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The lost decade is over: Our 7.8% GDP growth last year was comfortably the highest in Europe

The bigger picture is certainly bright; the challenge is to better use the fruits of economic growth to improve living standards, writes Victor Duggan.

Victor Duggan Economist

LIKE A SUNNY spell sandwiched between snowstorms, the number crunchers at our Central Statistics Office published their own blizzard of economic data recently.

The headline numbers are nearly too good to be true: at 7.8%, GDP growth last year was comfortably the highest in Europe, and ahead even of India, which has leap-frogged China as the fastest-growing big economy in recent years.

Strong growth helped generate nearly 1,300 new jobs per week during 2017. This meant that by the end of the year the total number of people in work was within touching distance of the two-and-a-quarter million peak hit in late-2007. Cue cries that the lost decade is over. These are neither lies, nor damned lies: just statistics.

GDP is still benchmark

For all its imperfections, GDP is still the benchmark for comparing the size and growth rates of one economy versus another. If you divide the size of a country’s economy by the number of people living there, it is still a fairly good – if blunt – indicator of the average standard of living.

A country with significantly higher GDP per capita is very likely to have a better average standard of living. Irish and Indian GDP might both be growing at nearly 8% per year, but Ireland’s GDP per capita is more than 30 times higher than India’s.

Even when you take account of the fact that the cost of living is lower in India, Ireland’s GDP per capita is still more than eight times larger.

Irish GDP distorted

But, because Ireland is relatively tiny on a global scale, and has a massive multinational sector, Irish GDP is among the most distorted in the world, and therefore less reliable as an indicator of living standards.

To be fair, Irish economists have fixated on this point for decades, while the CSO themselves last year started publishing adjusted GDP figures, known lovingly by us economics geeks as ‘GNI star’.

Basically, this strips out some – but certainly not all – of the distortions, notably including aircraft purchased by our world-leading leasing industry but which may never even land in Ireland.

So, what does GNI* have to say for itself?

By this measure, the Irish economy is about a fifth smaller than suggested by the GDP figures, and grew only half as quickly. But, even 3.9% growth is not to be sniffed at. It would still be enough to put Ireland near the top of the European league table.

Some economists prefer to look at only the goods and services we consume as a better guide to economic health, since they are the part of GDP (or GNI*) least distorted by the multinational sector. Consumption increased by half as much again, or 1.9%.

For most people, it doesn’t really matter which of these measures you use, because they only indirectly impact on the things that matter most: whether you have a job, how much you earn, and everything else that makes life worth living.

An impressive job performance

Firstly, the jobs numbers are hard to argue with. As the ranks of the unemployed are gradually thinned, it is not surprising that the rate of jobs growth dipped slightly, from 3.8% in 2016 to 3.1% in 2017.

This is still a very impressive performance, and will be enough for the country to see its highest ever number of people at work in modern times by mid-2018 if this momentum is maintained.

Of course our population is larger now than it was a decade ago, which takes the shine off the headline number. This is part of the reason why unemployment is still above 6%, having spent most of the early years of the century below 5%. Still, this is down from the 2012 peak of 16%.

Tackling long-term unemployment can be particularly tricky. So, the fact that one in three people in this category found jobs during 2017 marks excellent progress.

Wage growth

Secondly, wage growth is starting to accelerate. 2.5% growth in the final three months of 2017 meant that average earnings were nearly €18 higher than a year earlier. That’s also five times the rate at which consumer prices are rising, so purchasing power is on the rise.

Tax changes in the budget will have given pay packets another boost when they kicked in in January. With the economy powering ahead – no matter how you measure it – and unemployment continuing to slide, wage growth should continue to accelerate, although price rises are likely to pick up too.

Thirdly, and perhaps most importantly, there is more to life than money. Having a decent income is certainly an important determinant of well being, but it may matter little if you or your family don’t have a secure roof over your heads or if you can’t access affordable, high-quality healthcare.

Unsurprisingly upbeat

Last week, the OECD rolled into town to deliver its periodic assessment of how our policymakers are doing, and what they can do better. Given the positive economic backdrop, the general tone of their 2018 Economic Survey of Ireland was unsurprisingly upbeat.

We are also a happy bunch overall, they report, but we have serious worries about housing, healthcare, water quality and – despite recent progress – jobs.

The OECD didn’t pull their punches when it came to health and housing. With an election looking increasingly likely before the end of the year, these will be two hot-button issues for voters.

Two-tiered health service

They zeroed in on inequalities in our two-tiered health service, noting that those without private health insurance face waiting times for standard procedures among the longest across 35 OECD countries.

Noting that Ireland is one of the few OECD countries without universal health coverage for primary healthcare, they recommended the government move in that direction by implementing Sláintecare, the cross-party Oireachtas report on reforming our health system.

Housing

On housing, Ireland’s failure to reboot supply to meet growing demand is highlighted as a factor behind the surge in homelessness, particularly in Dublin. The OECD also notes that concerns about housing affordability may deter inward FDI or the return of Irish nationals living abroad.

As well as stepping up efforts to boost supply, the Organisation also recommends introducing a site value tax to encourage better land use.

The bigger picture is certainly bright; the challenge is to better use the fruits of economic growth to improve living standards by investing in universal healthcare and social housing. In short, a lot done, more to do.

Victor Duggan is an economist.

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Victor Duggan  / Economist

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