GDP overestimated economic activity by a third in 2016

Paschal Donohoe has welcomed new measure to counter ‘leprechaun economics’

Minister for Finance & Public Expenditure and Reform Paschal Donohoe delivered a speech entitled ‘The new, new economy’.

Minister for Finance & Public Expenditure and Reform Paschal Donohoe delivered a speech entitled ‘The new, new economy’.

 

Economic activity in the Republic in 2016 was almost a third lower than the GDP figure published by the Central Statistics Office (CSO), Minister for Finance Paschal Donohoe has said.

Mr Donohoe addressed an Ibec conference on the theme of The New, New Economy on Wednesday.

“Measuring and interpreting the size of the Irish economy is particularly challenging given that our economy is so deeply embedded in global supply-chains,” he said.

“The 26 per cent growth rate recorded in 2015 is the clearest example of this challenge.”

Mr Donohoe was referring to the inflated gross domestic product (GDP) data in 2015, which was described by the Nobel prize-winning US economist Paul Krugman as “leprechaun economics”.

“This growth rate was driven by movements from the multinational sector, in particular from the on-shoring of intellectual property and outsourcing of production – two key features of the new, new economy,” said Mr Donohoe.

“But just because it is difficult to measure, does not mean this new, new economy is not real. A key challenge related to mobile intellectual property, and globalisation more generally, is measuring economic activity.”

In response to the limitations with GDP and gross national product (GNP) figures as measures of economic activity, an Economic Statistics Review Group was established by the CSO in late 2016.

One of the key recommendations of the group was for the CSO to develop a new indicator of the size of the economy that excludes the effects of globalisation.

In July, the CSO published for the first time an alternative measure of the size of the economy, so-called “modified gross national income”, known as GNI-star.

The new measure excludes the depreciation of foreign-owned intellectual property assets located in the Republic, which was one of the main reasons for the 26 per cent growth rate in 2015.

Furthermore, it excludes the depreciation of aircraft owned by aircraft-leasing companies.

Mr Donohoe said the level of GNI-star was estimated at €189 billion in 2016. This compares to GDP of €276 billion and GNP of €227 billion. The level of GNI-star was about 32 per cent lower than the GDP figure.

“This has important implications,” he said. “For instance, if this new measure is used to scale our debt, the debt ratio was 106 per cent in 2016.

“It can be seen easily then that the debt-to-GDP figure of around 73 per cent paints an overly benign picture. So just like other forms of capital, intellectual property generates income flows which boost GDP.

“However, unlike most tangible assets, intangibles and their associated benefits are highly mobile – intellectual property can move very quickly.

“My key point is that despite this complexity, we can measure this new economic activity. However, we will need to look at our economy through a different lens to get a clear picture of performance.”

Mr Donohoe said nearly 88,000 companies were registered in the Republic from 2012 to 2016. “When last year’s numbers become known, it will likely rise above 100,000 registrations since the depths of our economic crisis,” he said.

Mr Donohoe also said intangible assets “are now the largest component of headline investment in Ireland”.

“In the first three quarters of last year, for example, almost 35 per cent of modified investment – that is, total investment with the distortionary effects of globalisation removed - was in intangible assets. That is up from just 9 per cent in 2000.”

Ibec chief executive Danny McCoy said the economy was undergoing “transformational change” and that the State ought to use the resources generated by the intangible economy “wisely”, by investing in innovation and infrastructure.