Economic growth is the increase in the volume of stuff produced by the economy in a year. Growth matters because when economies grow the welfare of some, if not all, in the economy gets better.
Countries with large levels of debt can also use the proceeds of growth—increased taxes for example—to repay some of the debt burden. When looking to see whether to lend to a country by buying its sovereign debt, a key indicator the bond markets will look at is Ireland’s expected rate of growth. Countries that grow can repay. Countries that don’t grow won’t get lent to.
Politicians imagine they can control the rate of growth in an economy by a variety of policies: lowering wages, increasing productivity, decreasing rents on capital, decreasing income taxes, and more.
But growth itself is not a policy, nor is it something that can be controlled. For a small open economy like Ireland, we could be consuming and investing away, the government can be spending more and more each year, but were there a collapse in the economy of a major trading partner, say the UK, and we would most likely be in a recession.
Economists generally use a single measure of economic growth called gross domestic product, or GDP, to compare growth between countries and for the same country over time. GDP is the sum of all the private consumption, gross fixed capital formation, government expenditure on goods and services, and net exports in a quarter or a year. Last year Ireland’s GDP was just over 161 billion euros.
Based on the GDP measure, and taking account of price changes, the economy grew 0.7% in the fourth quarter of 2011 relative to the same quarter the year before, after 1.9% and 0.2% expansions in the previous two quarters. So the Taoiseach can claim when talking, for instance, to an international audience at a banking conference on March 22nd: “The economy returned to growth in 2011 for the first time in four years, with exports of goods and services reaching new highs.”
Why did this growth return? Because exports went up, and yes, profits from companies domiciled in Ireland went up, but this isn’t a good measure of the Irish economy. The domestic economy—the bit of the economy you and I actually live in--shrank, dramatically, and across the board. So why did the growth statistic go up?
We have another measure of growth. It’s called gross national product, of GNP. GNP is a much better measure of the Irish economy, because it strips out the influence of the multinationals on our economy.
Based on the GNP measure, and taking account of price changes, the economy shrank 7.1% in the fourth quarter of 2011 relative to the same quarter the year before.
It is best to use GNP rather than GDP in the Irish case, since Ireland is a base for foreign multinationals that declare profits in Ireland for tax reasons. As such its net income from foreign sources and its foreign debts are outsized.
Remember I said that Ireland’s GDP was 161 billion euros? Without the influence of the multinationals on the Irish economy, Ireland’s GNP was 129 billion euros in 2011. A 32 billion euro difference is nothing to sniff at. The graph below shows the difference in the changes in quarterly GDP and GNP from 2010 to 2011.
Figure 1. GDP and GNP in Ireland, % change, Source: Department of Finance.
This chart shows ‘growthiness’ writ large. Growthiness isn’t actual growth in the economy—it’s something that seems a lot like growth – the growth that we want to exist. If there isn’t growth, then it will be harder (and more expensive) to find people to lend to us at the end of 2014.
Let’s not go for growthiness. The domestic economy is contracting thanks to a series of contractions in consumption and government expenditure. Arguing about whether this is the right or wrong thing to do at this time is beyond this column. My point is very simple: let’s use the right measure when we talk about the nation’s recovery, and not the one that suits us.
Hi Steve,
This is one I have been trying to tease out myself. I agree that GDP is not wholly reflective of the Irish economy but I'm not sure that GNP "trips out the influence of the multinationals on our economy."
The influence of the multinationals on changes in GNP is even greater than the impact of them on GDP. The primary influence of the MNCs on GDP is net exports. The influence of the MNCs on GDP is net exports AND net factor income from abroad (NFIFA). MNC decisions on either exports or profit repatriation can influence GNP.
In 2009 the top ten MNCs accounted for one-third of both imports and exports. The decisions in a tiny numbers of companies can have very large impacts on our national income statistics.
And this seems to be what happened towards the end of 2011. In Q4, real SA GDP fell 0.2% while real SA GNP fell 2.2%. The fall in GNP was much larger but I'm not sure that this is reflective of a further deterioration in the domestic economy.
Domestic demand (C + I + G) is in both GDP and GNP so that cannot explain the difference. In fact C + I + G rose in both real and nominal SA terms in Q4. There were seasonally adjusted quarterly rises in Consumption and Investment. Net Exports (X - M) is also in both GDP and GNP so that can't help. It's all down to NFIFA.
In nominal terms NFIFA went from -€8.3 billion in Q3 2011, to -€7.6 billion in Q4. However the real SA data show a change from -€8.0 billion to -€8.7 billion. It is clear that the seasonal adjustment technique used by the CSO expects a much greater drop in NFIFA than the €0.7 billion recorded, so in seasonally adjusted terms they actually reported a €0.7 billion increase in the outflow.
GNP fell because of this change in the MNC sector. The MNCs can increase their profit repatriation out of the country but, as they do the vast majority of their trade abroad, this is not necessarily at the expense of Irish people. They do not put their hands into our pockets to send more money out of the country. They bring it in from somewhere else first.
It is hard to see that the profits repatriated by MNCs in one quarter reflect the profits earned through exports in that quarter. Profits repatriated now may have been earned some quarters ago, they may even have been earned in a different year.
It would be great if we had an indicator of the "Irish" economy rather than the "economy in Ireland" but I don't think we have one. Total domestic demand did fall 3.0% in real terms in 2011 (2.7% nominally) but this excludes the net export performance of indigenous Irish companies. Reading Ireland's national accounts is not easy!
There was a short dust up on this in the Apr 18 Vincent Browne. Steve Keen was there. The 7% GNP drop came up with lots of oh no can't be, must be a seasonal......
Hi Seamus, Hi MikeB,
Seamus, the issues you're raising are actually properties that all national indicators have, in particular ones derived from aggregated national accounts. The quarterly financial accounts, also developed by the CSO and Central Bank, can be really useful in pulling some of these issues apart I think.
Hi Steve,
You're absolutely right. I tried to draw attention to the non-financial accounts published by the CSO a few weeks ago. The post attracted 11 replies. You can can guess how many were actually about the figures produced!
http://www.irisheconomy.ie/index.php/2012/04/16/the-household-sector-in-aggregate/
There wasn't much interest in an indicator that says aggregate disposable income of the household sector in Ireland fell by just 0.4% in 2011 and that aggregate earnings actually rose slightly in 2011. It can't be. We're doomed you know!
We're *always* doomed. Must send you some of the INET stuff we've been working on actually, it achieves some of this synthesis.