Ireland puts another nail in the coffin of GDP statistics

Friday brought news on a subject that is genuinely troubling so let me hand you over to Bloomberg.

Ireland’s economy surged in the third quarter, boosted by rising exports and falling imports.

On the face of it this is good news for Ireland but you barely need to touch the surface to see that there is as Taylor Swift would put it “trouble,trouble,trouble”. Let us go to the Central Statistics office release.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 4.2 percent for the third quarter of 2017. Real GNP increased by 11.9 per cent over the same period.

There are some obvious initial issues as we note that these are not annual numbers or even annualised ones but quarterly data. Those who doubt a first world economy can grow by 4.2% in a quarter then find themselves facing a mind-boggling 11.9% from the GNP measure. So let us steel ourselves and look at the annual data.

Initial estimates for the third quarter of 2017 indicate that there was an increase of 10.5 per cent in GDP in real terms in Q3 2017 compared with Q3 2016………Factor income outflows were 7.7 per cent higher than in the same quarter of 2016 resulting in an increase in GNP of 11.2 per cent year-on-year.

So we have double-digit growth on both measures but even more bizarrely pretty much all the GNP growth came in the latest quarter! So the economy did just about nothing for 9 months and then in the next quarter flew out of the water like the most athletic Irish salmon you have ever seen?

Detailed problems

The Irish Ivory Towers will be having a party as they observe a sea of export-led growth.

Exports increased by 4.4 per cent in Q3 2017 compared with Q2 2017 which when combined with an import decrease of 10.9 per cent meant overall net exports for the quarter increased by 63.1 per cent.

This meant that even countries like Germany or China would be jealous of the trade position.

The Balance of Payments current account, a measure of Ireland’s economic flows with the rest of the world, had a surplus of €14,488m (18.7% of GDP) in the third quarter of 2017.

However in the previous quarter there has been a deficit of 872 million Euros so what really drove the change which exceeded 15 billion Euros?

Service imports at €38,842m were down €8,625m over the same period in 2016.

As we look further we sign a sign of a particularly Irish issue.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

Let me hand you over to the official view on this.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

The numbers are a combination of mind-boggling and bizarre as we see that the R& D sector which is essentially intellectual property saw import growth from 19 billion Euros in 2015 to 47 billion Euros in 2016 but now has seen a quarter of only 3.6 billion. So slower than 2015 when the economy is apparently booming?

The issue of plummeting imports in an economic boom is a fundamental one and frankly on its own would have the Starship Enterprise on red alert.

A space oddity

A perhaps curious consequence of this provokes a wry smile. You see Ireland has moved into a current account surplus with the UK just as the UK Pound £ has fallen and made its exports more competitive. I will leave the Ivory Towers to explain that one.

A manufacturing boom

We have got used to seeing manufacturing declines in the western world and Ireland was in that camp with output falling from 45.2 billion Euros ( 2015 prices) in 2011 to 43 billion in 2013. But there was quite a boom to follow as we note that output was 92.4 billion Euros in 2016.  Actually the boom came in one-quarter because as the clocks recorded a New Year as 2014 ended then quarterly manufacturing was on its way from 10.7 billion Euros to 23.5 billion. Another way of putting the surge was that it was 101.4% higher than a year before.

Since then it has done very little having risen gently. The issue at hand is what is called contract manufacturing where the products may never have been within Ireland’s borders. Finfacts has reported this.

However, we reported in 2012 that Dell Products Ireland which closed its PC plant in Limerick in 2009 remained one of Ireland’s biggest exporters and manufacturers as it booked the output of its Polish plant in Ireland.

And this.

Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes.

We will have to see going forwards but the investment figures were not especially hopeful.

Capital formation declined by 36.0 per cent in Q3 2017 compared with the previous quarter.

This is an especially serious area because manufacturing produces actual things which we should ( especially in an information technology revolution) be able to count increasingly accurately. Instead we seem unable to count it at all. This affects many economic figures as there is something of a gap between monthly goods exports in the mid to high 20 billion Euros counted in the trade figures and the 40 billion plus in the national accounts.

Consequences

On the face of it the Fitch Ratings report was good news.

 On the basis of data up to 2Q, we estimate real GDP growth for this year of 5%. Early estimates for 3Q point to stronger GDP growth……..Fitch forecasts the general government debt-to-GDP ratio to fall to 65.8% by 2019, from 72.8% at end-2016 (1.1 percentage points of which is due to the sale of part of the state’s stake in AIB).

Even they had to admit though that the numbers are doubtful and it is hard to forget their catastrophic efforts in 2007 of pronouncing the Irish banking sector to be in good shape as you read this.

Fitch believes the health of the banking sector is improving, reducing risks to the Irish sovereign and economy. The ratio of non-performing loans (NPL) has fallen to 11.9% in 2Q17 from a peak of 25.7% in 2Q13.

Comment

Back in time I used to visit clients in Dublin at this time of year and would be looking forwards to the restaurants around St.Stephens Green and some Guinness. However back then building and development work was increasing this described below by the Tax Justice Network.

 The second big development has been the Dublin-based International Financial Services Centre (IFSC), a Wild-West, deregulated financial zone set up in 1987 under the “voraciously corrupt” Irish politician Charles Haughey:

The issue of tax is hard to avoid as money crosses Ireland’s borders in all directions but in particular seems to slip past the tax collectors. From Fortune.

The European Commission ruled last year that a tax deal that Ireland gave Apple was illegal, and that it owed the country $14.5 billion in back taxes. Ireland has been dragging their feet a little bit when it comes to collecting on that debt,

Unusual isn’t it for a country to not actually want tax? After all there are plenty of things it could be spent on. From the Irish Times.

In October 2014, when The Irish Times first interviewed some of Dublin’s homeless children, they numbered 680 in 307 families. Although Enda Kenny, then taoiseach, said no child should be homeless, their numbers have increased 256 per cent.

So how much economic activity is happening? The Central Bank of Ireland helps us out a bit.

GNI* excludes the impact of redomiciled
companies and the depreciation of intellectual
property products and of leased aircraft from
GNI. When this is done, the level of nominal
GNI* is approximately two-thirds of the level
of nominal GDP in 2016.

Please do not misunderstand me as there are signs of economic improvement in Ireland as for example tax revenues have risen and unemployment fallen. Yet in spite of the apparent economic boom the unemployment rate at 6.1% is above the pre crisis rate of 5% and that is in spite of those on government schemes. Thus the picture is complicated as we see enormous sums wash in and out of the Irish economy relegating the national accounts to a picture of tax avoidance more than economic activity in general.

 

 

 

 

19 thoughts on “Ireland puts another nail in the coffin of GDP statistics

  1. Very interesting – as you say, which figures (if any) do you trust. I would take a bet that some or all of importing R&D will be pharma companies pretending that they do research in Ireland to take advantage of its tax rates. This helps with transfer pricing (aka stripping out profits from high tax jurisdictions).

    • Yes James,
      The whole Irish economy is a huge tax dodge on steroids, this as Shaun has alluded to here and also on TipTV, is what makes the very difficult job of compiling economic statistics virtually impossible. There are many massive pharmaceutical and medical device plants in Ireland in fact 24 of the worlds largest drug conpanies have plants there, including Pfizer,Amgen,Novartis, Medtronic,MSD, Biogen Idec, Gilead, Lilly, Abbot,Boston, so manufacturing does actually take place, but they are there for one main reason -to avoid or minimise tax, the very fact that Dell is diverting revenue through Ireland having left eight years ago says it all really, no doubt having recieved a grant from the EU/Polish government to build its plant in Poland, after having received a similar deal from the Irish government to build it in Limerick in 2000. I’m sure noone will be grealy surprised to learn that the Dell plant in Limerick is now being used by another US biotech – Regeneron.

      https://www.siliconrepublic.com/careers/biotech-pharma-companies-ireland

      • which is why Blair, Cameron, Mandelscum, Hammond, Osborne and all the more corrupt and self serving politicians want us to stay in the EU.

        When leaving it’ll be easier for our govt to put the brakes on this should they desire (they won’t).

  2. When the day comes where western govts. can no longer print and need the taxation earned in their country but funnelled to Ireland the Irish will be up the creak without a paddle.

    Can’t be too long now with anti neoliberal voters seemingly on the rise throughout the western world.

    • Hi Arthur

      For the moment I think that bodies like the European Commission are basking in the Celtic Tiger style economic growth being reported. They can present it as a country in trouble that with their help has bounced back. Meanwhile reality is different as yes Ireland has seen economic growth but not what has been reported. Also it will take time for the populations in countries which have lost the tax revenue to fall into the situation at which point we may well see some more “populism”.

  3. so whats the tax take like and is it really worth it just to have a few jobs in Ireland .

    Is it not the case to make things and have local ownership of the companies ( even if they too out source > ? ) Japan and Germany seem to be the right model – look at China – they want to build everything – and can do so – but at what cost ?

    Ireland can’t fool the money markets like the UK and EU ( USA too ) and just get people buy their paper

    and for how long for the UK ?

    Forbin

    • As long as the UK remains in the spiders web of Globalist/bankers – oh sorry- EU control it should just about survive, if we Brexit(very unlikely) they will unleash the weapons of financial destruction that will bring us back to the negotiating table on our hands and knees begging for a deal to rejoin at any price.

      We have in the UK found the nirvana of eternal wealth in flipping houses to each other, much less trouble than having to actually design, manufacture and sell things.

      As long as central banks keep interest rates near zero and keep juicing bond and stockmarkets, it can go on for as long as they want it to, they seem to have pretty much everything under their control at the moment, and it has been nine consecutive years of micromanipulation, so barring a massive external event or simply their decision to end it, why can’t it continue??

  4. on another note

    I see Ireland is buying leccy off us tonight and we’re down to a few GW of wind

    lots of coal burning going on though

    good job we’re getting rid of those pesky coal fire plants , eh ?

    Forbin

  5. Great blog as usual, Shaun.
    I looked up the Irish CSO report that recommends the calculation of a GNI*:

    http://www.cso.ie/en/media/csoie/newsevents/documents/reportoftheeconomicstatisticsreviewgroup/Economic_Statistics_Review_(ESRG)_Report_Dec_2016.pdf


    At first, it seemed that your blog was mislabelled as the GNI* series is a modified income series, but the documents make clear the Irish statisticians don’t like the GDP measures either. They recommend adjusting the estimates of final domestic demand by omitting investment expenditures on intangibles, including R&D, and on transportation equipment. It looks like a bit of overkill omitting all investment in transportation equipment to eliminate a problem with leasing of airplanes, but perhaps they have their reasons for this. I remember you were not a fan of capitalizing R&D expenditure, so it is interesting that some official statisticians now seem to be having buyer’s remorse.
    With regard to the GNI* estimate, I am not sure why the CSO publishes estimates at current prices but not any chain volume estimates. If one uses the GNI deflator to deflate GNI* the GNI* increase in volume terms in 2016 was 8.9%, less than for GNI but identical to that of the gross national disposable income series in volume terms, the broadest based measure of real income the Irish CSO calculates. I am not sure why they don’t calculate a net national disposable income series in volume terms. One of the adjustments that they make in obtaining GNI*, deleting depreciation of intellectual property and leased aircraft, would be unnecessary in deriving an adjusted series for NNDI, since it would already exclude depreciation on all capital goods.

    • Hi Andrew and thank you

      I am pleased that at least some statisticians are coming round to my view that the capitalisation of R&D expenditure was a mistake. Ireland has turned out to be something of an extreme case for this via the way that such expenditure has got caught up in the tax merry go round. As to your point about transportation equipment it is fair but I wonder if the CSO feels it cannot get an accurate number out of the “noise”.

      I think that you linked article is very eloquent when it states this.

      “EU legislation requires the production of statistics that meet the ESA 2010 and BPM6 standards
      and the CSO will continue to produce GDP, GNI and related measures. Nevertheless,
      supplementary statistics that are more appropriate to the measurement of domestic economic
      activity are needed that will be comprehensible and stable over time. ”

      A clear critique of ESA 2010 and BPM6 I think.

  6. I would be very interested in your views of Cyprus ( where I live) as it would seem to be a similar story except it is mainly Russian money moving through rather than actual Corporations.

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