Notes on the Front

It would really help if some analysts took the time to read the reports they comment on. Take the EU Commission’s recent Spring Forecast – there was a titter of excitement that the EU revised upwards its projections for Irish growth (from its Autumn Forecast published before the last budget). Surely this, along with recent Exchequer returns, Live Register figures and the Retail Sales Index, shows that not only have we troughed, but we are back into growth mode. QED: the government’s policies are working.

However, beneath the GDP headline figures, the EU’s projections should give us some concern for worry. We’ll come back to the GDP numbers but let’s do a brief tour of other important economic indicators.

GNP: The Domestic Economy

The EU actually revised GNP growths downwards – and their projections for this year make for depressing reading. In 2010, the EU is projecting the GNI (GNP plus EU net inflows) will decline by -2.8 percent, compared to -2.6 percent prior to the last budget.

The same for 2011: the EU revised GNI downwards, coming in below the Government projections. This is part of the emerging two-tier economy narrative; a growing multi-national sector whose exports, which are neither tax-rich or job-rich, are driving GDP. But take away the repatriated profits and we find growth in the domestic economy falling behind.

Investment

The EU revised downwards their 2011 projections for investment. Whereas pre-budget they estimated investment to grow by 5.1 percent, they now project a 4.2 percent increase.

Consumer Spending

Once again, the EU revised downwards 2011 projections for consumer spending. Pre-budget, they estimated private consumption to rise by 2.1 percent. Now, they’re projecting 1.4 percent.

Employment and Unemployment

We’re still in downward territory. Regarding employment, the EU projected an increase of 0.7 percent prior to the budget (or about 14,000 net job creation). Now they’ve reduced this to 0.4 percent (or about 8,000 jobs). The ESRI has gone further, projecting no employment growth at all in 2011 (the Government is banking on 20,000 net job creation).

This resulted in the EU revising their unemployment projection upwards from 13.2 percent to 13.4 percent.

Wages

Don’t be surprised: the EU has revised wage growth downward. Prior to the budget, they estimated that compensation per head would rise by 1.1 percent. Now they project a 0.8 percent.

GDP

So let’s return to the GDP figure that commentators seized on as vindication of the Government strategy. Yes, the EU revised it upwards, based primarily on revising export growth upwards – from 3.7 percent to 4.3 percent. But there are two major caveats which were referred to in the three-page country summary.

First, projected GDP was calculated on the basis of ‘no-change’– no-change in the Government’s fiscal policy. While the EU acknowledged the Government’s proposed fiscal adjustment of €2 billion, or 1.2 percent of GDP, they didn’t factor this in since the Government has not declared where this adjustment will be achieved (taxation, public spending). However, the EU did state:

‘Depending on the specific consolidation measures that are eventually implemented, a dampening effect on domestic demand cannot be excluded.’

In other words, the EU may revisit their GDP figures (and other indicators), depending on which deflationary option the Government alights on.

Second, the EU projected an increase in Government consumption of 2 percent in 2011 (public sector payroll, purchases from the private sector, etc.). This is an extension of the ‘no-change policy’ formula regarding the fiscal adjustment mentioned above. However, the Government has made it clear it intends to cut its consumption in 2011 by -0.5 percent. This will impact on overall GDP growth.

Factoring in this cut (and this is only my own back-of-the-envelope job) the EU may have to revise their GDP growth downward by about 0.3 to 0.5 percent.

The point is that the EU, in its commentary, made it clear their GDP growth projection was provisional and based on only partial information.

To conclude, the EU revised most of the major economic indicators downwards but you won’t find this mentioned in most, if any, commentary. The one figure that commentary did seize on – GDP – was provisional only. In any event, a big story – the divide between the multi-national driven portion of the economy and the domestic economy (the GDP/GNP divide) – was totally missed.

When analysts don’t actually read the report they’re commenting on, or don’t get it, or gloss it over, or just plain ignore it (because it doesn’t fit the prevailing consensus) – well, no wonder we’re in the mess we’re in.

Because the debate is in a mess.