No time to lose the head on economy ahead of Budget 2017
GDP in the second quarter was 4.1% ahead of the second quarter of last year and GNP was up by 4.6%.
While these growth numbers, in themselves, are strong, they are nothing like as strong as the 2015 numbers or, indeed, the first quarter numbers.
My response following the July release was one of shock and embarrassment for Ireland, and I suggested that the GDP and GNP growth metrics are pretty meaningless in a real sense and that it is much more appropriate to focus on some of the key components of growth. My view has not changed.
Personal consumer expenditure on goods and services in the second quarter was 1.8% ahead of last year and in the first six months of the year was 3.5% ahead.
These are strong numbers, but it is worthy of mention that expenditure in the second quarter was 0.5% lower than the first quarter, on a seasonally adjusted basis.
This slowdown has not come as a surprise, as all of the indicators of consumer behaviour have been pointing towards some loss of steam in recent months.
The consumer numbers are very real and are very believable and easily explained, but not so with another important component of growth — gross domestic fixed capital formation or, in other words, investment spending.
This component showed year-on-year growth of 21% in the second quarter. This strong growth number is due to growth of 113% in ‘intangibles’, which is basically multinationals moving items such as patents and intellectual property rights into Ireland.
However, this movement of intangibles reflects itself in a concomitant increase in imports, so the net impact on growth is nullified.
Exports of goods and services in the second quarter were 3.9% ahead of the same quarter last year, and in the first six months of the year, were just 3.8% ahead. This does represent a marked slowdown on recent years. No major surprises there, as the impact of sterling’s sharp decline since last November has started to become apparent in Ireland’s recent monthly merchandise trade statistics with the UK.
It is the case that, from quarter to quarter, growth numbers tend to be volatile and jump about, but in Ireland’s case the volatility is obviously magnified by the activities of the multinational sector.
Notwithstanding these reservations, the underlying picture painted in the first half of the year is one of solid growth, but there are also clear indications that growth has lost some modest momentum in recent months. The Brexit effect has been an important driving force, particularly in terms of the impact on consumer and business confidence, and exports.
If one accepts that growth has lost some momentum and that Ireland’s corporation tax situation is now coming under more intense scrutiny following the Apple ruling, Irish policymakers need to tread carefully.
Various EU officials have made it quite clear, this week, that the EU is not in any mood to countenance what they clearly regard as nefarious tax behaviour by large multinationals.
Whatever the rights and wrongs of the Apple ruling (incidentally, I still believe that the Government should not have appealed the ruling), the reality is that Ireland’s tax treatment of multi- nationals will increasingly come under intense scrutiny over the coming months. This is not good news for Ireland.
In recognition of these realities and indeed many others, it is imperative that Irish policymakers maintain a steady hand on the economic policy tiller.
Budget 2017 must be extremely prudent and populist notions, such as grants for first-time buyers, must be eschewed. It is also imperative that the exorbitant wage increases being sought by Dublin Bus unions, which could quickly escalate into a free-for-all, should be resisted.
Our underlying or real economic recovery remains fragile and it would be utter lunacy to revert to type and allow the economic bus career out of control again.
