Was the Irish election result a case of its the economy stupid?

Back in the day the presidential campaign of Bill Clinton came up with the phrase “Its the economy stupid” which worked on several levels. Firstly Bill got elected and secondly the phrase has echoed around since. But applying it to what has recently happened in Ireland is an example both of the phrase and the way we have these days to look beneath the official statistics.

Let me start the story by looking at GDP growth in Ireland.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.7 per cent for the Q3 quarter of 2019. ( Central Statistics Office or CSO)

Something for an incumbent government to trumpet you might think and this continues with the annual comparison.

Initial estimates for the third quarter of 2019 indicate that there was an increase of 5.0 per cent in GDP in real terms in Q3 2019 compared with Q3 2018.

For these times that is quite a surge which puts Ireland far ahead of the Euro area average and the breakdown starts with a hint of a modern thriving economy.

 Information & Communication made the most positive contribution to the Q3 result, rising by 22.4 per cent with Agriculture recording an increase of 15.2 per cent.

Trouble,Trouble,Trouble

The Taylor Swift lyric appears as we look at some of the detail though.

 Capital formation decreased by 55.3 per cent or €25.2 billion in Q3 compared with the previous quarter.

That is quite a drop but you see we find the cause here with a similar number popping up elsewhere.

 Imports decreased commensurately by 22.5 per cent (€24.2 billion) in Q3 2019 compared with Q2 2019.

These are not the only conventional metrics which are lost in a land of confusion as Genesis would put it.

Exports increased by 2.4 per cent which meant that overall net exports increased by €26.8 billion quarter-on-quarter.

As you can see the economic growth story starts well but then has collapsing investment which is a warning and collapsing imports which is another warning accompanied by a triumph for net exports giving a strong signal.

Now let me bring in some context which is that if we look at Gross Value Added for the Irish economy it was 49.1 billion in the final quarter of 2014 and 79.7 billion in the third quarter of last year on a chain-linked basis. How could you not be re-elected with those numbers? Well regular readers may recall early 2015 which saw a 25.6% quarterly jump.

There are two major issues here which I looked at on December 18th 2017,

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. ( Finfacts )

Manufacturing has boomed but some of it has been the type of contract manufacturing described above. Next comes this issue.

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

There is a large impact from intellectual property which sees money wash into and out of Ireland on such a grand scale it even affects the Euro area national account breakdown.

These have led the Central Bank of Ireland to develop this to try and help.

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.

Wealth and Debt

According to the Central Bank of Ireland there is a strong position here.

Household net worth reached a new high of €800bn in Q3 2019, which equates to €162,577 per capita. Household debt continued its downward trend, falling by €176m in Q3 2019.

If we look into the detail I note the following and the emphasis is mine.

The increase over Q3 2019 was driven by improvements in both households’ financial assets and housing assets. Financial assets rose by €11.5bn, due primarily to increases in the value of insurance and pension schemes. Housing assets rose to €545bn, an increase of €8.2bn over the quarter, the highest it has been since Q4 2008. Household liabilities remained unchanged at €147bn.

There has been success here too.

Household debt stood at €135bn, its lowest level since Q3 2005. This equates to €27,453 per capita. Household debt has decreased by a third, or €67.8bn, since its peak of €202bn in Q3 2008.

We can see by default that Irish companies borrow quite a bit.

Private sector debt as a proportion of GDP decreased by 2.4 percentage points to stand at 239 per cent in Q3 2019

Or do they as are the companies Irish?

 It should be noted that private sector debt in Ireland is significantly influenced by the presence of large multinational corporations (MNCs) and that restructuring by these entities has resulted in extremely large movements in Irish private sector debt, particularly from 2014 onwards.

Inflation

According to the official data there essentially has not been any in Ireland over the period we are looking at. The official Euro area measure was 101.8 last December after being set at 100 in 2015 so you can see I am guilty of only a slight exaggeration. But we are reminded of its flaw ( which even ECB policy makers are presently admitting) that is highlighted by this from the Irish Times on the 5th of this month.

House price growth is obviously one part of the equation; while it may be finally easing in Dublin, half a decade of double-digit growth has nonetheless pushed the cost of owning a home out of the reach of many.

Indeed as it goes on they have become both more expensive and unaffordable.

But in Ireland, and in many other countries across the globe, rising property prices have been compounded by wage stagnation. Pay rises have only returned in recent years and continue to significantly lag house price growth.

The inflation measure of the Euro area completely ignores the area of owner-occupied housing on the grounds of whatever excuse it thinks it can get away with.

Ireland has its own measure which tried to do better by including mortgage interest-rates but that valiant effort has been torpedoed by the advent of negative interest-rates and QE.

So here we see another problem for the official view as people are told there is no inflation and yet in Dublin the Irish Times tells us this.

Dublin has experienced the third-fastest rate of house price growth in the survey over the last five years, up by a staggering 61.9 per cent.

Although it has also had a relatively strong rate of income growth over the same period – up by 13.2 per cent – that still means there is a huge gap between the rates of increase.

In terms of house purchase real wages have not far off halved. No wonder people are unhappy and should be questioning the inflation data.

The official numbers do pick up rental inflation and both have it being around 17% since 2015. So even on the official data there has been a squeeze here too.

Comment

On today’s journey we have seen that the experience of an ordinary Irish person is very different to that of the official data. They are told it is a Celtic Tiger 2.0 but face ever more expensive housing costs and the concept of buying a home has changed fundamentally. Thus we see how what are fabulous looking metrics of surging GDP and virtually no inflation are for a type of virtual Ireland which is really rather different to the real one where housing costs have surged. This impacts in other sphere as for example national debt to GDP has plunged and Ireland has moved for being a recipient of EU funds to a net payer.

Context is needed as there have been economic improvements in Ireland for example the unemployment rate this January was 4.8% as opposed to the 16% of January 2012. Improved tax revenues have helped provide a budget with a surplus although this relies a bit on higher corporation tax from guess who?

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.