I get several E-mails a month telling me to pull my head in that because, apparently, Ireland is clearly demonstrating my claims that fiscal austerity will kill growth and cause even higher unemployment is plainly wrong – “just look at the data” – is a regular claim by these phantom contact form types. Heroic indeed. They should have realised by now that I love to “look at the data” and are also circumspect about data that will be revised in the course of time. Last week (June 27, 2013), the Irish Central Statistics Office (CSO) released the March-quarter 2013 National Account estimates – GDP decreased 0.6% (Q1 2013 compared with Q1 2012) – which also revised the December-quarter real growth estimates down to show a contraction. That is three consecutive quarters of negative real GDP growth. That should demonstrate some 4.5 years into their fiscal austerity experiment that it isn’t working. Time for change. So, all you phantoms, save your comments until you have something to say that transcends your blind free market ideology. And perhaps, get a life.
The UK Guardian (June 27, 2013) came out with this headline after the Irish CSO has issued the latest data – Ireland falls back into recession despite multibillion-euro austerity drive.
There has been speculation that this was tongue-in-cheek. The text doesn’t suggest that. But let’s say it was – why would we be making a joke about a devastating tragedy?
Anyway, whatever.
Last week, the Irish saw the impacts of austerity and the selective bailouts in very clear lights.
First, the CSO revisions and updated data demonstrate that the fiscal strategy has failed badly and should be abandoned forthwith before it causes even more damage.
Second, as the Guardian article noted:
The blow comes as Ireland reels from the unfolding Anglo Irish Bank scandal, in which executives at the bailed-out bank were caught on tape joking about their multi-billion euro rescue in 2008 and, at one point, singing “Deutschland über Alles” as they quipped about German deposits shoring up the bank.
Jail time is warranted for many of those who creamed the system in this way.
I last wrote about the Irish situation in this blog – The Celtic poster child demonstrates the failure of austerity – when the September-quarter 2012 National Accounts data came out.
I noted that despite all those commentators who had seized on the slightest evidence of real GDP growth (or a falling unemployment rate) as a sign that austerity was finally going to deliver the miracle the EU, the ECB, the IMF and the Irish government has been telling the world about, that the reality was clear – Ireland is an example of how much damage fiscal austerity causes.
It was the first of the Euro nations to impose a fiscal austerity package. It is still not growing and private spending is collapsing.
With the CSO revisions to the December-quarter 2012 real growth estimates (a decline of 0.2 per cent) and the estimated contraction of 0.6 per cent in the first three months of 2013, it is hard to conclude anything else.
This is now 4.5 years of austerity with no sign of improvement and an economy that is now highly dysfunctional.
The most recent (March-quarter 2013) – National Accounts – data for Ireland issued last week (June 27, 2012) by Ireland’s Central Statistics Office continue to paint a very bleak picture.
Consider the following graph which shows the evolution of personal consumption, government consumption and investment (indexed at 100 in the March 2008 quarter peak) to the June quarter 2012.
Investment now has an index number of 41 compared to 100 in the peak quarter March 2008. Both public and private spending have consistently headed in the same direction since fiscal austerity was imposed.
The following graph shows quarterly growth rates in real Gross Domestic Product (GDP) and Gross National Product (GNP) from the first quarter 2007 to the March-quarter 2013. Real GDP declined by 0.6 per cent in the first quarter of 2013 and after declining by 1 per cent in the September-quarter 2012 and 0.2 per cent in the December-quarter 2012 (seasonally adjusted).
So three consecutive quarters of negative real GDP growth.
However, real Gross National Product (GNP) grew by 2.9 per cent in the March-quarter 2013, an increase on the estimated 0.5 per cent growth in the December-quarter 2012.
What does that mean?
First, you need to first understand the difference between GDP and GNP. This is a particularly important point when it comes to understanding the Irish predicament (both before the crisis and now).
You can gain a thorough understanding of these concepts from this excellent publication from the Australian Bureau of Statistics – Australian National Accounts: Concepts, Sources and Methods, 2000
The two concepts are defined as such:
Gross domestic product (GDP) is defined as the market value of all final goods and services produced in a country in any given period”.
Gross National Product (GNP) is defined as the market value of all goods and services produced in any given period by labour and property supplied by the residents of a country.
The Irish CSO publication says that GNP = GDP + Net factor income from the rest of the world (NFI). NFI is defined as:
Net factor income from the rest of the world (NFI) is the difference between investment income (interest, profits etc.,) and labour income earned abroad by Irish resident persons and companies (inflows) and similar incomes earned in Ireland by non-residents (outflows). The data are taken from the Balance of Payments statistics. However the components of interest flows involving banks in this item in the national accounts are constructed on the basis of “pure” interest rates (that is exclusive of FISIM) whereas in the balance of payments the FISIM adjustment is not carried out. There is an equal and opposite adjustment then made to the imports and exports of services in the national accounts which is not made to these items in the balance of payments. The deflator used to generate the constant price figures is based on the implied quarterly price index for the exports of goods and services. In some years exceptional income payments have had to be deflated individually.
In this blog – The sick Celtic Tiger getting sicker – I argued that the so-called “Celtic Tiger” growth miracle was an illusion and was driven by major US corporations evading US tax liabilities by exploiting massive tax breaks supplied to them by the Irish government.
In a New York Times article (May 20, 2010) – Irish Miracle — or Mirage? – by Peter Boone and Simon Johnson, we read that:
… 20 percent of Irish gross domestic product is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies – the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008.
I indexed the national aggregates (GDP, GNP and NFI) at 100 at the GDP peak of the last cycle (December quarter 2007). As at the March-quarter 2013, the GDP index was 90.2, the GNP index was 92.6 and the NFI index was at 77.3 (but there was a sudden plunge in NFI in the March-quarter 2013, which makes the domestic economy look better than it actually is).
The following graph shows the evolution of these indexes between December quarter 2007 and the March-quarter 2013. It is not a model economy.
In relation to the rise in real GNP, the CSO told journalists that the “increase should be treated with caution as it represented profit inflows into Ireland from overseas subsidiaries of companies that had set up headquarters in the country” (Source).
In other words, we cannot interpret that as a bonus for the Irish people.
The following graph shows the quarterly growth in the major spending aggregates since the downturn took hold in Ireland (March quarter 2007).
The CSO reports (comparing the changes in the 12 months to March 2013) that:
On the expenditure side personal expenditure fell by 1.6 per cent and government expenditure declined by 1.8 per cent compared with Q1 2012. Capital investment decreased by 19.8 per cent (due to a large reduction in imported aeroplanes) while net exports fell by €300m in the first quarter of 2013 compared with the corresponding quarter of 2012.
On a quarter-by-quarter basis, personal consumption growth has declined for the last two quarters (plunging in the March-quarter 2013) and remains well below its pre-austerity levels. There is no revival evident in private consumption expenditure.
All those Ricardian Equivalence arguments that claimed there would be a surge of private consumption once the austerity was invoked would seem to be silent well and truly now.
Government spending growth has been aggressively negative although there was a slightly positive contribution in the March-2013 quarter.
Private investment (capital formation) fell dramatically in the June quarter due to the aviation investment. These special airline purchases of leasing companies which use Dublin as a tax haven always distort the aggregate national accounts data.
Investment expenditure is sensitive to these large lumpy items (especially in an economy the size of Ireland) but there is no sign of a major investment-led recovery about to swamp Ireland anytime soon.
Even net exports has been negative for two of the last three quarters. The volume of exports fell in the March-quarter 2013 (by 3.2 per cent), the third negative result in the last four quarters and the sixth in the last eight quarters.
The situation would have been worse had not imports slumped (on the back of declining national income). Imports have contracted for 7 of the last 8 quarters, a truly dismal sign.
The other “arm” of the fiscal contraction expansion argument used to justify the imposition of austerity – the domestic deflation leading to rising international competitiveness and an export-led recovery is also proving to have no merit.
Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
The following Table provides a longer view to see beyond the volatility of the sometimes large capital flows which occur given that there are some very large companies sheltering in the a relatively small nation.
The Table compares real GDP, NFI and GNP for the 12 months to March 2012 with the 12 months to March 2013.
Real GDP fell by 0.5 per cent over the last 12 months compared to the previous 12 month period, while real GNP grew by 3.3 per cent over the same period. Net factor income to foreigners grew by a staggering 16.0 per cent over the last 12 months compared to the previous 12 months.
Ireland’s growth strategy has been based on increasing exports of real goods and services which are a cost to the domestic economy (forgoing local use). Further, any growth dividend is being expatriated to foreigners as rising income.
The only conclusion you can draw at this stage is that the austerity package is further impoverishing the local residents and handing over increasing quantities of Ireland’s real resources to the benefit of foreigners. That doesn’t sound like a very attractive option to me.
The Irish Labour market
If we take the ILO Participation and Unemployment rates (Source) as a reference we can use the total working age population series (15 years and over) (Source) to derive what are ILO consistent estimates of the labour force, unemployment and employment. This allows us to gain deeper insights into the Irish data, which is rarely discussed in the mainstream media.
If we take the fourth-quarter 2007 as our benchmark quarter, given the participation rate peaked at 64.1 per cent, we can track what has happened in the labour market since then – a period which covers the descent into crisis and then the sustained austerity stance (beginning early 2009).
The following Table provides a comparison between the period from the December-quarter 2007 to the March-quarter 2013 (21 quarters) with the 21-quarter leading up to the December-quarter 2007 and demonstrates the stunning turnaround in the nation’s fortunes.
There has been a dramatic slowdown in total population growth since late 2007, a massive shrinkage in the Irish labour force and a large proportion of the jobs gains in the five-years or so leading up to the crisis are gone.
Period
Working age Population (000s)
Labour Force (000s)
Employment (000s)
Unemployment (000s)
2002Q3 – 2007Q4
434.2
412.0
378.8
33.2
2007Q4 – 2013Q1
50.8
-122.0
-305.2
183.2
The Central Statistics Office in Ireland estimates the standardised unemployment rate to be 13.7 per cent in May 2013. Critics of my position have suggested that the rate has fallen from its peak of 15.1 per cent in the March-quarter 2012, which illustrates that austerity is bringing the unemployment rate down.
Well it depends on how you measure things. There are shifts in a number of components that go to make up the official measure. Remember it is a ratio of those who are officially unemployed to the current official labour force. The unemployment rate can fall if the denominator falls less quickly than the pool of unemployed falls due to workers being counted as outside the official labour force.
What would drive that sort of outcome? Exactly what we are witnessing in Ireland since December 2007.
First, there has been a rapidly slowing population growth rate as more and more young Irish workers leave the nation in search of a better outcome.
Since mid-2009, net migration rates have been negative with a dramatic decline in the migration to Ireland and a rise in the migration from Ireland (Source)
In 2006, 83.6 per cent of the total out migration was from persons in the 15-44 year old cohort. There were 36 thousand leaving Ireland in total in that year.
By 2012, the proportion of 15-44 year olds was about the same 86.5 but the total out migration for all groups had risen to 87 thousand.
The main destination for Irish nationals is Australia.
Second, there has been a dramatic decline in the participation rate as workers give up looking for work and become discouraged (hidden unemployed) workers not counted in the official unemployment rate.
These are workers who would start work immediately should a job offer be available but fail activity tests (search) and are excluded from the ranks of the unemployed.
What impact has this effect had?
Ignoring the virtual zero population growth since the December-quarter 2007 (which if we took that into account would produce a much worse situation than follows), the drop in participation from 64.1 per cent to 59.8 per cent in the March-quarter 2013 (and it continues to fall), means that approximately 154 thousand persons have left the labour force as a result of the recession and become hidden unemployed.
These are not including those who have left the country. So the rise in official unemployment has been 183.2 thousand over the period but the rise in hidden unemployment has been not much less at 154.6 thousand (and rising).
That is a better measure of the extent of labour market failure. If we add the two groups together the unemployment rate would currently be around 19.5 per cent rather than 13.7 per cent, as officially measured.
The following graph shows the annual growth in the Irish Labour Force since the March-quarter 1999. It includes the effects of a dramatically slower population rate since 2008 and a sharp (and on-going decline in the participation rate).
The next graph shows what has happened to the labour force and total employment (both indexed to 100 as at December-quarter 2007). The difference between the two lines is the growth in unemployment But, as noted above, this seriously underestimates the impact of the downturn and the subsequent fiscal austerity given the slump in population growth and the collapse in the participation rate.
So there is another “look at the data”! It isn’t rocket science.
Conclusion
In this blog from July 2010 – The Celtic Tiger is not a good example – I noted that Ireland’s growth was coming from the modest growth in the US economy. As the Euro depreciated against the US dollar, Ireland’s exports (pharmaceuticals, software, food and services) became increasingly cheaper and more attractive to its two major trading partners Britain and the US.
Exports were driving Ireland’s growth. I noted then that with the UK economy heading back into recession courtesy of its own government’s austerity mania, that the Irish recovery would soon come to an end.
That prediction continues to be validated by each subsequent data release (once the revisions come in).
Austerity begets austerity and trade is one way that the transmission occurs. There is nothing good that can be taken out of the latest Irish national accounts data.
It demonstrates the pernicious lie that the IMF, the OECD, the EU bosses and the Irish politicians are forcing on the Irish people.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.