You would have to have some sympathy with the economic forecasters in the Central Bank. No doubt a few weeks ago they were polishing their growth estimates for this year and next, when the extraordinary Central Statistics Office data was published revising last year's GDP growth forecast to more than 26 per cent. When the official figures are so far departed from reality, how on Earth do you predict what might happen next?
Economic forecasting was always a dangerous game, but the Central Bank economists will be conscious that a movement of a fleet of aircraft or a patent for intellectual property either into or out of Ireland could send the data sharply up, or down, again.
Lucky dip
Forecasting Irish GDP is now a game of lucky dip. As such the bank’s forecasts might be seen more as indicators of what is happening in the underlying economy, rather than estimates for what the actual GDP figures will show. And that is before you even get into discussing the enormous uncertainties caused by Brexit and their potential impacts on growth.
As the Central Bank says, we need a new system for measuring economic activity. This would at least help in domestic policymaking. However, the problem would remain that the headline GDP figures will still have to be compiled using the international rule book, and our compliance to various European Union rules relating to the debt and deficit will still be influenced by this. There is a lot for the high-level committee of Irish public servants which is to examine this issue to think about.
Far-reaching implications
The Central Bank’s latest report puts the dilemma neatly when it says Irish national accounts data “now include a very significant amount of activity carried out elsewhere, but formally recorded as part of GDP and GNP”.
Why this has happened has already been examined after the figures: for example, it appears that a few big companies which established headquarters here in 2015 have contract manufacturing conducted on their behalf across Europe, and that the rules oblige Irish statisticians to count this as part of our GDP.
As the bank points out, the implications are far-reaching, including having no proper gauge of the sustainability of budget policy. To judge whether a budget should add or subtract cash via tax and spending measures, or how sustainable the public finances are, you need a proper measure of the size of the economy and its growth rate.As of now, we have neither. We are driving in the dark, with – at best – our sidelights on.
Brexit-related slowdown
What reliable indicators we have suggest the economy is continuing to grow at a healthy enough rate. The Central Bank estimates the underlying growth rate of the domestic economy last year was 5 per cent.It suggests that this measure of our domestic economy might grow by about 4 per cent this year, slowing to 3 per cent in 2017.
This forecast of a slowdown is largely Brexit-related, and the bank says there are risks that the fallout from the British vote could hit us harder. The impact of these things on sentiment is very hard to calculate. It also cautions that the big surge in corporation tax revenue, due in part to companies basing their headquarters here, could quickly reverse.
It all adds up to the need for some caution in Government budget policy. For the years ahead, if “real” growth does hold up at about 3 per cent, then the Government’s longer-term economic and budget forecasts should be okay. If the potential “downsides” identified by the bank appear, then this will change.
Data devalued
How we will measure economic success or failure is another thing altogether. It remains to be seen whether the mess with the 2015 figures was a once-off or part of an ongoing story. Either way, the official GDP and GNP data is now completely devalued – and as of now we have nothing to replace it.
