Over the weekend just gone a rather familiar issue has reared its head.
Gabriel Makhlouf, governor of the Central Bank of Ireland, has defended Ireland’s world-beating economic growth against accusations that it is an artificial product of big US companies taking advantage of Dublin’s low taxes.
Mr Makhlouf told The Financial Times that much of Ireland’s growth – forecast to be 12.2 per cent last year, more than treble growth in the overall EU – comes from “real factories with real people” even if a lot of activity stems from big technology and pharmaceutical groups. ( Financial Times)
As you can see there is a lot going on there as “world-beating” and “12.2%” pose their own questions before we even get to the issue of the fact that central bankers rarely tell the truth these days. The debate got triggered by this.
The debate about Ireland’s economic outperformance flared up recently after the country’s 3.5 per cent quarter-on-quarter growth in gross domestic product single-handedly prevented the eurozone economy from stagnating in the final three months of last year. ( FT)
As you can see 3.5% in one quarter is the claim and it kept the Euro area from reporting nil growth in the last quarter of 2022. That added to existing concerns where Irish economic numbers which are usually produced later that the rest of the Euro area are sometimes moving them around a lot. That has been particularly true of business investment. Often it has been a case of the Irish tail wagging the Euro area dog.
According to our central banker things are fine.
“Too many people think or jump to the conclusion that this is all about intellectual property that’s sort of moving around and it’s not real, and that’s wrong,” Makhlouf said.
“This stuff, especially in pharma, it’s made in Ireland. There are people in Ireland. There’s a remarkable proportion of the top ten medicines in the world [that] are made in Ireland,” he said. “One of the oldest multinationals in Ireland is Intel and they also make stuff.”
Actually back in 2015 it was intellectual property.
Critics say Ireland’s GDP is distorted by the accounting manoeuvres of large US multinational groups capitalising on low Irish tax rates. When Apple moved intellectual property assets to its Irish base in 2015, it helped to send Ireland’s GDP up 25 per cent, which Nobel-prize winning economist Paul Krugman called(opens a new window) “leprechaun economics”. ( FT)
If we now switch to his example if the pharmaceutical industry there is a clear problem. Whilst there is genuine economic activity it is much less than the claimed total because the profits go elsewhere ( mostly to the US).
Irish Consumption
One problem is that the Irish do not spend the money the GDP accounts suggest they have. Here are the latest detailed accounts.
Personal Consumption Expenditure grew by 0.3% in Q3 2022 compared to Q2 2022,
That is a long way short of the GDP growth rate of 2.3% for the quarter. The difference is another move in investment of the sort I referred to earlier.
Capital Investment increased by €24.4 billion in Q3 compared with the previous quarter and accounted for 57.1% of total domestic demand in Q3 2022.
That may slide past the unwary but 24 billion or so is a lot for an economy the size of Ireland and investment being 57% of domestic demand? We get more insight as we note that at just under 49 billion Euros in total it was up 91.8% on the quarter.
If we now switch to the annual numbers we see that GDP was also on something of a tear.
Preliminary estimates for the third quarter of 2022 indicate that there was an increase of 10.9% in GDP in real terms in Q3 2022 compared with Q3 2021.
But Irish consumers spent very little of it.
Personal Consumption showed an increase of 2.2%
This is a familiar pattern
But the massive GDP spike has not translated into higher living standards: Irish consumer spending in 2022Q3 was 2% lower than in 2019Q4 after accounting for inflation. The disconnect between Irish GDP and Irish living standards is not new, but it has widened considerably over the past few years. ( MC Klein )
Curious when the economy has apparently been so strong.
Even before last year’s growth, Irish GDP had more than doubled since 2014, according to Eurostat, the EU’s statistics office. That dwarfs the overall EU economy’s 23 per cent growth in the same period. ( Financial Times)
The Central Bank of Ireland does not agree
We then get something of a change of tack from Governor Maklouf
The Irish central bank uses alternative growth measures to strip out the impact of multinational companies and get a better picture of domestic demand. One is a version of gross national income, known as GNI star, which the central bank expects to show much slower growth of 5.9 per cent in 2022.
So that is half the growth gone. He than makes the case for GDP being unreliable.
Makhlouf said exports by multinational companies in Ireland “have gone up and they’ve been a big driver” of the country’s growth. “They do distort our stats, which is why . . . because a lot of the profits go back to the parent — they don’t sit in Ireland — we don’t use GDP.”
If we switch to industrial production we see that it fell by 15.2% in October 2022, then rose by 7.8% in November 2022 before falling by 8.5% in December. So we have yet another very distorted number.
Comment
As I have pointed out before the picture for Ireland is much more nuanced than the headlines say. There has been a boom for some as Duncan O’Leary of Goodbody points out.
But he added: “The activities of the multinationals are real and have had a visible impact on the prosperity of the Irish economy over recent years.” Employment from foreign direct investment rose 8 per cent on average in the past five years in Ireland, he said. “These are high-paying jobs,” which he said had “contributed to an extraordinary rebound in tax revenues on top of the boom in corporation tax receipts”.
If we look at the latest wages numbers we see some evidence of that.
The sector showing the largest annual percentage increase in average weekly earnings in Q3 2022 was the Information & Communication sector (10.8%) where average weekly earnings rose from €1,335.88 to €1,480.25 in the year to Q3 2022.
But if we allow for that growth elsewhere is very different.
Average weekly earnings were €864.32 in Q3 2022, an increase of 3.2% compared with €837.61 from one year earlier according to preliminary estimates of the Earnings and Labour Costs quarterly release.
So they were quite a bit behind inflation.
The Consumer Price Index (CPI) rose by 9.2% between October 2021 and October 2022, up from an annual increase of 8.2% in the 12 months to September 2022.
This is the thirteenth straight month where the annual increase for the CPI has been at least 5.0%.
If the economy was as strong as we have been told surely it would be the one places with real wage growth? Whereas in fact the fall is quite heavy.
Looking ahead there are issues for Ireland.
A further blow could come from a wave of job cuts announced recently by several big tech groups that is expected to hit their Irish units. ( FT)
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Notayesmanseconomics's Blog 
Another anomaly of the Irish economy or should I say governance is its appalling health service, like ours it is characterised by services overun by demand and similar stories regarding delays for treatment, if the government has so much tax revenue it would beg the question as to why their health service is almost as bad as ours and if they have the money, why do they deliberately underfund it??
My recent experience of the NHS has been absolutely first class. I saw my GP end of first week January, referred to a consultant who saw me end of January and I had my operation last Thursday. I doubt I could have done better than that privately. When it works it can work extremely well. Nothing serious and a quick op so they were able to fit me in a schedule at short notice.
Stay well and its good to hear a positive for
once, the world still has some good people
and not every outcome is bad.
An excellent summary of the issues in measurement caused by Ireland’s economic model but the general aim seems reasonable – I imagine Dublin’s economy has been boosted by all those company secretaries, governance consultants and lawyers which is better than not having those jobs. Perhaps like the UK has a worldwide expertise in finance and insurance, they are building their own centre of expertise.
I appreciate there are downsides, not least the one you highlight in the last section on the potential job losses as the overseas companies will have no loyalty to their Irish operations. A small disadvantage, but one that makes me smile, is that their EU contributions are calculated on the size of their GDP, which means they’ll be paying a lot more than they otherwise would.
Hi DD
There are indeed gains for some as for example for those in the information and communications sector where wages are not only high but growing strongly. That is part of what is boosting tax receipts.which is a boost for the economy but there does not seem to be much trickle-down as it is called to the rest of the economy.
Ireland used to do very well out of the EU.
“From 1973 up to 2018 Ireland was a net recipient, in nominal terms, of over €40 billion in EU funds. The country is now a net contributor due to its significant economic growth.”
Although it is GNI based rather than GDP so not as much as it might be.
12.2% growth & job losses?
If the EU competition rules are ever applied, (The EU is a rules-based organisation except when it suits them) and there isn’t a load of corporate tax money swilling around the economy, what will the employment market be like then?
They will struggle with the old fall back of tourism. I have been visiting Ireland regularly since the late 60’s and have been most years. Joining the euro made a huge difference to prices and Ireland is no longer an inexpensive destination, no matter what currency you earn. The prices last September were eye watering!
I also think the prices in Ireland these days are simply eyewatering!!!(almost went last year but a simple basic B&B in Dublin was hard to find under 100 euros, and how they have a tourism industry left at all is a miracle, their old model of selling nostalgia and an unspoilt rural ideal that simply doesn’t exist anymore doesn’t work, combine that with its legendary rain and astronomical prices makes tourism to other destinations a no brainer.
The number of traditional rural B&B’s has collapsed in the last twenty years -c.80%, I would imagine due to the above reasons but also as described in the article below, the demographic shift of older couples running them now retiring and newer households requiring that due to the high cost of housing, the woman has to work full time(another unintended consequence of a housing bubble). AirBNB are also eating their overpriced lunch:
https://www.irishexaminer.com/news/spotlight/arid-41046854.html
Of course no discussion on an EU country’s economy would be complete without discussing its property market, and Ireland’s is still on fire, many parts have exceeded the 2006 bubble heights and others are coming close to it, it started to take off in the mid 1990’s when it became apparent that they would be adopting the Euro and thus interest rates would drop form double figures to single figures. Therefore, it has been going up (apart from a big drop after the GFC for two or three years) for nearly thirty years.
Waiting lists for council properties are ten to fifteen years and any private properties that come up for rent have long snaking queues of desperate tenants on viewing days, so unaffordability is even worse than the UK – and that’s saying something. The main driver of course is interest rates being too low, but of course the Irish government can say the ECB sets rates so cannot influence demand by raising rates.
So a big proportion of Irish disposable income is being devoured by the housing monster that requires ever more money to feed it and may explain why Shaun’s figures for personal consumption are so weak.
Hi Kevin
One of the reasons Ireland joined the Euro was for lower interest-rates. Back in those days I doubt anyone thought we would see an ECB Deposit Rate of -0.5%.But in any sane world the Irish establishment should be held culpable for this.
buz,
I know you like listening to podcasts and you tube videos by Jordan Philips well I have just listened to this video between him and Roy Sebag which you may be interested in, the topic “The Natural Order of money”
Took me a good 30 minutes to figure out what Roy Sebag hidden agenda was really about though and to my mind it was investing in Gold or Crypto.
I have to say however when you look back at the last 50 years there have been long periods where if you had bought gold you would have had to wait for a decade or more for the price to resume it’s upward tragectory having plummeted or flattened out.
Bit stuck for time at the moment so cannot add much more.
investing in Gold or Crypto.
uh oh, this is not America. We still have I beleive the 1920s rules on gold . If you’ve got it then its legally declared ( or its a process of theft or laundering) . As HMG know you have it they can at a moments notice require you to hand it in or send the military to collect it. Dont worry you’ll get a receit.
If you dont hand it in or tell the authorities you know someone who has it then you get a jail sentance.
As for crapto , sorry , crypto . They will move all holdings to their new crapto-pound. If its held abroad , no worries , soon as you cash it and wish to spend it here it will be in the new crapto-pound.
hey ho
Forbin
Transfer pricing within corporates to reduce tax, common knowledge.
Hi JW
Indeed.Which makes me wonder what the Governor of the central bank of Ireland thought he was up to? Maybe they just cannot stop telling lies….
Great blog and podcast as usual, Shaun.
I hope I am not off-topic in asking how, if at all, Ireland measures terms of trade changes. Remember at the ONS Economic Forum meeting a week ago on February 13, Sumit Dey-Chowdhury gave a presentation on “The Purchasing Power of GDP”. He and his colleagues, Graeme Chamberlin and Muhammed Khalid, adjusted the UK GDP for the net trading gain to obtain an estimate of gross domestic income (GDI). They used the imports deflator as the deflator for the trading gain based on the questionable statement that: “The general deflator [for the terms-of-trade effect] that is typically chosen by national statistical institutes (NSI) is the import deflator.”
I wrote them about this on February 14, noting that both Canada and the United States use the deflator for final domestic expenditures to deflate the trading balance. The actual term “trading gain” appears to have been coined by the great Irish economist Roy Geary along with his Australian collaborator, R.W. Burge in a paper written in 1957. At that time Geary and Burge recommended that the trading balance should be deflated by the import deflator in the case of a trade deficit and by the export deflator in the case of a surplus. Later Geary noted that during the years that he was director of the Irish Central Statistical Office there was no difference between using the import (or Nicholson) deflator and the Burge-Geary deflator, as Ireland ran trade deficits through the entire period. Geary himself moved on and recommended a simple average of the import and export deflators, but didn’t seem to think it too important what deflator was used. Now, of course, the trading gains and losses are much greater than what he had to deal with, and it certainly does make a difference. The ESA95 manual does not dictate a deflator to be used, but does recommend, mistakenly in my opinion, the Geary 2 deflator, an average of the import and export deflators, if there is no compelling reason to use anything different.
If I am not mistaken, the Irish CSO does not calculate a GDI measure but does publish annual estimates on “Gross National Disposable Income at Constant Market Prices Adjusted for Terms of Trade (i.e., Real Gross National Disposal Income).” I could not find what deflator they use for the trading balance but assume that they would follow the ESA2010 manual and use the Geary 2 deflator to deflate the trading balance. However, I am just guessing.
The series is highly volatile with an increase of 9.5% in 2021 following on an increase of 2.2% in 2020.
I still think the deflator for final domestic expenditures is the best deflator for the trading gain. Since it is President’s Day in the US, it is good to remember that sometimes American official statisticians make a better call than their European counterparts. I wrote Mr. Dey-Chowdhury and his colleagues to say as much. So far the ONS hasn’t sent me a plane ticket to the UK to discuss this thorny subject in person, but I live in hope.
Hi Andrew and thank you.
I have to confess I was not paying full attention at that point of the forum mostly because I have little confidence in the accuracy of such numbers. Both the UK and Ireland have large volumes of trade in services about which we know little. We get all sorts of detail on goods trade but so little on services.The latest UK numbers are below.
“When removing the effect of inflation, service imports increased by £0.1 billion (0.3%) to £18.5 billion while service exports declined by £0.1 billion (0.4%) to £28.5 billion in December 2022.”
How much of a difference have the deflators made? I would have thought the energy crisis would have heavily affected the import deflators
Thank you for your reply, Shaun. I would think it would make a substantial difference. I tried to find the implicit deflator for gross domestic final expenditures (it is also called domestic absorption in the United States) but couldn’t locate it for the UK. Perhaps I was looking in the wrong pew. For Canada, where the most recent data is for 2022Q3, the implicit deflator for imports shows a stronger quarterly growth rate for every quarter from 2022Q4 forward. The four-quarter inflation rate for imports in 2022Q3 is 11.2%, as opposed to 5.7% for GDFE. As you said, the energy crisis is pushing the import deflator up strongly.
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