Here’s another one from today’s Quarterly National Accounts release from the CSO. There seems to have been a huge difference in the current and constant price measures of GDP.
We can see that a gap between these series emerged in the latter part of 2008 as deflation dragged the current price GDP series down faster than the current price series. This gap stabilised in the middle of 2010 and it appeared that the period of price deflation was beginning to unwind – at least this is what the Consumer Price Index shows. See here.
So what on earth happened in Q4 2010 that caused such a huge fall in current price GDP?
Current price GDP for 2010 at €153.9 billion was 3.6% below the €159.6 billion recorded for 2009. The Q4 2010 quarterly current price GDP of €36.9 billion was 4.7% below the same figure in 2009. In seasonally adjusted terms the Q4 current price GDP was down an incredible 6.4% on the Q3 figure.
It is hard to explain the large difference between the quarterly growth rate of current price GDP and constant price GDP. Here are the quarterly changes for each component of GDP.
There are some differences but nothing sufficient to account for the 4.3 percentage point difference in the overall growth rates. It may be due to the chain link process that is used to create the constant price index which is carried out independently on each element. So maybe the questioned shouldn’t be “what happened to current price GDP that it fell by 6.4%” but instead should be “what happened to constant price GDP that it only fell by 2.1%”.
The current price series is additive and adding the changes of the individual components does give a change of –6.4%. The constant price series is not additive but adding the effect of the better changes (that is, better than the current price series) in investment, government, exports and imports to the worse change in consumption would have given a drop in current price GDP of 4.5%.
This sort of gap between current and constant price GDP changes would be reasonable enough in a time of deflation. Consumer price deflation was beginning to unwind towards the end of 2010 (post here) so that is not a viable reason. It seems we’ll have to leave this to the stats techniques employed by the CSO. The same happened to GNP but the effect was not as visually dramatic. See graph here.
Finally, when looking at the growth rates of the individual components it is interesting to note the big jumps in consumption expenditure. This should not be taken as the consumer getting back into the market. The final quarter (and particularly the run-up to Christmas) is the most important time of the year for retail sales.
The seasonally adjusted figures take account of this expected bump. On a seasonally adjusted basis current price consumption fell by 0.9% compared to Q3. In constant prices the fall was only 0.1%. This is largely borne out by the retails sales index which shows that both the value and volume indices were falling in the last three months of the year. See post here.
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Thanks for picking up on this. It has been a source of confusion to me as to why there is such a large difference. I'd pegged deflation as the cause, but, as you say, Q4 CPI was +0.1% (on some basis or other).
ReplyDeleteI've been using current prices to reference growth, as I think constant prices are dangerous in a time of deflation, overstating growth. As we're in a common currency, Irish deflation is not really giving us a boost, just as Irish inflation didn't give us an excuse to raise prices and wages during the bubble.
Is this a reasonable position to take or just irrational pessimism? I haven't been able to get anyone to bit on either IrishEconomy or thepropertypin!
Hi yogan,
ReplyDeleteI can't really pin it down either. It's a very dramatic break in two series that have been very well correlated for a long time. They mightn't always have moved by the same amount but they generally moved in the same direction. The difference in Q4 was very noticeable.
I think current prices are important as a measure of real activity. The recent period of deflation in Ireland would have pulled down nominal GDP but the level of activity would not have fallen as much. I do think the deflation will give us a boost. Surely we must fair better in a comparison to the UK now with their 5.5% rate of inflation? For how long will they be able to say that we are "very expensive"? I would favour using constant price GDP as the better measure of what's happening in the economy.
The big role for nominal GDP is in debt/GDP ratios as the denominator is current price GDP. This unexpected, and unexplained, drop in nominal GDP will push up our debt and deficit ratios. As these are now targets this is an important consideration. Remember last year when the CSO revised 2009 GDP downwards by about €3 billion in June? This was part of the reason for the jump to a €6 billion adjustment in the Budget.
I wouldn't be as pessimistic as you and would follow more closely the trends in seasonally adjusted constant price GDP. Retailers, and others, of course, work off nominal figures but I think the level of activity gives us a good indication of the changes occurring.
Thanks for the response. I accept what you're saying about debt:GDP. I don't see any way round GDP, in general, falling back towards GNP (as the pressure comes to limit transfer pricing).
ReplyDeleteWhat worries me about deflation/inflation adjustment to GDP is the components of it. Wages haven't really come down that much. There's lots of imported commodity price inflation, but there's still lots of imported finished goods deflation.
So my concern is that there's 'embedded' decline in the real figures that will come out at a time when the domestic economy is growing. This would be bad for confidence (real confidence, like!). Mind you, that is the opposite of what we've seen!
Hi Seamus,
ReplyDeleteLove the blog. Most informative by a long way. Why aren't you on VB or PT.
Where does this leave the projections of the DOF in the national recovery plan and the IMF in the extended arrangement.
DOF projections were €157.3 million.
For the IMF it was €156.6 million.
The CSO data indicate our nominal GDP is €153.9 million. This puts DOF and IMF projections out significantly already. It is unlikely that CSO revisions will bring it in by €2.7b - €3.4b. Surely this is a worry, especially with regards our debt.
Hi Anon,
ReplyDeleteThanks for kind words.
As you say this has some implications for the four year plan, particularly the debt ratios. The DoF have estimated the 2014 nominal GDP will be €184.5 billion. The 2014 deficit (2.8%)and debt (100.0%) ratios use this as the denominator.
We can now compare the actual outturn of 2010 nominal GDP (€153.9 billion) to the forecast used as the starting point in the four-year plan (€157.3 billion).
If we assume that nothing else will change and apply the DoF forecasts of real growth and inflation and use the just published figure as the initial point we get an estimate of 2014 nominal GDP of €179.0 billion. This assumes the only downside to the DoF forecasts were the 2010 projections (and these were made in October 2010!).
Anyway this new estimate of 2014 nominal GDP brings the predicted deficit to 2.9% and the debt ratio to 102.5%. These are not huge changes but if the EU/IMF deal holds it is the existing targets that will have to be met, i.e. the new figures mean that additional adjustments (expenditure cuts and/or tax increases) will have to be made to ensure that the 2.8% budget deficit target is met by 2014.
In the context of the planned €9 billion of "adjustments" over the 2012-2014 period this only means an additional €100 million is required. But this is after just one data point has been revealed. If there are further undershoots of GDP forecasts then the cumulative effect of these could be substantial.
The forecast level of unemployment for 2011 is 13.2%. The shock from the latest QNHS was that unemployment finished 2010 at 14.6% and with no forecasted increase in employment we may be doing much as we are now in 12 months time.
To be honest, I wouldn't put as much store as the above might indicate into individual estimates from the plan. As the saying goes "the plan is nothing, but planning is everything". I think we have to plan to get the budget deficit under control. We know it won't we down to 3% by 2014. The target of the new government of 2015 is also likely out of reach. What is important is that we are taking the appropriate steps to get there. Hopefully lower than expected nominal GDP figures along the way will just be be a speedbump on the road that means it takes a little longer to reach the destination.