Ireland creates quite a problem for attempts to measure an economy via GDP

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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Is the economy of Ireland half the size we thought?

Today we are going green in a manner of speaking as we take a look at the economy of the Emerald Isle. Or rather most of it as the situation between Ireland and Northern Ireland is rather fraught. But if we stay south of the border we see some similarities with our themes but we can open with a difference.

Initial estimates for the fourth quarter of 2021 indicate that there was a decrease of 5.4% in GDP in real terms in Q4 2021 compared to the previous quarter while GNP fell by 2.1% ( Central Statistics Office)

So we saw a fall in the last quarter of 2021 and a reminder of one of the features of the Irish economy. For newer readers it has a lot of multinationals which do create some economic activity but create a lot more of the equivalent of simply having a letter plate in Ireland as money flows through. That is why it reports GNP in its economic headlines and the difference is material as we go from 104.4 billion Euros to 81.1 billion.

The economy does get bounced about by some wild swings at times due to those issues.

Exports increased by 1.3% in Q4 2021 compared with Q3 2021 while Imports rose at a significantly faster rate of 22.7% which meant that overall net exports for the quarter were 39.4% lower in Q4 compared with Q3 or just under €20 billion lower in money terms quarter-on-quarter.

There is another attempt going on to measure the economy but care is needed as it is less than half of GDP.

Modified Domestic Demand, a broad measure of underlying domestic activity that covers personal, government and investment spending, increased by 1.3% in Q4.

Looking Ahead

The Central Bank of Ireland tells us this.

The economy began 2022 with strong growth momentum from the lifting of pandemic restrictions. However,
higher inflation, the result of sharply rising energy and higher food prices, as well as greater uncertainty and negative consumer confidence effects, all imply headwinds to growth.

What does that mean in terms of numbers?

Accordingly, modified domestic demand growth has been revised down to 4.8 per cent in 2022, 4.3 per cent in 2023
and 3.9 per cent in 2024.

Modified Domestic Demand

There is an issue here as not only is Ireland using a different metric from other countries ( GDP) there is the fact that it keeps changing its own measure. We have had people looking at GNP, then the Central Bank of Ireland producing a modified GNI ( I is for Income) and now we have a modified domestic demand. So it is not only difficult to compare Ireland with others it is hard to compare it now with its own past.

Why is it being used?

In Ireland, imports and exports are very large but are mostly related to transactions of foreign-owned corporations (including Contract Manufacturing) that are high in value, but in the end have little impact on the Irish economy. So when we count imports and exports in GDP, some of the large values we include do not reflect much on the domestic economy.

Let me welcome the honesty here as we do not see enough of that. It goes further.

Modified Total Domestic Demand goes further in trying to exclude those large transactions of foreign corporations that do not have a big impact on the domestic economy.

These are.

Aeroplanes purchased by leasing companies in Ireland but then operated in other countries are part of capital investment in TDD but are excluded from Modified Total Domestic Demand. Intellectual Property(IP) purchases are large transactions which generally only relate to foreign-owned corporations and generate profit that flows out of the economy with relatively little impact.

But there is an issue.

Modified Total Domestic Demand is therefore a smaller number than GDP and it more truly reflects how Households, Government and domestic Corporations in Ireland are doing.

Inflation

This area matters for many reasons but the situation has been exacerbated by the growth forecasts above as they have consumption soaring. Let us look at where Ireland stands.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), increased by 6.9% compared with March 2021.

Indeed the hammer was down in March.

The HICP increased by 2.1% in the month. This compares to an increase of 0.9% recorded in March of last year.

The most significant monthly price changes were increases in Housing, Water, Electricity, Gas & Other Fuels (+6.1%) and Transport (+5.3%). There were decreases in Clothing & Footwear (-0.9%) and Health (-0.3%).

The Central Bank of Ireland thinks that will pretty much be the state of play for the rest of 2022.

Consumer price inflation is expected to average 6.5 per cent this year, the result of strong energy price inflation that is also passing through to increases in core HICP (excluding energy).

I can see how the quarter just gone saw a post Covid rebound but fail to see how the rest of 2022 will be this strong?

Over the forecast horizon, consumption is forecast to grow by 7.4 per cent this year, slowing to 4.7 per cent and 3.9 per cent in 2023 and 2024, respectively.

Agriculture

This was 3.1 billion last year in terms of output but 2022 will see lots of swings. The positive for farmers is higher prices for their output but the negative is this.

Shortages of fertiliser and maize, or the large increases in the price of these products over recent weeks, will
have knock-on implications for the agriculture sector and, ultimately, food prices ( Central Bank of Ireland)

Also higher food prices will subtract from consumption which makes me doubt the earlier numbers even more.

House Prices

This was the topic around a decade ago and looking at the numbers below may soon be so again.

Residential property prices (houses and apartments) increased by 15.3% nationally in the year to February. This compares to an increase of 14.8% in the year to January 2022 and an increase of 3.0% in the twelve months to February 2021.

We have lift-off! Also it comes on the back of previous rises as the index sat at 100 in 2015 is now 155.3. Just in case there were “never again” themes after the last property crash we have this now.

Property prices nationally have increased by 117.3% from their trough in early 2013.

It has led to quite a crisis.

The average home in Ireland now costs about €330,000. The median disposable income of a household with two working-age adults is about €50,000-€55,000 (putting their gross income at probably about €80,000); there’s clearly an affordability crisis. ( David McWilliams)

For renters it may be even worse.

According to Glassdoor, the going graduate salary in Dublin is currently about €35,000 (including bonuses, etc), leaving take-home pay of just over €29,000, which works out at €2,428 per month or €560 per week. The latest Daft report points to a 10.3 per cent annual rise in rental prices, pushing the average one-bed rent up to €1,407. ( David McWilliams)

Comment

There are a lot of numbers bandied around concerning the Irish economy but as you can see it is an area of grey rather than black and white. We see its GDP and indeed GDP per capita numbers used but in fact the Irish think that a number less than half the size is a better guide. This has all sorts of consequences as how do you measure its relative debt?

A General Government surplus is expected to emerge next year, rising to 1.9 per cent of GNI* in 2024. Meanwhile General Government Debt is forecast to be 84.7 per cent of
GNI* in 2024.

As you can see we have yet another metric in play.

But this highlights the issue of how we can be told Ireland is doing so well and yet it has a housing affordability crisis at the same time. Also in the David McWilliams piece there was the opposite of what we are usually told.

But the price of materials is crippling everyone and, even if the client can pay, it’s hard to get your hands on everything – from wood to piping to radiators. In fact, they’ve just come back from a run to Belfast to get a few things. It may be tight up there, but not quite as bad as down here.

 

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?

Japan and Korea have chosen a bad time to fire up their own trade war

This is a story influenced by a brewing trade war but not the one that you might think. It is between Japan and Korea and the latest phase started in July when Japan imposed restrictions on trade with Korea for 3 chemicals. This gets more significant when you realise that they are crucial for smartphones ( displays on particular) and that according to CNBC Japan is responsible for 90% of the world’s supply of them. This affects quite of bit of Korean industry with Samsung being the headliner. Them Japan dropped Korea from its whitelist of trusted trading partners making trade more difficult before Korea did the same.

According to Bloomberg Citigroup have tried to downplay this today but I note these bits of it.

Meanwhile, boycotts in South Korea have led to a plunge in sales of Japanese consumer goods and a decrease in tourists to Japan, who may have decided to travel domestically instead, according to Citi………Last month, South Korean exports to Japan fell 14 percent, while imports from Japan slid 23 percent. South Korea’s trade ministry attributed the declines to industrial factors rather than trade actions.

Ah an official denial! We know what that means.

The issue has deep roots in the past and the Japanese occupation of the Korean peninsula a century ago as well as its later use of Korean “comfort women.” That explains the Korean issue with Japan and on the other side the Japanese consider themselves superior to Koreans and in my time there were quite open about it. Whilst he initially made moves to calm the situation there was always going to be an issue with a nationalistic politician like  Shinzo Abe running Japan.But let us move on noting that both countries will be experiencing an economic brake.

Japan Economic Growth

Let me hand you over to The Japan Times which gives us the position and some perspective.

In the third quarter the world’s third-largest economy grew an annualized 0.2 percent, slowing sharply from a revised 1.8 percent expansion in April to June, according to preliminary gross domestic product data released by the government Thursday.

It fell well short of a median market forecast for a 0.8 percent gain, and marked the weakest growth since a 2.0 percent contraction in the July-September period last year.

So over the past six months Japan has grown by 0.5% and we also get an idea of the erratic nature of economic growth there.This is partly due to the way that Japan does not conform to stereotype as it has struggled more than elsewhere to measure GDP. Partly due to last year’s third quarter drop. annual growth has picked up to 1.3% but that looks like being the peak.

Why? Well the 0.2% growth was driven by a 0.9% rise in domestic demand ( both numbers are annualised) just in time for the consumption tax to be raised. Actually private consumption was up 1.4% in the quarter suggesting that purchases were being made ahead of the rise.

At the end of last month this was reinforced by this.

The Consumer Confidence Index (seasonally adjusted series) in October 2019 was 36.2, up 0.6 points from the previous month.

Yes it was up but you see the number had fallen from around 44 at the opening of 2018 and these are the lowest readings since 2011.

Korea Economic Growth

Real gross domestic product (chained volume measure of GDP) grew by 0.4 percent in the third quarter of 2019 compared to the previous quarter……Real GDP (chained volume measure of GDP) increased by 2.0 percent year on
year in the third quarter of 2019.

In a broad sweep this means that economic growth has been slowing as it was 3.2% in 2017 and 2.7% in 2018. Rather unusually Korea saw strong export growth especially of we look at what was exported.

Exports increased by 4.1 percent, as exports of goods such as motor vehicles and semiconductors expanded. Imports were up by 0.9 percent, owing to increased imports of transportation equipment.

Also manufacturing grew.

Manufacturing rose by 2.1 percent, mainly due to an increase in computer, electronic and optical products.

However the economy has been slowing and if either of those reverse will slow even more quickly. Back on the 18th of October we noted this response.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

This was more of an external rather than an internal move as last week we learnt this.

During September 2019 Narrow Money (M1, seasonally adjusted, period-average) increased by 0.6% compared to the previous month.

So whilst it had been weak as annual growth was 3.3% in June it has risen since to 5% which is slightly above the average for 2018.

However they could cut on inflation grounds as this from Korea Statistics shows.

The Consumer Price Index was 105.46(2015=100) in October 2019. The index increased 0.2 percent from the preceding  month and was unchanged from the same month of the previous year.

According to the Bank of Korea the outlook is for more of the same.

 The Producer Price Index increased by 0.1% month-on-month in September 2019 – in year-on-year terms it decreased by 0.7%.

Exchange Rate

This is at 10.68 Won to the Yen as I type this and is up over 7% over the past year. So an additional factor in the situation will be that the Korean’s have been winning the currency war. This of course, will be annoying for Shinzo Abe who’s Abenomics programme set out to weaker the Japanese Yen. As we stand Korea has an official interest-rate some 1.35% higher so there is not a lot the Bank of Japan can do about this.

Comment

As we stand it initially looks as if Korea will be the relative winner here.

“Domestic demand had made up for some of the weakness in external demand, but we can’t count on this to continue,” said Taro Saito, executive research fellow at NLI Research Institute.

“A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum.” ( Japan Times)

But the argument it is in a stronger position weakens somewhat if we switch to its Gross National Income.

Real gross domestic income (GDI) increased by 0.1 percent compared to the previous quarter.

Over the past year it has gone on a quarterly basis -0.3%,0.2%,-0.7% and now 0.1%.

Korea is looking to use fiscal policy to stimulate its economy which sets it in the opposite direction to the consumption tax rise in Japan. But as they use a time of trouble to posture and scrap let us look at something that they share.

Korea’s potential output growth is expected to fall further in the long term, as the productive population declines in line with population aging and the low fertility rate……In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate. ( Bank of Korea Working Paper )

I wonder what the latter bit really means?

Meanwhile this is the last thing Japan needs right now.

(Reuters) – Japan’s Nissan Motor Co Ltd (7201.T) has said it is recalling 394,025 cars in the United States over a braking system defect, causing concerns that a brake fluid leak could potentially lead to a fire.

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