Negative Growth Returns

Thursday’s Quarter National Accounts release from the CSO have shown that the economy contracted in the second quarter of this year, after recording positive (GDP) growth in Q1.  Technically the economy is not in a recession, but another negative growth figure in Q3 will confirm the ‘double-dip’.

We are now in a position where GDP has contracted for 11 of the last 13 quarters.  Table here.  GDP is now 13.4% below the level seen in the final quarter of 2007.  With one definition of a depression being a 10% reduction in the size of the economy this puts is firmly into that realm. Graph here.
The return to negative growth has been attributed to a number of factors.  Reacting to the release, Minister for Finance, Brian Lenihan said

"The second quarter figures are affected by a spike in imports in part resulting from an increase in royalty payments that depressed the overall GDP figure," he said. “The figures for exports are strong and I am encouraged by this, the necessary competitiveness improvements are working. We must export our way out of our current difficulties, there is simply no other way."

I will return to the exports element of this quote shortly, but let’s begin with the elements that make up the overall GDP figure: GDP = C + I + G + (X – M)

Consumption + Investment + Government + (Exports – Imports)

The Minister’s assertion is that the “spike” in imports has dragged down the GDP figure.  Imports in the second quarter were €32.8 billion (Table 2).  The Balance of Payments Q2 release (Table 2a) shows us that there was €12.0 billion in merchandise imports and €20.7 billion in service imports.  Of this €20.7 billion in service imports, approximately €7.6 billion was accounted by royalty and licence payments to foreign holders of intellectual property rights.  This was indeed a record total for this figure which has risen almost  €2 billion on the Q3 2009 figure but is still only €400 million ahead of the Q4 2008 total.

The seasonally adjusted increase in imports in constant prices from Q1 to Q2 of €1.4 billion (Table 6) is only partially offset by the €0.6 billion increase in the equivalent export figure so it is not unreasonable to suggest that the GDP drop is partially explained by trade changes.
Both Consumption and Government expenditure showed relative small declines of about €50 million each, and there was a surprising €600 million jump in Investment expenditure.  However, investment is still 49.6% below the equivalent Q2 figure from 2007.
And the Minister still hasn’t given up on his ‘turning the corner’ metaphor.

"I agree that these are not encouraging figures but we have moved from a position of a very sharp steep decline to a position where we've stabilised.  That is a turning of a corner that hasn't been seen in very many economies in the world."

As one of my colleagues noted, this feels more like a roundabout!