Last month the Central Statistics Office (CSO) published the annual national accounts for the Republic. An inevitable consequence of the globalised nature of this economy is that they do not provide a clear picture of what is happening: as discussed in earlier articles we need significant additional data to understand just how fast the economy is growing.
The headline GDP figures suggest that the Irish economy grew by about 7 per cent last year, while gross national income GNI suggested a growth rate of 4.5 per cent. By contrast, the new adjusted measure GNI grew by only 3 per cent in current prices, and probably less in constant prices.
The Central Bank in its latest Quarterly, published earlier this week, refers to these problems, saying it is "difficult to analyse adequately fundamental questions such as the current cyclical position of the economy or the extent to which growth is being driven by domestic or external factors".
The inevitable difficulties in reading the economy's runes cause problems for policymakers in understanding what is really going on
Nonetheless, the Central Bank, building on a growth figure for 2017 of 4.5 per cent, expects that the economy will continue to grow at over 4 per cent into next year. This “feels” right given the rapid growth in employment. However, it is a bit like driving in a thunderstorm. We know there is a road in front of us, but we can’t really see it.
Partly reflecting this uncertainty, the Central Bank, the ESRI, Fiscal Advisory Council and the Department of Finance are all recommending great caution in the next budget – it should plan for a government surplus in 2019.
The inevitable difficulties in reading the economy’s runes cause problems for policymakers in understanding what is really going on.
The National Competitiveness Council on Wednesday expressed its concern about Ireland's vulnerability to changes by a few very large companies. It rightly pointed to our heavy dependence on a handful of firms for the size of tax revenue, referring to the fact that five companies account for 40 per cent of our exports.
However, a fuller reading of the available CSO data would suggest a rather different picture. While the National Competitiveness Council is right to say a few large companies account for a large share of our recorded exports, some of these are goods manufactured in the Far East and sold on world markets, with Ireland not even being a stopover.
For these goods, and much of the other exports of foreign multinationals (MNEs), there is very little value added in Ireland, and their impact on the real economy is low and much smaller than their face value.
The CSO’s Institutional Sector Accounts provide very valuable information on the impact on the economy of large MNEs. The 50 largest such firms account for around 5 per cent of Net National Income (the best measure of the economic welfare of those living in Ireland). The remaining smaller foreign MNEs account for a further 10 per cent of the economy. Thus, while clearly important to Ireland the top multinationals are really a small fraction of our economy.
Ireland’s vulnerability to changes in behaviour of MNEs lies more in the fact that 80 per cent of corporation tax receipts, amounting to around 3.5 per cent of adjusted national income, comes from MNEs. As a range of bodies, including the Department of Finance, have stressed, this is where Ireland’s true vulnerability lies.
As Brexit ructions rock the UK, last week it emerged the British government was making plans to ensure continued access to drugs made in Ireland and other EU countries after it has left. However, there is little danger of a sudden stop in these exports – if necessary the RAF will deliver them. Rather the vulnerability of Irish exports to Brexit is predominantly a challenge for domestic firms, not for high-tech MNEs.
The current account of the balance of payments ought to be a crucial indicator of whether there are serious imbalances in the economy – it reflects the difference between what we earn and what we pay abroad. In the run-up to the economic crisis it showed a huge deficit, which in 2006-2007 should have been a red light for policymakers.
However, as with the national accounts, the current account balance is today heavily distorted by transactions involving aircraft leasing and foreign-owned intellectual property, as a result showing a huge surplus that bears no relation to reality.
To deal with this problem the CSO have published an adjusted measure excluding the distorting items. The result shows a small balance of payments surplus for 2016 and 2017, suggesting that economic growth to date is real and sustainable. This adjusted measure is a valuable addition to our understanding of what is going on in the economy.