUR500 million, you have to borrow EUR 500 million in order to spend it.

Simples. But not for Irish media that keeps confusing deficit financing via debt for resources.

1/8/15: Irish 1Q 2015 Growth: Recovery on Pre-Crisis Peak

In previous posts, I have looked at:

• Sectoral growth contributions for 1Q 2015;
• Trends in annual (y/y) growth rates in GDP and GNP;
• Quarterly (q/q) growth rates; and
• Domestic Demand component of GDP.

So now, let's try to answer that persistent question: has Irish Economy regained pre-crisis peaks of economic activity?

To do so, we need two things:

1. We need 12-months running sum of total activity measured by GDP (mythical metric for Ireland), GNP (increasingly also mythical metric, but slightly better than GDP); and Final Domestic Demand (basically an approximation for the real, domestic economy); and
2. We need population figures to get the per-capita basis for the above metrics.

We can compute all metrics in (1) based on actual CSO data. But we cannot know exactly our population size (CSO only provides estimates from 2011 through 2014 and no estimates for 2015). So I did a slightly cheeky approximation: I assumed that 2015 will see increase in Irish population of similar percentage as 2014. This is cheeky for two reasons: (1) population change can be slightly more or less than in 2014 due to natural reasons; and (2) emigration might be different in 2015 compared to 2014. Specifically, on the second matter, there has been some evidence of slower emigration out of Ireland and there have been some migrants coming into Ireland on foot of MNCs hiring.

Still, this is as good as things get, so here are the numbers, all referencing inflation-adjusted (real) variables:

Irish Personal Consumption per capita (not shown in the chart above) on 12 months total through 1Q 2015 stood at around EUR19,074.79 or 8.4% lower than pre-crisis peak in 4Q 2007. Meanwhile, Final Domestic Demand per capita was some 15.43% below pre-crisis average. Irish GDP per capita was around 2.4% lower than at pre-crisis peak. However, Irish GNP per capita in 1Q 2015 based on 12 months total was 0.2% above pre-crisis peak.

So in simple terms, by one metric of three, we are back at pre-crisis peak levels in per capita, inflation-adjusted terms. This metric is somewhat better than GDP per capita, but not perfect by any means and is getting worse, not better, in terms of measuring the real activity on the ground. Still, after 8 years, the recession cycle is complete in terms of GNP. It is still ongoing in terms of Domestic Demand.

1/8/15: Irish 1Q 2015 Growth: The Real Economy Side

Having previously looked at

• Sectoral growth contributions for 1Q 2015 
• Trends in annual (y/y) growth rates in GDP and GNP, and
• Quarterly (q/q) growth rates

now, let's take a peek at the Domestic Demand component of GDP - the bit that covers Private Consumption, Government Current Expenditures and Gross Fixed Capital Formation.

Looking at real data, not seasonally adjusted:

Personal Expenditure on Goods and Services by Irish households posted 3.78% growth year-on-year in 1Q 2015. This is faster than 4Q 2014 growth of 3.00% and faster than 1Q 2014 y/y growth of 1.56%. The rate of growth is also faster than four-quarters' average of 2.54%. So this is good news. In fact, this is the fastest rate of growth in Personal Expenditure since Q1 2008 and fifth consecutive quarter of y/y growth.

Net Expenditure by Central and Local Government on Current Goods and Services was up 5.91% y/y in 1Q 2015, which is slower than 9.54% y/y growth reordered in 4Q 2014, but faster than 1.46% growth in 1Q 2014. Current rate of growth in Government spending is slightly ahead of the four quarters average of 5.65%.

This is the second fastest rate of Government spending growth since 2Q 2007 and marks 8th consecutive quarter of positive growth in spending, full three quarters longer positive run than for Personal Expenditure. To compare the two series: austerity from 1Q 2013 on implies a rise in Government current (ex-investment) spending of 7.5%, while recovery in the economy means Personal Consumption rising by 5.4% over the same period.

Gross Domestic Fixed Capital Formation (aka a proxy for Investment - proxy because it includes questionable stuff, like aircraft, as well as some of the MNCs-valued investments) was up 4.03% y/y in 1Q 2015 which is miles lower than 20.3% growth registered in 4Q 2014 when scores of punters rushed out to buy property, and when REITs continued to replace vultures in doing the same. Over the last 4 quarters, average rate of growth in Fixed Capital Formation was 12.77% and even back in 1Q 2014 this activity expanded by 10%, so 1Q 2015 was a major slowdown in activity, albeit it remained positive. This might be a healthy sign of structural normalisation in what has been becoming a somewhat overhyped property market, but it can also be a short-term blip. Overall, 1Q 2015 was the slowest y/y growth quarter since the onset of the 'recovery' in the investment markets here in 3Q 2013 and the first quarter in the period when growth rates fell below 10% mark (albeit 1Q 2014 actual expansion was 9.979%).

With the above, Final Domestic Demand (probably the closest we have in the National Accounts to a realist measure of our economic performance) posted a healthy y/y expansion:

As the above chart shows, Final Domestic Demand rose 4.22% y/y in 1Q 2015, slower than 7.51% growth recorded in 4Q 2014 but faster than 3.61% growth in 1Q 2014. Over the last 12 months, average annual rate of growth in the Domestic Demand was 5.31% which makes 1Q 2015 performance relatively less spectacular. Still, 4.22% growth rate is a healthy one.

And it is consistent with the longer term trends:

As chart above shows, upturn in the Final Domestic Demand took place (on trend) around 3Q 2013 and it is gaining some momentum. However, unlike the GDP series - posting full recovery (on rolling 12mo basis) to pre-crisis peak back in Q3 2014, Final Domestic Demand (domestic economy proxy) is still 11% below the pre-crisis peak. So while our MNCs-inclusive economic performance has regained pre-crisis peak, our domestic economy remains quite below the pre-crisis levels of activity.

Table below summarises source of growth in real GNP:

As shown above, single largest contributor to growth in GNP in 1Q 2015 (annual rate of growth) was Net Trade Balance (Exports less Imports) growth in which accounted for 33.81% of the total expansion in GNP. Personal Expenditure was the second largest contributor to growth with 28.83% share. Overall, growth in Final Domestic Demand (domestic economy proxy) was responsible for 55.4% of total growth in GNP over 1Q 2015 compared to 1Q 2014. Interestingly, inventories (Value of Changes in Stocks) accounted for almost 1/5th of total growth in GNP.

13/11/2014: Size of Government vs Growth

BCA Research are usually not known for silly charts and comparatives. But yesterday, they did produce a blooper …

As chart above (via BCA) shows, there appears to be a strong linear relationship between higher Government Spending as % of GDP (averaged over 2008-2014) and lower real GDP per capita growth. In fact it is very strong - at 63% explanatory power (as measured by R-Sq).

The problem with the above chart is that

1) There are likely influential outliers in the data - Hong Kong, Korea, Taiwan and Singapore

2) We are not quite certain that a linear relationship is a reasonable one

3) There are questions with the sample range: for example 2008-present is a sample covering the period of higher spending due to crisis (including banks measures, but also automatic stabilisers, such as unemployment insurance etc), and

4) GDP per capita is a better metric than GDP itself, but it disfavours younger economies and older economies (where a greater share of population is not at work due to age, education and training) in contrast to middle-aged economies.

So here is the exercise carrying across longer range of data (2000-2014 averages) and on the basis of actual real GDP.

Chart above shows that positive relationship continues to exist when we switch to a longer period average and base our estimates on real GDP metric, as opposed to GDP per capita. It also shows that the relationship is pretty similar for the measure of Government size either by expenditure or revenues. The former is more subject to change over time due to banks rescue measures, while the latter is more prone to change due to GDP changes.

Crucially, however, the relationship is by far not as strong as in the BCA data: we only get a R-Sq of 34.9% for Government Expenditure and even lower R-Sq of 25.3% for Government Revenue relationship to real GDP growth. 

Also note, I run analysis for logarithmic and cubic relationships and these confirm the above R-Sq readings, suggesting that a linear relationship is a reasonably good approximation to reality.

However, we still have the potential problem of outliers in the above. Which appear to be the same ones as in BCA case. So I take 1.5 sigma weight to the mean for each data set and remove all observations that fall outside 1.5 sigma range. This removes 4 countries altogether from the set and also removes another 2 countries from the set covering Government Revenue.

Chart above shows just how dramatically the relationships change when we control for influential outliers. Both R-Sq readings collapse to the point of being no longer significant at all. In other words, absent influential outliers, there is no statistically significant relationship between long-term average real GDP growth and Government spending or revenue.

Which strongly suggests that BCA findings are biased to the upside in terms of reported relationship between the size of Government and GDP by:

1) Demographic effects; and

2) Idiosyncratic factors relating to four Asia-Pacific Tiger economies.

Note: I tested the second set of estimated relations for sensitivity to model specification, including non-linear models (log, cubic, quadratic and exponential) and the result stands - there is no statistically significant relationship.

4/7/2014: Q1 2014: Domestic Demand dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO, top-level GDP and GNP growth dynamics, and sectoral decomposition of GDP.  These provided:

1. Some caveats to reading into the new data 
2. That the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 being much more anaemic than in any period between 1997 and 2007. The good news: in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news: these are still below the Q1 2001-Q4 2007 averages.
3. Evidence that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. 

Now, let's consider Domestic Demand data. In the past I have argued (including based on econometric evidence) that Domestic Demand dynamics are most closely (of all aggregates) track our economy's actual dynamics, as these control for activities of the MNCs that are not domestically-anchored (in other words, they include effects of MNCs activities on Exchequer and households, but exclude their activities relating to sales abroad and expatriation of profits and tax optimisation).

Of the components of Domestic Demand:

• Personal Consumption Expenditure on Goods and Services stood at EUR19.915 billion in Q1 2014, which is up EUR42 million (yes, you do need a microscope to spot this - it is a rise of just 0.21% y/y. Good news is that this is the first quarter of increases in Consumption Expenditure after four consecutive quarters of decreases. Previously we had a EUR125 million drop in Personal Consumption Expenditure in Q4 2013 compared to Q4 2012.
• Net Current Government Expenditure stood at EUR6.614 billion in Q1 2014 which is EUR167 billion up on Q1 2013 (+2.59% y/y) and marks third consecutive y/y increase in the series.  Over the last 6 months, Personal Consumption fell by a cumulative EUR83 million and Government Net Current Expenditure rose EUR617 million. Austerity seems to be hitting households more than public sector?..
• Gross Domestic Fixed Capital Formation (basically an imperfect proxy for investment) registered at EUR6.864 billion in Q1 2014, up EUR191 million y/y. Which sounds pretty good (a 2.86% rise y/y in Q1 2014) unless one recalls that in Q4 2013 this dropped 11.35% y/y. Over the last 6 months Fixed Capital Formation is down EUR798 million y/y in a sign that hardly confirms the heroic claims of scores of foreign and irish investors flocking to buy assets here.
• Exports of Goods and Services, per QNA data, stood at EUR47.164 billion in Q1 1014, up strongly +7.41% y/y, the fastest rate of y/y growth since Q1 2011 and marking fourth consecutive quarter of growth. I will cover exports data in a separate post, as there is some strange problem with QNA data appearing here.
• Imports of Goods and Services were up too, rising to EUR37.635 billion a y/y increase of EUR2.086 billion.  
• Over the last 6 months, cumulatively, y/y Exports rose EUR4.970 billion and Imports rose EUR3.741 billion.
• Total domestic demand (sum of Personal Expenditure, Government Current Expenditure, Gross Fixed Capital Formation and Value of Physical Changes in Stocks in the economy) stood at EUR33.828 billion. This represents a y/y increase of just EUR335 million or 1.0%. This is the first quarter we recorded an increase since Q4 2013 saw a y/y drop in Total Domestic Demand of 3.83%. Over the last 6 months, cumulatively, Irish domestic economy was down EUR1.087 billion compared to the same 6 months period a year before.

The above are illustrated in the two charts below:

Lastly, let's take a look at nominal data, representing what we actually have in our pockets without adjusting for inflation. Over Q1 2014, nominal total demand rose by EUR499 million y/y, while over the last 6 months it is down EUR570 million y/y. So in effect all the growth in Q1 2014 did not cover even half the decline recorded in Q4 2013. One step forward after two steps back?..

Chart below summarises nominal changes over the last 6 months and 12 months.

28/6/2014: Public Debt: It Really Is the Case of Beggar Thy Children…

In a new paper, researchers from Germany use "controlled laboratory experiment with and without overlapping generations to study the emergence of public debt."

The set up of the experiment is simple: "Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes."

The end result is asymmetric:

• "With a single generation, public debt is accumulated prudently, never leading to over-indebtedness." In other words, if your generation is the one responsible for repaying debt, spending is prudent and debt accumulation is ex ante bounded by expected income.
• However, "with multiple generations, public debt is accumulated rapidly as soon as the burden of debt and the risk of over-indebtedness can be shifted to future generations."

Crucially, "debt ceiling mechanisms do not mitigate the debt problem. With overlapping generations, political debt cycles emerge, oscillating with the age of the majority of voters." In other words, the idea that debt can be controlled by explicit limits is useless. So much is clear from the US debt ceiling system performance, as well as from the EU SGP experiences. And as much will be confirmed by the Fiscal Compact rules application in due time. Worse, absent levels constraints we are left with the Keynesian proviso that simply says: Be nice. Save when you can, send when you need. Oops... if the stick does not work, any hope the carrot will? I don't think so...

The paper was written by Fochmann, Martin and Sadrieh, Abdolkarim and Weimann, Joachim, and is titled "Understanding the Emergence of Public Debt" (May 24, 2014, CESifo Working Paper Series No. 4820. http://ssrn.com/abstract=2458325).

15/5/2014: Bad Habits Die Hard

A neat summary of the euro area revisions to targeted deficits for 2014-2016 period:

Per BBVA Research: "The relaxation in fiscal targets approved by ECOFIN in the first half of 2013 was an important factor in the European economy’s recovery in the second half of the year, as we pointed out in previous editions of this report. The panorama has not changed. Fiscal policy continues to be contractive, but less so than forecast at the time, thanks to the postponement of the 3% deficit target for several countries, including France, Italy and Spain. Deviations from the deficit targets in 2013 have been small, except in France (0.4pp off the May 2013 stability plan’s target) and plans presented to the Commission in April this year retain the targets forecast or modify them towards a somewhat slower consolidation path."

Here's a question: we have growth in underlying GDP (anaemic, but still growth). We have widening deficits compared to targets, and deficits reductions over time are penciled in at slower rates for 2014-2015. Oh, and we are still running deficits… so explain to me where is that amazing 'austerity' excluding the bizarre stretch of the imagination by which lowering deficits (not turning surpluses) is 'austerity'… [presumably in the same way as spending money we don't have is a stimulus, may be]…

Just a few pages down, BBVA gloriously declare: "Fiscal policy will continue to be restrictive in the forecast horizon, although fiscal efforts will be less rigorous than those of 2012 and 2013, since the rest of the adjustment has been postponed, in order to meet the target of structural balance in the public accounts beyond 2015. With all this, public consumption may go up by around 0.3% in 2014 and 0.7% in 2015."

Ah, European 'austerity' - where reducing the rate of spending growth represents unbearable economic pain and is yet consistent with a possible increase in the Government consumption...

It clearly looks like we are back to the good old 'bad' habits' on the side of the euro area periphery's largest sovereigns...

20/12/2013: Q3 GDP: Is There a Domestic Recovery?

In previous posts, I covered:
1) top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html)
2) expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html), and
3) 3-quarters aggregates changes in GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/20122013-how-real-is-that-gdp-and-gnp.html)


Now, onto the Domestic Demand.

With both GDP and GNP now severely skewed by the transfer pricing going on in the ICT Services sectors in Ireland, it is no longer reasonable to look at either GDP or GNP for the signs of underlying activity gains in the real Irish economy. Instead, we should consider a combination of all three: changes in GDP, GNP and Final Domestic Demand. Final Domestic Demand is defined as a combination of:

• Government spending on goods and services (other than investment goods)
• Government and private investment in the economy, and
• Private household consumption of goods and services

Unlike Total Domestic Demand, Final Domestic Demand excludes stocks built up by businesses.


First, looking at the Q1-Q3 aggregates comparatives based on data that is not seasonally-adjusted and is expressed in constant euros. In Q1-Q3 2013, final domestic demand in Ireland fell 1.41% compared to the same period in 2012 (down EUR1,293 million y/y). Final Domestic Demand is now down 2.89% on the first three quarters of 2011 and is down 21.6% on the same period of 2007.

In other words, over Q-Q3 2013, on aggregate, there is still no recovery in the domestic economy in Ireland.

Second, let's take a look at q/q changes in the GDP, GNP and Final Domestic Demand. For this purpose, we consider seasonally-adjusted constant euros series.

In Q3 2013, Exports of goods and services fell 0.80% q/q on seasonally-adjusted basis. The decline was shallow compared to 4.63% rise in Q2 2013, but it replicates the pattern of 'quarter up, quarter down' established since Q3 2012.

Overall, since Q1 2011 (in other words since the 'adjustment programme' or 'bailout' started) Irish exports of goods and services were up over 6 quarters and down over 5 quarters. Exports-led recovery stacks ups s follows:

• In 1997-2007 average quarterly growth in exports of goods and services in Ireland stood at 2.445%;
• In 2008-present that rate was 0.281% and
• In 2011-present it is 0.4988%

In other words, massive increases in ICT services exports over the period of the crisis are not strong enough to generate significant uplift momentum in exports growth.

GDP at constant market prices rose 1.502% q/q in Q3 2013, marking a second consecutive quarter of growth. In Q2 2013 the rise was 1.023%. Since Q1 2011, GDP rose on a quarterly basis in 7 quarters and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 GDP growth average 1.630% on a quarterly basis;
• Over 2008-present the average is -0.353% and
• Over Q1 2011-present the average is +0.358%

So there is a longer-term recovery on average, based on GDP, but it is weak, consistent with annualised rate of growth of just 1.44%.

GNP at constant market prices rose 1.580% q/q in Q3 2013, marking the first quarter of growth. In Q2 2013 the GNP contracted 0.133%. Since Q1 2011, GNP rose on a quarterly basis in 6 quarters, it was flat at zero in one quarter, and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 GNP growth averaged 1.522% on a quarterly basis;
• Over 2008-present the average is -0.302% and
• Over Q1 2011-present the average is +0.171%

So there is a longer-term recovery on average, based on GNP, but it is weak, consistent with annualised rate of growth of just 0.68%.

Final Domestic Demand at constant market prices rose 2.412% q/q in Q3 2013, marking the second quarter of growth. In Q2 2013 the FDD was up 0.218%. Since Q1 2011, Final Domestic Demand rose on a quarterly basis in 7 quarters, and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 FDD growth averaged 1.621% on a quarterly basis;
• Over 2008-present the average is -0.961% and
• Over Q1 2011-present the average is -0.175%

So there is no longer-term recovery on average, based on Final Domestic Demand, with FDD contracting on average at an annualised rate of 0.70%. There is, however, good news of FDD rising for two consecutive quarters, clocking cumulative growth of just 2.64% over 6 months or 5.34% annualised. The problem is that the levels from which this growth is taking place are low.

As shown above, overall recovery is not yet taking hold in the domestic economy, although there are some gains recorded in the domestic demand that are encouraging and have been sustained over 2 consecutive quarters.

20/12/2013: How Real Is that GDP and GNP Growth in Ireland? Q3 data

In previous two posts, I covered top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html) and expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html).

Now, let's take a look at 3-quarters aggregates. The reason why looking at 3 quarters aggregates makes sense is that q/q changes are volatile, while y/y changes are only reflective of quarter-wide movements in activity. 9-months January-September 2013 data comparatives to a year ago provide a better visibility as to what has been happening in the economy so far during this year.

All analysis below is based on seasonally unadjusted data in constant prices terms.

In 3 quarters (Q1-Q3) of 2013, Personal Consumption of Goods and Services fell 1.22% when compared to the same period in 2012. The series are down 1.93% on Q1-Q3 2011. In level terms, personal consumption is down EUR734 million for the first 9 months of 2013 compared to a year ago.

Expenditure by Central and Local Government on Current Goods and Services was down 0.96% for the 9 months January-September 2013 compared to the same period of 2012 and is down 5.03% on same period in 2011. In level terms, Government spending on goods and services is down EUR178 million in Q1-Q3 2013 compared to a year ago.

Gross Domestic Fixed Capital Formation for the nine months January-September 2013 has fallen 2.90% compared to the same period a year ago (in level terms, -EUR381 million). Compared to the same period in 2011, gross fixed capital formation is now down 4.42%. When we talk about 'big increases' in investment, keep in mind, Q1-Q3 cumulated Gross Fixed Capital Formation was down 55% on the same period for 2007.

Exports of Goods and Services for the nine months January-September 2013 were down 0.8% on the same period a year ago (-EUR1,013 million), but up 0.84% on the same period of 2011. This hardly shows 'robust growth' in exports. Exports composition has shifted once again in favour of Services. Goods exports shrunk over the last nine months by 4.51% compared to same period 2012 (-EUR2,809 million) and are now down 8.29% on Q1-Q3 cumulative for 2011 and down 2.47% on Q1-Q3 2007 too. Meanwhile, exports of services rose 2.77% in Q1-Q3 2013 compared to a year ago (+EUR1,796 million) as per 'Google-tax effect' and these are now up 10.69% on Q1-Q3 2011 and up 21.29% on Q1-Q3 2007. At the rate we are going, pretty soon Barrow Street GDP will exceed that of South Korea, which will make Poly's Pizza more economically important than Geneva.

Sarcasm aside, Imports of goods and services (another driver - via their collapse - of positive GDP and GNP news) are down 0.93% y/y in Q1-Q3 2013 (-EUR908 million) and are down 1.35% on same period 2011. Compared to Q1-Q3 2007 imports of goods and services are down massive 9.49% - the effect that contributes significantly to upside of GDP. Goods imports alone are now down 33.3% on Q1-Q3 2007 and these were down 4% (-EUR1,419 million) on Q1-Q3 cumulative for 2012.

So, let's add few things. In 9 months January-September 2013, relative to the same period of 2012:
1) Personal consumption fell EUR734 million
2) Government consumption fell EUR178 million
3) Domestic Gross Fixed Capital formation fell EUR381 million
4) Exports of Goods and Services fell EUR1,013 million
5) Imports of Goods and Services fell EUR908 million, and
6) Stocks of goods rose EUR503 million.

(1)-(4) subtracted from GDP growth, (5) and (6) added to GDP growth. Which means that the only two positive contributions to growth in our GDP came from: imports decline and stocks of goods held by businesses rise. This is hardly a good news, as both sources of growth are really not about increased/improved activity in the economy.

Thus, GDP at constant market prices fell over the period of Q1-Q3 2013 compared to Q1-Q3 2012 by 0.58% (or EUR706 million). Notice the word 'fell' - whilst there were rises in GDP in Q3 and Q2 in q/q basis, overall so far, 2013 total output in the economy is below that registered for the same period in 2012.

GDP is also down 0.04% on same period 2011 and is down 6.82% on the same period in 2007.

Let me know if you are spotting any positive growth in the above.

Next, the difference between GDP and GNP is formed by the Net Factor Income from the Rest of the World. This also fell in Q1-Q3 2013 compared to the same period of 2012 - down 14.37% y/y (or -EUR3,378 million), which 'contributed' a positive swing to the GNP in the amount of almost EUR3.38 billion. The reason for this? Well, growth-generating fall-off in activity in the phrama sector meant that MNCs were booking lower profits via Ireland and this, allegedly, has a positive effect on our economy… err… on our GNP.

GNP, propelled by stocks accounting tricks, hocus-pocus of transfer pricing and continued decline in imports rose 2.69% in Q1-Q3 2013 compared to Q1-Q3 2012 (up EUR2,670 million = decline in GDP of -EUR706million plus decline in factor payments of +EUR3,378 million). Seriously, folks, this is beginning to look like a joke!

Based on the same physics of transfer pricing miracles, Irish GNP is now 4.16% ahead of Q1-Q3 reading for 2011.

Recap: On expenditure side of the National Accounts, growth in 2013 is not exactly real (for GNP) and not present (for GDP).

Analysis of Total Domestic Demand (aka domestic economy) is to follow. Before then, charts to illustrate the above:

19/12/2013: QNA Q3 2013: Expenditure Side and External Trade

QNA results came in strong at the headline levels for Q3 2013. These were covered here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html

Now, let's take a look at the GDP decomposition by expenditure line. I am referencing throughout non-seasonally adjusted series for y/y comparatives. All in constant prices.

Year on year, personal expenditure on goods and services fell 0.98% in Q3 2013 and the series were up 0.79% on Q3 2011. This is not a good result, but it is an improvement on -1.52 y/y contraction recorded in Q2 2013.

Net Expenditure by Central & Local Govt. on Current Goods & Services rose 0.68% y/y in Q3 2013, after having posted a contraction of -1.73% in Q2 2013. Compared to Q3 2011, net expenditure by Government was down -3.25% in Q3 2013.

Gross domestic fixed capital formation jumped significantly in Q3 2013 up 8.30% y/y albeit from low levels. The series are now up 18.68% on Q3 2011. In Q2 2013, fixed capital formation rose 1.42% y/y, so Q3 2013 data shows some serious improvement.

Exports of Goods and Services (net of factor income flows) rose 0.58% y/y in Q3 2013 and are up only 0.94% on Q3 2011. This is poor given how much we have staked on an exports-led recovery. Worse news: in Q2 2013 exports grew 1.09% y/y, so we are seeing continued slowdown in the rates of growth.

Exports of Goods fell 2.37% y/y in Q3 2013 on foot of a decline of 1.61% in Q2 2013. Exports of goods are now down 7.64% on Q3 2011.

Exports of Services meanwhile picked the slack from Exports of Goods contraction. Exports of Services grew 3.32% y/y in Q3 2013 having previously posted growth of 3.63% y/y in Q2 2013. In other words, strong growth in Q3, but slower than in Q2. Compared to Q3 2011, exports of services are now up cumulative 9.89%.

Imports of Goods and Services fell 1.28% y/y in Q3 2013 and are now up only 0.73% on Q3 2011. The decline was primarily driven by a 3.4% drop in imports of goods and moderated by a decline of 0.11% in terms of imports of services.

Trade Balance grew on foot of stronger trade surplus in services (+EUR747 million in Q3 2013 compared to Q3 2012) and moderated by small decline in trade deficit in goods (-EUR93 million in Q3 2013). Trade balance overall grew by EUR654 million in Q3 2013 compared to Q3 2012, up 6.56% y/y.

Thus, on the expenditure side of the National Accounts, Q3 2013 gains in GDP were supported by 

• Growth in the Net Government Expenditure on Current Goods and Services, Gross Domestic Fixed Capital Formation, and Exports of Services
• Contraction in Imports of Goods and Imports of Services

The GDP dynamics were adversely impacted by declines in:

• Personal expenditure on goods and services,
• Decline in Exports of goods.

Volatility remains a dominant theme in quarterly data analysis, so it is worth looking at the figures for the first 3 quarters of the year. This will be done is the next post.