Stellar growth rate comes with health warning

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.

Despite the caveat, it’s unlikely many will see past the 7.8 per cent jump in gross domestic product (GDP) for 2015 detailed in the latest set of national accounts, not least because of the confusing array of data that follows it.

It was more than three times that recorded in either the US (2.4 per cent) or the UK (2.2 per cent) and nearly five times the euro area average (1.6 per cent).

Annual real GDP per head of population at €43, 906 is now higher than where it was in 2007 before the economy crashed.

One of the big election debates centred around the “fiscal space” available for tax cuts or spending hikes in future years.

At the time of the budget, the Government had forecast GDP to come in at about €210 billion; the actual number appears to be closer €215 billion, suggesting the budgetary forecasts presented to voters may have been conservative, despite being criticised by many as irresponsible.

In contrast to the initial phase of Ireland’s recovery, which was driven by exports, activity is now underpinned by a strong recovery in domestic demand, which comprises consumer spending, government expenditure and investment.

Large jump

The latter rose by 28. 2 per cent or €10.6 billion, one of the largest jumps on record. On the face of it, this was almost entirely accounted for by increased purchases of intangible assets, shorthand – in

Ireland

anyway – for intellectual property, by multinationals.

Effectively, Irish subsidiaries are buying intellectual property from other subsidiaries. This sort of investment, as the CSO admits, is once-off and probably reflects tax planning in the face of the clampdown in multinational tax avoidance.

The bumper stream of corporation tax receipts evident in the most recent exchequer returns is another manifestation of this.

Taking in a €3 billion contraction in aircraft purchases, the real increase in investment in buildings, plants and machinery – in other words the real economy –is probably closer €3 billion – positive but more modest than the headline number.

Buoyant numbers

The buoyant trade numbers were also heavily supported by a weak euro and a strongly performing UK economy, which are unlikely to materialise this year amid uncertainty over Brexit. All of which makes the velocity of Ireland’s real economic recovery difficult to isolate.

Perhaps the resurgence in consumer spending, which advanced by 3.5 per cent up from 2.7 per cent in 2014, with car sales and tourism spending highlighted as the main drivers, provides a more accurate measure.

Increased activity in “other services” , the largest sector in the domestic economy, is another.