The Party’s Over

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The latest GDP data were a disappointment. The world economy recovered a little around the middle months of this year. And some surveys suggested that, despite austerity, this meant Irish GDP growth recorded in the second quarter would be a bit stronger than the outturn of +0.4%. Worse, as Michael Taft points out, GNP actually contracted by the same amount in Q2.

The economy is still 9.5% below its previous peak at the end of 2007. Any talk of recovery is therefore entirely misplaced.

But it is strange that while we are halfway through the sixth year of the Irish Depression there remain a number of myths regarding the causes of the slump. One of the most prevalent of these is that the entire preceding boom was driven by solely by a housing bubble and that its bursting is unavoidably the main factor in the subsequent crash.

The chart below shows the real output of the different sectors of the economy since the beginning of the Depression. Building and construction is shown in yellow. Clearly it has contracted sharply, almost to nothing. But is also clearly not responsible for the entirety of the slump.

MB1

In fact this real measure of changes in output shows that building and construction has not even registered the largest decline in output. The table below shows the change in output of the different sectors of the economy.

 

Change in Real Output from Q4 2007 to Q2 2013, €bn

MB2

Industry has clearly contracted more in terms of real output than any other category and is nearly responsible for half of the total fall in output. The total for the services category is somewhat misleading as this includes rent, which has continued to rise throughout the slump.

In addition the base date may be misleading. Q4 2007 is when output (and the economy) peaked in aggregate. But categories such as services and public administration peaked later, while others peaked earlier.

It is widely known that building and construction began to contract before the economy as whole. From this it is assumed that the collapse in building activity led the recession. But this is factually incorrect.

Building & construction peaked at the beginning of 2007, three quarters before the economy as a whole. But both transport & distribution as well as industry excluding construction peaked even earlier, in Q2 2006. The chart below shows the two separate categories building & construction (left-hand scale) and transport & distribution (right-hand scale). Both the scope and timing of the earlier fall show that it was a contraction in components of output which are responsible for the crisis, not building & contruction.

MB3

Why does any of this matter, so long after the event? Because the widespread tendency to focus on the housing sector as the cause of the crisis (not even construction as whole) obscures an important truth. It was a broad-based decline in industrial output and associated declines in transport and other industries that have driven the slump. They fell earlier and further than the building slump.

The ignorant and complacent notion that ‘we all partied, and now the party’s over’ does not identify the real cause of the crisis and is therefore unable even to conemplate a solution to it.

The Irish economy is suffering a broad-based fall in output which no amount of bailing out the creditors of property speculators and those who lent to them can correct. Output is declining. Under austerity, the Irish economy isn’t working.

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One Response

  1. Seanán Kerr

    September 30, 2013 3:59 am

    I appreciate the first graphic was not just pulled out of thin air, but I’m baffled as to how the loss of some 170,000 jobs in construction since 2007, is accounted for in that tiny yellow sliver in the first image.