Friday, July 13, 2012

The Return of the Domestic Economy?

Yesterday’s release of the Q1 2012 Quarterly National Accounts by the CSO has generated a slew of conflicting news stories.
Of course, these stories focus on different measures from the release.  As is well known
GDP = C + I +G + (X – M)
The RTE story leads with the overall real GDP figure while the emphasis in The Irish Times headline is on the domestic components of GDP (C + I + G) which says:
THE DOMESTIC economy grew for the first time in two years in the first three months of 2012, according to figures published accidentally yesterday on the website of the Central Statistics Office.
Yesterday’s figures on the economy show that domestic demand grew by 1.5 per cent between the first three months of 2012 and the final three months of 2011.
Domestic demand includes spending by consumers, the Government and companies. It excludes exports and imports.
The 1.5% figure can be seen in the bottom right corner of Annex 3B on page 12 of the release.  Domestic demand in 2010 prices was nearly €40 billion in Q1 2007.  This has fallen by around a quarter and at the moment quarterly domestic demand is around €30 billion.  This is made of €20 billion Consumption expenditure, €6 billion Government expenditure on goods and services and €4 billion of investment.  Here are the quarterly real changes in these for Q1 2012 which were covered in more detail in a second piece in The Irish Times.
  • Consumption: –2.1%
  • Government: + 2.2%
  • Investment: +11.6%
Consumption is the largest and most important component of domestic demand and this fell by 2.1% in the quarter.  This was the largest seasonally adjusted fall since Q1 2009.  Government expenditure on goods and services actually rose by a similar percentage but because G is more than three times smaller than C its effect was quite small.

The reason for the rise in Domestic Demand in Q1 was the 11.6% jump in investment.  The 1.5% rise in Total Domestic Demand was equivalent to rise of €453 million.  The 11.6% rise in Investment was the result of a rise of €469 million.

The growth in the domestic economy was entirely driven by a rise in Investment.  So what did we invest in?  It is hard to see an increase in confidence and sentiment in the domestic economy visible that could explain such a jump in investment.  That would be because the rise in investment had very little to do with what would be considered the domestic economy.  We bought large airplanes! (weight > 15,000kg)

In the first three months of 2012 Ireland imported 29 large aircraft worth €1.4 billion.  This can be seen in point 790.42 on page 189 of the March Trade Statistics.  We imported 25 aircraft worth just over €1.3 billion from the US with another 3 aircraft worth €70 million coming from Brazil.  This compares to 20 aircraft worth €1 billion in the first three months of 2011 and just 3 aircraft worth €80 million in the final three months of 2011.

The seasonal adjustment of the data will account for some of the large difference between Q4 2011 and Q1 2012 but there was still a €400 million increase between the start of this year and the same period last year.
From the trade data, these aircraft imports will feed through to Investment in transport equipment in the Domestic Demand data.  Investment did jump in Q1 2012 but it was because aircraft leasing companies based in Ireland bought some aircraft rather than any real improvement in domestic economic conditions.  As this story shows this distortion of domestic demand figures is going to continue.

Absent this propping up by aircraft leasing companies it is likely that Investment would have registered a similar change to Consumption, i.e. a drop.  Yesterday’s release does not herald the return of the domestic economy.


  1. Seamus, fair play for going through the in-depth March results.

    Quick question, can those aircraft imports be recorded as both I (investment) and as M (Imports)?

  2. @ Rob

    Yes, but they won't necessarily be counted as equal value in both. A consumption example is probably best to show this. If someone buys a product for €100 this is added to nominal GDP via the total for consumption. However, if this product was imported at a cost of €80 then the 'value-added' in Ireland is €20 and the €80 cost is subtracted from GDP through imports. So this product appears in both the Consumption and Imports figure in GDP.

    The same will happen with these large aircraft. When they are imported to Ireland they are included in the import figures and then they are counted as an increase in the capital stock through Investment.

    As has been pointed out elsewhere one thing that dragged the GDP figures down was the 4.9% jump in imports in the quarter. Depending in the type of imports this is not necessarily a bad thing as the imports will feed through the system via consumption, investment and production.

    If the imports are replacing domestically produced goods it would not be good as there would be no net increase but if they are coming in for additional consumption, production and investment it will be a good thing.

    Looking at Annex 1 in the release it seems that most of the increase in imports was due to goods with a slight drop in service imports. Unsurprisingly, given the big jump in large aircraft imports from Q4 2011 to Q1 2012 the increase in goods imports is explained by an increase in imports of Producer Capital Goods. Imports of Consumption Goods and also Materials for Production both fell in the first quarter but in the absence of seasonally adjusted numbers it is hard to tell how significant that is.

  3. Many thanks for the reply.

  4. Good to see critique in the world of economics. Something sorely lacking - especially in the era of the so-called Celtic tiger - amongst mainstream economists