Is it time to welcome the Celtic Tiger mark two?

It has been a while since I ventured across the Irish Sea to take a look at the economy of the Emerald Isle so let me put that right today. After all they can be considered part of an economic tour of the Rugby World Cup after looking at the UK,France and New Zealand earlier this week! Also Irish rugby fans may be wondering exactly what zero inflation means as they try to book accommodation? From the Irish Independent.

“The hotel price increases in Cardiff are the most extreme we have ever reported for an event in the UK,” said Denise Bartlett from Trivago. “The average in Cardiff for all match nights is £574/€789, which is 140pc more expensive than a night in London during the Rugby World Cup.”..Rates in Cardiff have been similarly expensive for October 11, when France clash with Ireland in the city (£927/€1,275 on average)

Strangely enough there still seems to be plenty of rooms available…

Economic growth surges

This was so strong that we need to remind ourselves that the numbers below are not annualised and are for just one-quarter. From the Central Statistics Office.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.9 per cent for the second quarter of 2015.  Growth in GNP also increased by 1.9 per cent in this quarter.

If we look for a driver of these numbers it was a surge in investment.

Capital formation increased by 19.2 per cent compared to the previous quarter.

Also it showed that austerity and economic growth can be bedfellows.

while government expenditure decreased by 0.7 per cent over the same period.

The annual figures were also extraordinary although they also highlighted one of the key issues in the Irish economy.

The factor income outflows recorded in Q2 2015 were €1,026m higher compared with Q2 2014 resulting in the 6.7 per cent increase in GDP becoming a 5.3 per cent increase in GNP over the same period.

Again investment was to the fore and unlike quite a few countries production was strong..

On the expenditure side, Capital investment rose by 34.2 per cent…..The Industry sector (including building and construction) and other services both increased by 4.4 per cent.

Oh and perhaps an old stereotype has seen its day.

Agriculture, forestry and fishing decreased by 1.2 per cent compared with the same quarter of 2014,

So overall the picture for GDP was rather aptly described by U2.

It was a beautiful day
Don’t let it get away
Beautiful day

The outlook is good too

The services sector remains very strong as readings in the 60s for a Purchasing Managers Index are relatively rare beasts.

The headline PMI was little changed at 62.1 (versus 63.4 in July) while across the individual components of the survey we see clear indications that Irish services firms remain upbeat on the prospects for the sector.

The picture for manufacturing has slowed but we are not a lot wiser as it has been proved spectacularly wrong in the credit crunch era.

The headline PMI slowed to 53.6 from July’s 56.7, although the sequence of growth now extends to 27 months.

What about unemployment?

Like quite a few Euro area countries Ireland saw its unemployment rate elevate well into double-figures so let us see how this has been influenced by the growth spurt.

The seasonally adjusted unemployment rate for August 2015 was 9.5%, unchanged from the July 2015 rate and down from 11.1% in August 2014. The seasonally adjusted number of persons unemployed was 206,500 in August 2015, an increase of 400 when compared to the July 2015 figure or a decrease of 32,200 when compared to August 2014.

Wages?

The picture here is not one which will set Irish eyes smiling as on the surface it looks okay.

Preliminary estimates show that average weekly earnings were €697.52 in Q2 2015, a rise of 1.8% from €684.97 a year earlier.

But now take a look at this.

In the five years to Q2 2015 overall average hourly earnings decreased by 0.5% (€0.10) from €21.95 to €21.85.

This hides quite a shift as the IT sector saw a 15.9% rise but health and social work saw a 7% fall.

So a recovery but one that so far has lacked any wage growth for the employed group as a whole. Not quite a wage less recovery but one without wage growth.

Inflation

On the headline measure there isn’t any to be found.

Prices on average, as measured by the CPI, remained unchanged in August compared with August 2014.

Actually Ireland was way ahead of the disinflation theme that has been hitting the rest of the world as in essence there has been no inflation there for some time. I am exaggerating a little but it has totalled some 2.3% since 2011 and 6.8% since 2006 so below 1% per annum.

Thus real wages have fallen by a lower amount than in the UK where the Bank of England recklessly “looked through”  inflation pushing above 5% per annum in 2011 leading to sharp falls in real wages. Most commentators lauded this and are consequently silent about the consequences.

House Price Inflation

The picture here could have been included in my house price bubble analysis of yesterday.

In the month of July, residential property prices rose by 0.9% nationwide.  Residential property prices remained up 9.4% on an annual basis……In Dublin residential property prices rose by 0.7% in July.  Dublin residential property prices were 9.0% higher than in July 2014.

Before we start mimicking a Eurovision entry and singing “Boom,bang a boom” we need to remind ourselves of this.

At national level residential property prices were 36.9% lower than their peak level in 2007.  Dublin house prices were 36.3% lower than their peak, Dublin apartment prices were 40.6% lower than their peak and Dublin residential property prices overall were  37.9% lower than their highest level.

Now here’s a thing as we need an expert on relativity like Albert Einstein to tell us where we are! Let me illustrate from the house price series for Dublin which was set at 100 in January 2005 boomed to 133 as soon as 2007 and busted to 57.3 in July 2012 and as of July this year was 83.5.

Oh and the turnaround coincided exactly with the Bank of England’s Funding for (Mortgage) Lending Scheme. Did it? Could it? Maybe to some extent although of course there was also the trillion Euros of the ECB LTROs applied in early 2012.

What about the public finances?

The situation here saw perhaps the most extreme of all as the national debt to GDP ratio of less than 25% saw around 100% added to it as private banking debt was socialised and the Irish economy struggled. Now we see the benefit of economic growth coming through.

Ireland’s General Government Gross Debt (GG Debt) at face value stood at €203,624 million or 104.7% of annualised GDP at the end of Q1 2015,

However some care is needed as the deficit goes on.

Ireland’s General Government Deficit (GG Deficit) amounted to -€2,687 million in the first quarter of 2015 representing -5.4% of quarterly GDP.

So a different aspect of austerity to that noted earlier. If I was involved in setting examination questions for Masters degree economic I would ask if this is austerity or Keynesianism?

The ECB

This is of course buying Irish government bonds right now as part of its QE (Quantitative Easing) program. Some 4.4 billion Euros worth so far in an economy growing at over 6%. In examination terms I would simply say discuss?

It also means that Ireland can borrow extremely cheaply. From the NTMA yesterday.

10 September 2015 – The National Treasury Management Agency (NTMA) has today completed an auction of €1,000 million of the benchmark 15-year Irish Government bond, 2.4% Treasury Bond 2030, at a yield of 1.8157%.

Comment

Firstly let me welcome the advent of the Celtic Tiger 2.0 and the economic growth it has brought. The growth is so fast that I am reminded of another U2 song.

I’m at a place called Vertigo (dónde estás?)

I note another potential exam question posed yesterday by Roel_D

So is anyone going to revisit the Iceland vs Ireland discussion?

However we also need to note the fact that the housing market and the economy seem to be in tune again which if history is any guide would have the Starship Enterprise on yellow alert. Also the gap between GDP and GNP was 14.5% in the second quarter of this year which relates to the company equivalent of “residential non-doms” (Google for example) where there is some genuine economic activity but much larger transfers of money which leave Ireland as soon as they arrive. It affects the trade figures too.

Oh and whilst Ireland is in the Euro area and it threw off the shackles of UK rule a long tome ago now its economic pattern is very similar to ours.

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13 thoughts on “Is it time to welcome the Celtic Tiger mark two?

  1. “Agriculture, forestry and fishing decreased by 1.2 per cent compared with the same quarter of 2014,”

    Is this not an artefact of how GDP is calculated? If oil prices go down then agricultural prices can drop (since most agriculture is dependent on oil – for every calorie of food value we get out we have to put in more than 10 in the form of petrol and other oil-derived chemicals to support modern yields) and their contribution to GDP with them. So actual production of food, wood, and fish (in tons) may not have gone down at all, surely? Likewise, the numbers of jobs in this sector may have increased, decreased, or done nothing notable.

    I’m asking because the whole focus on GDP that we get in economic news seems to me to be very difficult to relate to how people experience their economic lives, particularly when looking at sectors which are so directly affected by oil price changes and comparing them with sectors which are more weakly coupled.

    Cheap oil is good for us (ignoring environmental issues) because it means cheap food, but if that drives GDP down that’s bad? Is that right?

    • Hi TW and welcome to my corner of the web.

      The numbers for GDP and sectors of it that I have quoted are in real terms so they should allow for price changes. If you go through my back catalogue on here you will see that I pose plenty of issues for the way that inflation is calculated and therefore have my doubts about the accuracy of such calculations.

      As to Irish agriculture forestry and fishing then the output in 2015 so far is up around 5% on 2009 so that gives a general picture.

      With the swings in beef prices I have to say that I would have expected more variation but maybe it has evened out over time.

      “Cattle numbers were up by 37,400 (+0.5%) to 6,963,500” (June 2015)

      Oh and Andrew Baldwin has given you quite a comprehensive reply below on the statistical back ground.

  2. Hi Shaun,

    Excellent article as always.

    A quick question. I’ve been reading a few comments on expected UK growth projections averaging 2.4% and why this is unlikely where we are coming to the end of the current economic cycle, but also on why some of the UK’s major structural problems are also likely to impact this. Are Ireland making similar projections of 6% between now and 2020 or are they being more conservative?

    Ireland’s and the UK’s sovereign debts are in the same ballpark, it is going to be interesting to see which is the higher by 2020 with Ireland’s higher growth rates.

    • Hi Rods and thank you

      Moodys published it latest rating on Ireland last night ( Baa1 still but the outlook was raised from stable to positive) and told us this.

      “Looking ahead, Ireland’s economy has the potential to grow by 3-3.5% on average per annum over the next three to five years, given its openness to trade, competitive export sector with a large multinational presence in high value-added sectors, and favourable demographics with a growing and highly skilled workforce.”

      I like the favourable demographics bit as it of course goes the other way in hard times as the Irish emigrate in them! This is the critique of both the Irish and UK forecasts as a recession never figures and as you say one is becoming due.

      The Central Bank of Ireland feels a little behind the times though.

      “GDP is now expected to expand by 4.1 and
      4.2 per cent in 2015 and 2016, respectively.
      This upward revision to the forecast relative to
      the previous Bulletin (0.3 and 0.5 percentage
      points) is driven by a stronger contribution from
      domestic demand while the outlook for external
      demand remains broadly unchanged. Similarly,
      GNP growth is expected to be marginally
      stronger than previously forecast this year and
      next, at 4.2 and 3.8 per cent.

  3. Great blog, Shaun, as usual. With regard to the British shackles that used to bind Ireland, the Irish CPI and the UK RPIs used to take the same limited payments to measuring owner-occupied housing (OOH). The UK wisely moved to an accounting approach in 1995, including a depreciation component in the RPI. Although it is inferior to the kind of broad payments approach John Austin and Jill Leyland favour for their Household Inflation Index, it is still probably the best approach for an upratings index used in any official consumer price series today. If the Irish index were just a regional index for the UK, and not that of a sovereign country, it would have moved in lock step with the reform of the RPI, and the Irish CPI would be showing more inflation than it is today. Perhaps now that the Irish have a decent residential property price index its Central Statistical Office will make a move in that direction.
    With regard to TW’s comment on the agriculture, forestry and fishing sector in Ireland, the Irish pioneered in calculating real value added using double deflation, led by the great Irish economist Roy Geary. Under double deflation gross output is deflated by a gross output deflator, intermediate inputs by an intermediate inputs deflator and the difference is real value added. Such a method will not in any way take account of decreases in the price of petrol or other intermediate inputs, as TW believes it should. To my mind, Geary’s method is entirely appropriate. However there is certainly a case for deflating value added by a single deflator as well, which would adjust real value added for gains in terms of trade by the agriculture sector due to the declining cost in petrol or other factors. This would appear to be one of the glaring weaknesses in the ESA2010 standard for the European National Accounts. While it has prescribed a method for calculating changes in terms of trade for GDP by expenditure category that is at least acceptable, it has not recommended anything similar for GDP by industry or real value added measures. (By the way, Roy Geary was also one of the pioneers in calculating terms of trade adjustments. He did a lot.)

    • Hi Andrew and thank you

      You reply reminded me that I had not seen any OOH (NA) numbers for Ireland so I scanned the CSO website for any mention and have failed to find any. I will email them later to see what plans they have if any on this front.

      On the subject of housing inflation I had a wry smile as I looked at the detail as mortgage interest was a -8.9% influence over the past 12 months which is no surprise with ECB QE of 60 billion Euros a month. But rent rises running at 8.9% per month are motoring….

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