Compared with the plethora of timely economic data releases in the US and UK, Irish economic forecasters have to operate on a leaner diet of information.
Data releases concerning the Irish economy are far less frequent and not as comprehensive as in the larger economies.
This is not too surprising given the small size of the Irish economy and its very open nature. The relatively very large international trade and financial flows of the Irish economy mean that there are very often measurement problems particularly with regard to profit repatriation and the flows associated with foreign-owned companies operating in Ireland.
GNP (gross national product) takes into account these flows and is now recognised as a better measure of Irish national output than GDP (gross domestic product). Whatever about the statistical niceties it is slowly beginning to dawn on many analysts that the Irish economy has in fact come through the global slowdown in very good shape.
Given the negative tone to much media comment, this may come as a surprise to many and indeed forecasts for economic growth have recently been pared back to GNP growth of only 1.5 per cent for 2003.
In 2002 GNP is estimated to have been virtually stagnant even though GDP grew strongly. Job losses have been associated with the downturn, but there have also been less widely publicised job gains, to result in continued growth in total employment levels. Some sectors of the domestic economy, such as housing, have remained buoyant throughout the downturn.
Compared with average annual growth of over 9 per cent in the 1996-2001 period, the past two years may indeed feel like a recession. However, growth of 1.5 per cent in 2003 will in fact compare favourably with most other European economies.
The Irish equity market has also performed well on a comparative basis in recent years. The market did very well in 2000. This was the first year of the global equity bear market and marked the initial bursting of the technology bubble.
Technology companies are under-represented in the ISEQ and this partly explains the good performance in 2000. However the ISEQ also outperformed in 2001, falling only marginally compared with much larger falls in overseas markets. It seems clear that a significant part of this outperformance was due to the much better growth being achieved in the Irish economy.
Only in 2002 did the ISEQ underperform its international peers and so far in 2003 the market has kept pace with the global equity recovery.
Clearly the excess returns generated by the Irish equity market in recent years are tied to a significant degree to the performance of the Irish economy. This is particularly true for the financial sector where over 50 per cent of profits are generated in the Irish market.
Even for the larger, internationally diversified companies such as CRH and Kerry Group, Ireland still accounts for a not insignificant 15 per cent of profits in both cases. For investors in Irish equities there are reasons to be optimistic regarding the impact of the Irish economy on the equity market in coming years. There is now growing support for the view that a synchronised global economic recovery will be in place by 2004. A better global economy should quickly feed through to the Irish export sector, which should then lead the economy onto a higher growth path in 2004.
The slide in manufacturing employment should be halted, thus enabling overall employment to grow again in 2004. With inflation expected to decline to below 3 per cent, a real rise in incomes should then create some buoyancy in consumer demand.
A return to the super-charged growth rates of the Celtic Tiger era is not on the cards for a number of reasons.
Several years of above-average wage inflation compared with the international average, combined with the stronger euro, has undoubtedly eroded Irish international competitiveness. The widely discussed infrastructural deficit is also proving to be a handicap. Another cloud on the horizon is the emergence of a public sector deficit that could widen to about 1.5 per cent of GDP in 2004.
Demands for better health and education combined with the very expensive benchmarking pay deal mean that public spending will be particularly difficult to control for the foreseeable future. Lower-than-expected tax revenues have been another contributory factor to the widening public sector deficit. But if growth improves in 2004 then this deteriorating trend should reverse.
Although the Irish economy in coming years will be faced with many difficult challenges, the overall medium-term position remains remarkably upbeat.
The economy is capable of growing faster than the European average for many years, and despite the international diversification of many Irish quoted companies, a robust Irish economic performance should continue to be an important support to corporate profitability.
