Cliff Taylor: Latest growth figures shorten odds on 2018 election
Big multinationals have messed up our economic data again, but growth is strong
Dublin Port: Ireland’s economic growth is strong and this will have a big impact on the political dynamic heading into 2018. Photograph: Bryan O’Brien
Big multinationals can completely mess up the economic figures in small economies. And the latest figures showing a 10.5 per cent annual rise in Ireland’s economic output have some echoes of the “Leprechaun economics” saga, when economist Paul Krugman responded to the 26 per cent growth rate in the 2015 figures. The distortions this time are not as dramatic, but nobody believes that the real growth rate is 10 per cent-plus.
However, the reappearance of the Leprechaun should not lead us to ignore these figures. They are further evidence the economy is now steaming along, even if what we might call the “real” rate of growth is probably about half the headline 10.5 per cent.
However you count it, growth is strong and this has big implications for Government policy. This is going to have a big impact on the political dynamic heading into 2018, particularly if it becomes clear early next year that a transition period after Britain leaves the EU removes the immediate threat to growth of a hard Brexit.
A bulging budget pot and the removal of the immediate Brexit threat would surely combine to shorten the odds on a 2018 general election. Everyone wants to be in power in the good times, after all.
We have all been focused on Brexit. But the world keeps turning and the backdrop of strong international growth and rock-bottom interest rates is pretty much the ideal one for a small economy with heavy debts which is trying to bounce back from an extraordinary economic collapse. And many sectors are booming.
GDP of 7%
You could argue back and forth about the “real” level of economic growth. The Central Statistics Office is, of course, counting the figures based on established international norms and pointing clearly to where multinational movements are having an impact. In time, we will get estimates for the year based on a new method which is designed to factor out a lot of this. In the meantime, Ireland’s reported gross domestic product growth rate for all of this year may well, according to estimates by Investec, touch 7 per cent. We are now growing faster than China.
The latest batch of figures have been heavily affected by contract manufacturing, where big multinationals based here arrange for goods to be made in other EU countries on their behalf. The rules dictate that this be counted as part of Irish output. Irish exports are also been pushed up by earnings related to the recent movements of intellectual property (IP) assets here – copyrights, patents, trademarks and so on – largely for tax reasons. And whatever about the headline figures, the breakdown of the data is utterly messed up.
Perhaps the best guideline is the CSO’s figure for domestic demand – adjusted to take out some of the glitches – which shows growth of 4.9 per cent. That feels more like what is actually going on. It chimes with recent tax figures, for example, and with jobs data, the two most up-to-date indicators. Even if you divide the headline figure in half, growth of 5 per cent is still way ahead of elsewhere, with EU growth only about 2.2 per cent, for example, and the US growing by a bit more than 3 per cent.
These economic trends – and what has happened in Brussels this week – are going to change the Irish political dynamic heading into next year. Strong growth creates resources for the Government to spend – even if it also fuels expectations. If the UK and EU succeed in negotiating a transition agreement which effectively maintains current trade arrangement for a few years after Britain leaves the EU, a big threat to growth moving into 2019 is removed.
Despite the latest breakthrough, this transition deal is far from certain and one problem is that it could be well into 2018 before we know. And the central contradictions in the UK’s approach to Brexit remain to be sorted and have the capacity to cause considerable conflict as the talks progress.
Here, the “new politics” threatened to crash apart a few weeks ago and no one is quite sure how securely Humpty Dumpty has been put back together. But more money in the State coffers means it will be a good time to be in Government, provided the Brexit threat is pushed out. There was only a paltry few hundred million to spend in this October’s budget in net terms, even if fundraising by the Government allowed a bit more to be done. In contrast, current forecasts predict that, next October, more than €3 billion will be available for new tax and spending measures, and now strong growth may push this up further.
This gives a big incentive for Fine Gael to hang in there, but also one for Fianna Fáil to pull the plug some time before next autumn, assuming it feels it would have a run at leading the next government. Whoever presents October’s budget will have significant scope for spending.
Now injecting a load of cash into an economy which is already steaming along would not be a good idea. There is a case for significant new State investment, but not – if this growth rate continues – for big tax cuts or huge hikes in day-to-day spending.
But countercyclical economic policy – putting money aside so the Government can inject cash when growth slows – has never been our strong point. And that’s putting it mildly. All sides say they want steady sustainable growth, but – like the box of Quality Street at Christmas when the sweets are put in front of us – we find it hard to resist the temptation of spending and cutting taxes when the cash is rolling in.