The recent release of Irish data on national income and the labour market was reassuring for those of us who have argued that the economy is not as weak as the consensus believes.
We now know that gross domestic product (GDP) growth averaged 11 per cent in the first half of the year, so even a flat second six months would leave annual growth in 2001 at 5.5 per cent. On that basis, a 7.5 per cent forecast does not look as outlandish as it appeared to a few weeks ago.
Some of the media choose to focus on the gross national product (GNP) figures but this is not appropriate on a quarterly basis as it is much more volatile than the GDP measure, reflecting as it does huge swings in multinational flows. For example, GNP slowed to 1.6 per cent in the second quarter, from 15.8 per cent a year earlier, which is surely too big a swing to be credible.
Besides, GDP is the internationally accepted definition of growth, and determines employment and tax revenue, so it is a more appropriate measure of growth, particularly as the Central Statistics Office now captures much more of the multinational flows as service imports and thus as part of GDP.
It is quite likely that GNP growth will exceed GDP growth in the third quarter (5.5 per cent against 4.5 per cent say) and one wonders if GDP will then become the growth measure of choice, as some commentators will have to explain why growth accelerated at a time when the global economy was at its lowest ebb.
One interesting feature of the National Accounts was the trend in consumer spending. This is the largest component of GDP (just under 50 per cent) and so it is difficult to get negative or even zero growth for any length of time if this holds up.
In fact, consumer spending growth has slowed relative to last year but still rose by 5.5 per cent in volume terms in the second quarter, up marginally on the first. This implies that people are saving more in 2001 as it seems clear that personal incomes are still growing strongly.
Pay per head may be rising at around 10 per cent and we know from the recent Household Survey that employment is still growing strongly, up by 48,000 in the year to August, or by 2.8 per cent.
On that basis, pre-tax incomes are rising by around 13 per cent, and if we add in the huge tax cuts included in the 2001 Budget it is clear that disposable income is growing at a heady pace, which would imply much stronger consumption growth than recorded if people were saving the same proportion of income. That is not the case, so the savings ratio has risen, no doubt, partly reflecting the more uncertain global environment.
Another factor could well be the new Special Saving Incentive Scheme (SSIS), which uses taxpayers money to encourage savings.
Paradoxically, this came along at precisely the wrong time, the start of a cyclical downturn, and so may have contributed to it, by encouraging people to save and not spend. Furthermore, the Government has also chosen to boost national savings via the State Pension Fund, which takes revenue from taxpayers and invests it for future generations, which again reduces current consumption.
One final point on the consumer; the introduction of the euro could give a boost to spending this Christmas and to car sales in the New Year as undeclared and counterfeit punts are washed through the economy.
It is impossible to quantify the amount of undeclared cash circulating in the Republic, but research across countries tends to put the size of the black economy at 10 per cent to 15 per cent of recorded GDP. On that basis, one could speculate that the amount of undeclared cash in circulation in the Republic is more than £500 million (€635 million) as total cash in circulation is some £3.6 billion. So some or all of this may be spent in the remaining few months before the Irish pound goes out of circulation.
Indeed, the figure could well be higher if one adds in all the counterfeit money in circulation, which of course will cease to be accepted from February 9th.
All in all, retailers may find that this Yuletide season may well end up as one of the strongest ever, and a welcome surprise given the portrait of the economy painted by the headline writers.
Dr Dan McLaughlin is chief economist, Bank of Ireland
