Jim Power
IRISH DATA UPDATE
Economy comes back strongly: Data and personal observations. A good news story with at least one sting in the tail
As we prepare for Budget 2022, which will be delivered on 12th October, the path of the economy and the public finances will have a significant bearing on what the two ministers will be in a position to deliver, and indeed what they might need to deliver on budget day. Not surprisingly, as the economy opens up, we are seeing a strong rebound in economic activity across many fronts and strong growth in tax revenues, which suggests that an expansionary fiscal package is not warranted, and the focus must be on measures to address the key problems in society such as housing, law and order, and inequality. Of course, it will also be essential to ensure that incentivising work and effort is encouraged, and that those sectors who have suffered most damage from COVID-19 restrictions are given as much support as possible. The wind down of the PUP is essential, as many employers in some sectors are finding it very difficult to get staff at the moment.
There is now clear evidence that people are out and about again spending money, travelling and generally trying to resume their ‘normal’ lives. There have been many suggestions that COVID-19 would fundamentally change the way people live their lives. I was always sceptical about such notions, and I do believe the evidence is bearing this out. Many people are striving to get back to their old lives as quickly as possible, although there are of course some aspects that we will seek to avoid.
At a broader societal level, there are of course some things you would want to change, such as traffic. The hope might have been (it certainly was my hope) that people would think more carefully about the need to sit in the car and engage in unnecessary travel, and where possible, walk, cycle or take public transport. This is certainly not happening, and since the schools have re-opened in particular, traffic volumes have picked up in dramatic fashion, and air pollution and traffic congestion evident on my early morning walks in suburban Dublin. Imagine what it will be like when the weather moves into winter mode and when many workers return to the office. I shudder to think. In the context of the whole climate debate and the associated virtue signalling and blame game, people really do need to focus on their own behaviour and do what is possible in the greater good.
Q2 2021 QUARTERLY NATIONAL ACCOUNTS
The CSO has just released data for economic activity in the second quarter of the year. The release makes for pleasant reading and whether one looks at the data on a 2021 quarter 2 compared to quarter 1 basis, or on a quarter 2 2021 compared to quarter 2 2020 basis, a strong recovery in activity is evident.
No surprises there because quarter 2 2020 was the worst quarter of Covid impact, and so the year-on-year comparisons will be exaggerated. Likewise, given that there was a significant resumption of many activities as the second quarter of 2022 progressed, the growth rates are also exaggerated. Lots of dates and time periods might serve to confuse, but the bottom line is that the overall economy is coming back strongly.
A number of things stand out in the second quarter data.
Quarter-on-Quarter
· GDP in the second quarter was 6.3% higher than the previous quarter, GNP was 6.7% higher, and Modified Domestic Demand, which strips out the multi-national distortions, was 8.4% higher.
· Both the multi-national and the indigenous components of the economy expanded strongly in the second quarter. Multi-national dominated sectors saw growth of 3.7% in output compared to the first quarter, and indigenous sector output increased by 2%.
· The indigenous components had been most adversely affected by COVID-19 restrictions, so as the economy opens up, there is naturally a strong rebound in indigenous activity, particularly construction output and consumer expenditure. This will be more pronounced in the third quarter.
· The multi-national component of the economy has been in strong growth mode for some years now. The CSO reports that in the pharmaceutical sector, API manufacturing, biologics manufacturing, bulk dose manufacturing, R&D and global business operations are all contributing strongly. In the ICT component, software licencing, web-enabled services, product R&D, software development, software distribution and product localisation are all contributing.
· IP activity was low in the second quarter, so we are not seeing the usual data distortions.
Year-on-Year (Annual Growth)
· In the second quarter, GDP was 21.6% higher than a year earlier and GNP was 15.8% higher.
· If we consider the first half of the year, GDP in 2021 was 16.3% higher than the first half of 2020, and GNP was 9% higher. Modified Domestic Demand (a measure of indigenous activity) increased by 4.3%.
· To consider current levels of activity with pre-Covid levels, GDP in the first half of 2021 was 20.8% higher than the first half of 2019, and GNP was 12.6% higher. This suggests a very strong growth performance despite Covid, but the reality is that this growth was driven by the exceptionally strong performance of the multi-national sector. The indigenous component of the economy fared a lot less well. Modified Domestic Demand in the first half of 2021 was still 3.5% lower than the first half of 2019.
Components of GDP (Q2 2021)
Source: CSO, Quarterly National Accounts, 2nd September 2021.
In overall terms, the dual nature of the Irish economy is becoming more evident every quarter, but at least the domestic economy is now back in growth mode, but there is still some catching up to be done.
All in all, it is a good news story and the future looks positive. As a point of interest, Central Bank data just released for July show that household deposits increased by €13.4 billion or 11.2% in the year to July, to reach a new record high level of €134 billion. This is a lot of potential purchasing power coming back into the economy and the housing market, but of course the distribution of those savings is very skewed towards those who continued to earn during Covid, while those households who were most exposed to Covid restrictions will have slipped further behind. This has significant implications for all forms of consumer expenditure and the housing market. These will be matters of considerable interest in Budget 2022.