Is (Government) austerity working?

Slí Eile: Much has been made of the latest quarterly national accounts data issued by the Central Statistics Office last Thursday here. First the good news: Gross Domestic Product (GDP) is estimated to have increased by 2.3% - in real terms - between the second quarter of 2011 and the second quarter of 2010 (Table 1). Hurray. Next, GDP has increased for two consecutive quarters. So, the recession is over? And Government contractionary policies are having a positive impact? I think not. A number of caveats are in order:

1 Quarterly national accounts represent 'latest best estimate'. If you scrutinise a succession of Quarterly accounts as they are released you will spot significant adjustments to older estimates. CSO is obliged to publish Quarterly data within three months of the end of a given Quarter. Many components of estimated GDP (and GNP) are volatile and subject to change as new information become available later on.

2 The components of growth in GDP have been performing very differently (see below).

3 Discretionary hikes in tax rates and cuts in expenditure programmes have impacted but not in a way that stopped 'initial estimates' (CSO's own description) of an increase in GDP.

In relation to quarterly data, many variables need to be considered including seasonal adjustments (which can make a big difference from Quarter to Quarter), swings in the value of physical changes in stocks of goods, estimations of price changes in deflating current price estimates and estimations from balance of payments.

The latest CSO data show two emerging trends:

* a healthy recovery in the estimate of exports; and

* continuing contraction in domestic demand - especially investment

In volume terms exports were up by an estimated 4.9% between Q2 of 2011 and Q2 of 2010 (Table 3). It does appear that much of this was - curiously - in the services area (Table Annex 1 last line) where the year-on-year increase in the volume of services was 7.3% to Q2 of 2011. The other side of the story is what is happening on all the 'domestic' components of GDP. Personal consumption was down by 2.4% of this period while net expenditure by Government was down by 3.3%. Investment was down by a huge 14.3% (much of this is related to building and construction). As a result final domestic demand was down by 4.6% (Table Annex 3A). When adjusted for changes in the value of physical changes in stocks the fall in total domestic demand was 2.2%. Combining data from different tables in the CSO release it is possible to estimate that the total gain in GDP between Q1 of 2011 and Q2 of 2011 (quarter-on-quarter changes) was in the order of 900 million Euro. Other things equal, exports net of imports would have increased GDP by 1.9 billion. However, the components of domestic demand sliced one billion off GDP just in the space of three months. Set against a gain of 1.9 billion, the domestic demand side took it toll of close to one billion. So, we are looking at a twin-track economy - and - unemployment continues to inch up while the real value of consumption falls as more people are made redundant and incomes are still contracting. Its a strange kind of recovery.

Yet, one should be positive about the growth in exports. It would be interesting to have more data on how this growth breaks down - which sectors, what markets and how. Changes in commodity prices, currency shifts and changing cost structures as well as new product lines and services are relevant considerations. It is little wonder that Ireland inc is prepared to fight to the bitter end for our 12.5% corporate tax. Sentiment, confidence about the future and sticking to low corporate taxes is seen as a sine-qua non for securing continuing growth in the foreign direct investment sector and its export performance. But is it sustainable morally (as a form of tax-cheating and avoidance to the detriment of developing countries), politically (EU) and economically (as the BRIC countries rise and rise)? Somehow Ireland inc needs to discover and invent a wider range of tactics going forward. Of course, a huge unknown going forward is what is going to happen to world trade and, therefore, exports from Ireland. All the best current downwardly revised GDP growth plans may yet come to ruin if the world is faced with a double-dip slump.

And what of Government contraction here in Ireland? All the evidence to date indicates that cumulative fiscal austerity since the Autumn of 2008 has added to contraction in domestic demand, rising unemployment and a continuing investment slump. The latest CSO release provides no evidence that this is not still the case. If the theory and practice of such austerity is expansionary fiscal contraction, recovery in consumer and investor confidence and higher levels of competitive performance on world and domestic markets there is little to prove that slash and burn has delivered anything other than further contraction leading to further slash and burn.

Readers might find the following IMF working paper of interest here. IMF is not a monolith and the authors of this paper (Ball, Leigh and Loungani) propose a more prudent, measured and timely approach to fiscal consolidation linked to more growth-friendly and jobs-friendly strategies. They also point to the deep equity impacts on wage-earners of fiscal contraction with reference to empirical studies over 173 episodes in 17 advanced economies over 30 years.