The Return of the Domestic Economy?

Yesterday’s release of the Q1 2012 Quarterly National Accounts by the CSO has generated a slew of conflicting news stories.

• RTE: CSO’s figures show Irish economy shrank 1.1% in the first quarter
• Irish Times: Domestic economy expands for the first time in two years

Of course, these stories focus on different measures from the release.  As is well known

GDP = C + I +G + (X – M)

The RTE story leads with the overall real GDP figure while the emphasis in The Irish Times headline is on the domestic components of GDP (C + I + G) which says:

THE DOMESTIC economy grew for the first time in two years in the first three months of 2012, according to figures published accidentally yesterday on the website of the Central Statistics Office.
Yesterday’s figures on the economy show that domestic demand grew by 1.5 per cent between the first three months of 2012 and the final three months of 2011.
Domestic demand includes spending by consumers, the Government and companies. It excludes exports and imports.

The 1.5% figure can be seen in the bottom right corner of Annex 3B on page 12 of the release.  Domestic demand in 2010 prices was nearly €40 billion in Q1 2007.  This has fallen by around a quarter and at the moment quarterly domestic demand is around €30 billion.  This is made of €20 billion Consumption expenditure, €6 billion Government expenditure on goods and services and €4 billion of investment.  Here are the quarterly real changes in these for Q1 2012 which were covered in more detail in a second piece in The Irish Times.

• Consumption: –2.1%
• Government: + 2.2%
• Investment: +11.6%

Consumption is the largest and most important component of domestic demand and this fell by 2.1% in the quarter.  This was the largest seasonally adjusted fall since Q1 2009.  Government expenditure on goods and services actually rose by a similar percentage but because G is more than three times smaller than C its effect was quite small.

The reason for the rise in Domestic Demand in Q1 was the 11.6% jump in investment.  The 1.5% rise in Total Domestic Demand was equivalent to rise of €453 million.  The 11.6% rise in Investment was the result of a rise of €469 million.

The growth in the domestic economy was entirely driven by a rise in Investment.  So what did we invest in?  It is hard to see an increase in confidence and sentiment in the domestic economy visible that could explain such a jump in investment.  That would be because the rise in investment had very little to do with what would be considered the domestic economy.  We bought large airplanes! (weight > 15,000kg)

In the first three months of 2012 Ireland imported 29 large aircraft worth €1.4 billion.  This can be seen in point 790.42 on page 189 of the March Trade Statistics.  We imported 25 aircraft worth just over €1.3 billion from the US with another 3 aircraft worth €70 million coming from Brazil.  This compares to 20 aircraft worth €1 billion in the first three months of 2011 and just 3 aircraft worth €80 million in the final three months of 2011.

The seasonal adjustment of the data will account for some of the large difference between Q4 2011 and Q1 2012 but there was still a €400 million increase between the start of this year and the same period last year.
From the trade data, these aircraft imports will feed through to Investment in transport equipment in the Domestic Demand data.  Investment did jump in Q1 2012 but it was because aircraft leasing companies based in Ireland bought some aircraft rather than any real improvement in domestic economic conditions.  As this story shows this distortion of domestic demand figures is going to continue.

Absent this propping up by aircraft leasing companies it is likely that Investment would have registered a similar change to Consumption, i.e. a drop.  Yesterday’s release does not herald the return of the domestic economy.