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Quarterly Economic Commentary, Autumn 2008

7/10/2008

Some of the main findings of the analysis include:

• This Commentary has been prepared at a time when the world's financial markets are in a state of unprecedented turmoil, to a greater degree than at any time since the current spell began. Other economic news within Ireland which has impacted upon our analysis includes disastrous third quarter Exchequer returns and an alarming rise in the numbers on the Live Register.
• Given this background, it is unsurprising that the forecasts in this Commentary contain downward revisions to our previous forecasts. It is also unsurprising that we need to emphasize the uncertainty surrounding the forecasts and the possibility that further downward revisions may be applied.
• We now expect GNP to contract by 1.3 percent in 2008, down from our summer forecast of 0.4 percent. However, it is with regard to 2009 that we have introduced a more severe downward revision. We now expect real GNP to contract by 0.7 percent next year.
• Our forecast for a recession in 2008 is still largely the result of the housing downturn. However, a fall in the volume of consumption is also forecast. For 2009, a downturn in commercial building is expected, along with a fall in the Government's consumption of goods and services. Weak international conditions in both 2008 and 2009 leave little scope for external demand to fill the gap left by falling internal demand.
• Based on figures from the Department of Finance, it appears that the general government deficit will be 5.5 percent this year. Our forecasts include a Budget for 2009 in which this same deficit holds in 2009. It should be noted that even stabilising the deficit will still require severe cuts in spending and tax increases, which will themselves contribute to the economic downturn.
• Employment is expected to fall in 2008 by 14,000 and by 47,000 in 2009. The rate of unemployment is expected to average 6.1 percent in 2008 and to jump further in 2009, averaging 8 percent. The net migratory outflow in 2009 is now expected to be 30,000.
• In our General Assessment, we reflect upon the policy choices available to the Government in the current climate. We argue that the Government should aim to stabilise the General Government Deficit at 5.5 percent of GDP in Budget 2009. This deficit level will imply that the Budget will be among the most deflationary budgets of the last quarter century. Ideally, it would have been preferable for the Government to avoid adding to the downturn through a fiscal contraction. However, given the poor state of the public finances and the uncertainties surrounding the prospects for the economy, we think that the 5.5 percent level is prudent. We also discuss how an increasing tax share may be unavoidable in the medium term, if desired levels of public services are to be maintained.
  

Notes for Editors:

1. The Quarterly Economic Commentary, Autumn 2008, by Dr. Alan Barrett, Dr. Ide Kearney, Jean Goggin and Martin O'Brien (ESRI), will be published online at 9 a.m. on Tuesday 7th October. Please note that the embargo will be until 9 a.m. Tuesday 7th October, and not 00:01 a.m., as is usual.

2. Members of the media are invited to attend a media briefing at 8 a.m. on Tuesday 7th Oct., in the ESRI (Whitaker Square, Sir John Rogerson's Quay, Dublin 2).

3. A paper on the QEC entitled "Macroeconomic Background for Budget 2009" will be presented at the ESRI's "Budget Perspectives 2009" Conference, to be held on Tuesday 7th October, 2008. For details on the Budget Conference please visit the ESRI website.

4. There is one Special Article in this quarter's Commentary entitled "An Analysis of Revisions to Growth Rates in the Irish Quarterly National Accounts", by Patrick Quill, CSO. Please see media release below on this paper.

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Press Release

(Members of the Media should note that Patrick Quill is not a staff member of The ESRI. Whilst this Article has been accepted for publication by the ESRI, the views expressed are not necessarily the views of the ESRI)

Special Article in the Quarterly Economic Commentary, Autumn 2008

An analysis of revisions to Ireland's Quarterly National Accounts shows that relative to the growth rates experienced in the last decade, revisions to quarterly year-on-year growth rates have been in line with international norms. The analysis also shows that there is no systematic bias (positive or negative) in the revisions to these annual growth rates.

These are the principal findings in a paper by Patrick Quill, Statistician, CSO, in the Autumn 2008 edition of the Quarterly Economic Commentary, published by ESRI. The article uses revisions analysis methods developed by the OECD.

The largest revisions to annual GDP growth rates occur between three months and one year after the first estimate. In this period revisions range from - 2.7 to 2.9 percentage points. The mean revision for this period is 0.34. This result is not statistically different from zero.

The mean of the total revisions (between the first and latest estimates) is 0.45. Again this result is not statistically significant. The difference between the first published and latest estimates of GDP growth ranges from - 3.5 to 3.8 percentage points.

The article finds that revisions to imports and exports of goods and services are the main drivers of revisions to GDP growth rates. This reflects the fact that Ireland is a small open economy with combined imports and exports equal to roughly 170% of GDP, a big proportion of which is generated by large multinational enterprises and financial services companies. These enterprises frequently change their trading arrangements and company structures with consequential effects on the reported data, often involving re-statements of their returns for earlier quarters.

The article finds that revisions to GNP growth are much more volatile than revisions to GDP growth. Although again no statistical bias was found to the revisions, the range was greater thanfor GDP. The difference between these two measures is foreign net factor income, consisting mainly of profit flows of large multinational enterprises. The article highlights that early estimates of these profit flows are subject to considerable revision.

Relative to the size of GDP growth, revisions to the quarter-on-quarter seasonally adjusted series are larger than revisions to the year on year series. The mean of the total revisions (between the first and latest estimates) of the seasonally adjusted quarter-on-quarter growth rate is 0.35. This result is statistically significant. This suggests that CSO has tended to underestimate the first estimate quarter-on-quarter growth rates in the seasonally adjusted series.

The author stresses that the results are based on a relatively short series. The Quarterly National Accounts has been published by CSO since 1999. The seasonally adjusted series has been published since 2003. By comparison the UK has published quarterly accounts since 1955 and the United States has published quarterly accounts since 1947.

Link to publication