Analysis: Crazy growth figures bear scant relationship to reality
From 2015 record surge to 2016 slump: what the hell is going on at Ireland inc?
The Irish economy is under scrutiny as, to put the latest CSO figures in perspective, it means Ireland is growing at four times the rate of China. Photograph: Nick BradshawI
Ireland is a small, open economy and the actions of a few gigantic multinationals can throw the national accounts into total disarray.
This was essentially the CSO’s explanation for the State’s stratospheric growth for 2015, which has been revised up to 26 per cent, from the original estimate of 7.8 per cent.
To put this in perspective, that means Ireland is growing at four times the rate of China.
In actual money terms, Ireland’s national income jumped to €255 billion last year, up from the €215 billion calculated as recently as March.
This would be great if the figures had any bearing on the what’s happening in the real economy, in terms of employment and wealth creation. But we can safely say they don’t. And one key difficulty in interpretation is that the Central Statistics Office cannot give details of transaction that would identify individual companies, for reasons of confidentiality.
The huge boost to growth appears to have come from a few key areas.
- First,a handful of companies in the pharma and tech sector relocated their IP assets or patents here last year amid the global clampdown on multinational tax avoidance.This had the affect of transferring billions in capital assets to Ireland inc and boosting the measured level of investment. The country’s capital stock rose from €700 billion in 2014 to over €1,000 billion last year, a huge jump after year’s of stability. In turn these assets involve extra production and exports being booked here and included in our GDP.
- Second, big multinational companies are also involved in contract manufacturing, whereby they engage third-party companies abroad to manufacture products on their behalf. The exports which never touch down here are reflected in our trade balance. This contributed to the 102 per cent growth in net exports last year.
- Another reason for the inflated figures relates to aircraft leasing companies, which redomiciled aircraft in Ireland. It has already been reported that one company moved its entire multibillion euro balance sheet to Ireland in 2015. Again this creates a new stream of income for the economy as these are leased out.
- The final key reason is a number of major tax inversions - essentially tax driven deals which involved smaller Irish headquartered companies merging with bigger companies, with the entire operation now based in Ireland. Again this has inflated the production and exports recorded as coming from Ireland
In his final speaking engagement last year, outgoing Central Bank governor Patrick Honohan warned that the State’s headline growth numbers were being heavily distorted by multinationals and could not be relied on for a true reading of economic activity.
He said Ireland’s recovery was best illustrated by the growth in employment, which has been advancing at a more modest 2-3 per cent for the past three years.
Another metric through which to glimpse the real economy might be consumption, the strongest determiner of domestic growth, which rose by 4.5 per cent last year and was rising by 5 per cent in the first quarter of 2016.
This is still a strong performance but obviously nothing like the expansions in headline GDP or GNP. Indeed, official sources expressed some concern about the big GDP jump and the likely questioning of it internationally by analysts and investors, who would not see the figures as credible. The data could also see further focus on the use of Ireland for tax driven transactions, unwelcome at a time of international controversy about the tax paid by multinationals.
One positive stemming from the 26 per cent explosion in GDP is the Government’s debt to GDP ratio, which is now below 78.7 per cent, down from 93 per cent. It had been up at 123 per cent at the height of the financial crisis.
The new metric has positive implications for Government’s sovereign debt rating and it compliance with EU fiscal rules.
As Investec analyst Philip O’Sullivan noted the “one big winner” from these revisions is the Irish sovereign. Thanks to the stroke of a statistician’s pen, he said, any diminution of the fiscal space available to the Minister for Finance Michael Noonan post-Brexit has likely been reversed. However in the medium term it will take some time to assess the impact of the new data on our “fiscal space”. By indicating that the economy was growing more rapidly, it may - under EU rules - lead to pressure to run a tighten Budget policy for 2018 and beyond.
The first reaction to the figures, however, is that we no longer have a clear measure of the growth of the economy, vital for economic and budgetary planning. Nor is it clear how this can be developed, with the official figures drawn up by the Central Statistics Office on the basis of international guidelines.