Thursday, March 24, 2011

What happened to current price GDP?

Here’s another one from today’s Quarterly National Accounts release from the CSO.  There seems to have been a huge difference in the current and constant price measures of GDP.

GDP at Current and Constant Prices

We can see that a gap between these series emerged in the latter part of 2008 as deflation dragged the current price GDP series down faster than the current price series.  This gap stabilised in the middle of 2010 and it appeared that the period of price deflation was beginning to unwind – at least this is what the Consumer Price Index shows.  See here.

So what on earth happened in Q4 2010 that caused such a huge fall in current price GDP?

Current price GDP for 2010 at €153.9 billion was 3.6%  below the €159.6 billion recorded for 2009.  The Q4 2010 quarterly current price GDP of €36.9 billion was 4.7% below the same figure in 2009.  In seasonally adjusted terms the Q4 current price GDP was down an incredible 6.4% on the Q3 figure.

It is hard to explain the large difference between the quarterly growth rate of current price GDP and constant price GDP.  Here are the quarterly changes for each component of GDP.

Quarterly Changes

There are some differences but nothing sufficient to account for the 4.3 percentage point difference in the overall growth rates.  It may be due to the chain link process that is used to create the constant price index which is carried out independently on each element.  So maybe the questioned shouldn’t be “what happened to current price GDP that it fell by 6.4%” but instead should be “what happened to constant price GDP that it only fell by 2.1%”.

The current price series is additive and adding the changes of the individual components does give a change of –6.4%.  The constant price series is not additive but adding the effect of the better changes (that is, better than the current price series) in investment, government, exports and imports to the worse change in consumption would have given a drop in current price GDP of 4.5%. 

This sort of gap between current and constant price GDP changes would be reasonable enough in a time of deflation.  Consumer price deflation was beginning to unwind towards the end of 2010 (post here) so that is not a viable reason.  It seems we’ll have to leave this to the stats techniques employed by the CSO.  The same happened to GNP but the effect was not as visually dramatic.  See graph here.

Finally, when looking at the growth rates of the individual components it is interesting to note the big jumps in consumption expenditure.  This should not be taken as the consumer getting back into the market.  The final quarter (and particularly the run-up to Christmas) is the most important time of the year for retail sales. 

The seasonally adjusted figures take account of this expected bump.  On a seasonally adjusted basis current price consumption fell by 0.9% compared to Q3.  In constant prices the fall was only 0.1%.  This is largely borne out by the retails sales index which shows that both the value and volume indices were falling in the last three months of the year.  See post here

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