The latest picture of the economy from the Central Statistics Office (CSO) is one of an economy chewing its cud, rather than grazing new pastures. On a more positive note, there are two senses in which economy is moving back towards balance. Data released by the CSO yesterday show economic growth continues at a healthy clip and that we continue to run a deficit on the current account of the balance of payments.
Comment on the rate of economic growth tends to focus on the size of the that growth. Of course size matters. But so do composition and quality. Growth data for the first half the year was seriously imbalanced. Investment (or gross domestic fixed capital formation) grew annually by around 11 per cent. Personal consumption grew by five per cent and government expenditure grew by around half that. Net exports fell by around 12 per cent. The latest figures show some convergence in the growth rates of these components in the third quarter, although growth in the economy remains imbalanced.
The economy's productivity performance remains poor. What growth there is comes from extra people working in construction and existing people spending more money. This adds value to the economy. But productivity measures value added to the economy as a proportion of effort put into it.
Employment continues to shift from activities that generate much value-added for a relatively small amount of effort (such as manufacturing), towards activities that generate less value per effort (such as construction). According to CSO sources, spending on repairs and maintenance - probably undertaken in anticipation of SSIAs being cashed in - are one possible development driving employment and investment growth. Exports ceased to be a source of growth about two years ago when our cost of living and resultant wage growth began seriously affecting our competitiveness. Consumption continues to grow, with backing from lending growth.
The second aspect of balance relates to the current account on the balance of payments. This measures flows of income in and out of the economy. The deficit on this balance reflects several influences. The net movement of goods remains outwards and there is a corresponding surplus on the merchandise trade balance. But we continue to import more services than we export and the net flow of incomes from individuals, corporations and investment vehicles remains negative.
A deficit on the current account of the balance of payments is not necessarily unhealthy. But in the first two quarters of the year the deficit ballooned, largely as people bought over 100,000 cars. In the third quarter some moderation returned to the size of the deficit. It is a temporary reprieve. The deficit should balloon again in the first three quarters of next year as SSIAs are turned into new cars and other imported goods.
