Ireland exposes the flaws of using GDP as an economic measure

Firstly let me welcome you all to what is already being called MayDay in the UK as it will see our second female Prime Minister. However as I noted yesterday there has been quite an event in the world of economic measurement that has occurred across the Irish Sea and it is something which has taken place in spite of all the “improvements” that were made with the ESA 10 changes. Indeed more than a few of you may be wondering if someone has been indulging rather too liberally in one of the boosts to GDP (Gross Domestic Product) that it brought namely the addition of illegal drugs such as cocaine.

The Financial Times summarised it thus.

That is the highest level of growth for decades and far outstrips the original estimate of Irish economic activity last year, which the official Central Statistics Office had put at 7.8 per cent. A growth rate of more than 26 per cent is nearly three times the highest level recorded during Ireland’s Celtic Tiger boom years in the early 2000s.

To be precise the annual rate of growth was revised upwards to 26.3% with the first quarter of 2015 being the main culprit as it recorded economic growth of 21%. It was only on the 22nd of last month that I pointed out that the Irish economy was doing well so here is the comparison with what we were previously told.

Preliminary estimates indicate that GDP in volume terms increased by 7.8 per cent for the year 2015.  GNP showed an increase of 5.7 per cent in 2015 over 2014.

As you can see 26.3% is the new 7.8%! This of course was quite a rate of economic growth in itself. Also we should not move on without considering the point that this is treble the rate of growth claimed in the Celtic Tiger boom which of course ended in a painful bust.

There is another consequence of all this and let me explain with something else from the 22nd of June.

In 2015 GDP was 203.5 billion Euros and GNP (Gross National Product) was 171.9 billion Euros.

I was using this to explain a problem I will return to in a moment. But you will get my point if I tell you that the new revised 2015 GDP is 243.9 billion Euros and the new 2015 GNP is 194 billion Euros. So they are 20% higher and 13% higher respectively! Let us just remind ourselves that this is for the year just gone and consider the scale of this when sometimes changes in GDP growth rates as small as 0.1% are debated and indeed forecast.

The gap between GDP and GNP

This has been a regular topic on here concerning Ireland.

The difference is that a lot of businesses in Ireland are non-domiciled there and send the money home. They want to take advantage of the low corporation tax rate and other benefits but do not consider it to be home. As you can see it is a big deal.

The difference is that the “big deal” as I called it has just got a lot bigger. The gap was previously reported as 31.6 billion Euros and is now 49.9 billion Euros. But this is only part of the story as GNP rose by 18.7% itself in 2015.

An Inflation Problem

We are regularly told that there is no inflation in the Euro area and consumer inflation in Ireland has been close to zero for some time. Thus you will not be surprised to note my eyes alighted on these inflation measures. The deflator for GDP rose by 4.9% in 2015 and the deflator for GNP rose by 4.5%. So if Ireland had its own monetary policy and used the widest inflation measure of all for monetary policy then it certainly would not have an official deposit rate of -0.4%!

Care is needed as consumer inflation is a significant part of the GDP deflator (24% in the UK for example) but is far from all of it. The catch is that as I look elsewhere I see few signs of the difference. For example we know that there is some services inflation around but if we look it falls well short of what we are told.

Services prices in Quarter 1 2016, as measured by the experimental SPPI, were on average 1.5% higher in the year when compared with the same period last year.

Actually services inflation was a fair bit higher early in 2014.

There was a burst of inflation in the output price index for manufacturing early in 2015 as the annual rate rose to 9.5% but by the end of the year this had faded. But we have a problem as you see output is recorded as much higher and it seems to have done so accompanied by higher prices! If only we could all do that…….

Ch-ch-changes

This came in the world of net trade so let me take you back to where we thought we were only a few short months ago.

Import growth during the year of 16.4 per cent outpaced that of exports at 13.8 per cent.

I pointed out back then that Ireland was doing its bit for world and European trade. However that story has expired also and been replaced by a new version.

On the expenditure side of the accounts exports grew by 34.4% between 2014 and 2015 (Table 6, at constant prices). Imports increased also, by 21.7%, over the same period.

So as you can see there was an exports surge and in fact rather than helping demand in other nations Ireland in fact has increased its own current account surplus. So export led growth for it but not so good for its trading partners as we observe yet another large change.

The revised current account surplus for 2015 was €26,157m, an increase of €22,954m on 2014.

The current account surplus is now on its way to 15% of GDP. So is it Ireland that has used a lower exchange rate to boost its exports in the same way as Germany? That point is a little tongue in cheek but there is a point to it.

Manufacturing

I did point out that there was a potential issue with prices being higher whilst output also surges. As the surge in prices was taking place then quarterly exports of merchandise trade rose from 30.1 billion Euros to 46.5 billion Euros. Apart from the obvious question of how this happened without the official statisticians noticing there is a lot which requires investigation here. The national accounts do provide a clue of sorts.

Industry (including building) advanced by 87.3% ( in 2015)

That happened without anybody noticing it for quite a while.

Comment

Let me now bring in some of the factors which have been at play here. A lot of aircraft leasing activity takes place in Ireland. This has been booked as an increase in assets and therefore GDP. An explanation has been provided by Colm McCarthy on the Irish Economy website.

There are roughly 750 commercial passenger aircraft on the Irish register for April 2016. The number actually based at Irish airports and serving Irish traffic is only about 100. Ryanair registers all its 340 aircraft here but only 10% are based at Irish airports.

There is debate over the numbers but not the principle. Also it appears that factors such as the patents of international firms have been booked in Ireland and counted in GDP. Did I say firms as this from the Central Statistics Office might mean one firm?!

As a consequence of the overall scale of these additions, elements of the results that would previously been published are now suppressed to protect the confidentiality of the contributing companies, in accordance with the Statistics Act 1993.

Even the Governor of the Central Bank of Ireland is concerned by this according to the Irish Times.

The Irish Times has learned Prof Lane met the CSO on Monday and made known his concerns that the GDP growth figures do not accurately reflect economic activity in Ireland.

Please do not misunderstand me I think that the Irish economy is growing as there are other measures such as the rise in employment. But the sad part is that we now have very little idea of at what rate! Rather ironically Ireland will be paying more to the European Union because of all of this and because of money it may never see. At first I thought that it would be based on the rate of growth for net national income which was a more subdued 6.5%. However I have rechecked my notes and it is Gross National Income which is used for the major part of EU contributions and that rose by 18.7%. But it is time to hear from Marvin Gaye one more time.

Oh, what’s going on?
What’s going on?
Ya, what’s going on?
Ah, what’s going on?

Meanwhile I did point out on the 22nd of June that other measures pose questions as to the whole narrative.

Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

As the television series Soap used to tell us “Confused? You soon will be!”

Oh and as Claus Vistesen points out

Bonkers … it will likely lead to an upward revision of EZ GDP growth of 0.3pp in 2015. That’s 1.9% then, punchy

 

 

 

 

 

Advertisements

15 thoughts on “Ireland exposes the flaws of using GDP as an economic measure

  1. GDP has been broken for a while

    I guess Ireland has more sex and drugs trade now…….

    Dont the Dutch have the same issue ? lots of throughput but very little actual revenues to pay for government

    Forbin

    • Hi Forbin

      Yes the Irish situation is a relatively extreme case ( related to its corporate tax levels) but the issues are at play elsewhere. As to the Dutch there is an issue of double-counting on the trade which goes through its ports known as the “Rotterdam Effect” At least the trade physically goes through it though….

      i hope you got plenty of popcorn in as there must have been a Trading Places style weather report.

  2. How are Irish tax receipts doing? With all this growth and income, the Irish state should be awash with cash, so that they can pay the extra contributions to the EU, because of increased GDP.

    • LoL!

      if the GDP fall – do they then pay less ?

      Forbin

      PS: Greece must be paying very little or getting a rebate now….

  3. Hi Shaun,

    So … if we slash Corporation tax to near zero we can attract businesses to register from overseas, thus massively increasing GDP but not necessarily increasing the tax collected. Add that to the increased activity in the Drugs & Hookers index, re-invest the £350 million a week saved by Nigel the Brave and all of a sudden things don’t look so bad after all.

    Or am I perhaps missing something?

    I’ll ask Marvin.

    What’s Going On?

  4. So to misquote Mcmillan – “Let us be frank about it: most of our people never knew they have never had it so good”..

  5. It is not by chance that Osbourne wants to lower corporation tax; the rise in GDP will massage the debt/GDP ratio nicely.

  6. Ryanair is starting Sofia based operations this year. I’ll try to read the country codes of their plane(s) when I pass thru Sofia airport. With Wizzair basing many aircraft here – we are getting many interesting short haul options.

  7. Maybe that will be the only pass time we will be able to afford in the future – get your notebook and pencil out!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s