A tale of two economies

The ESRI's John FitzGerald showed in a paper published in May that Irish GNP had been overstated by at least 5% due to the decision of several overseas companies, mainly British and American, to relocate their headquarters to Ireland for tax reasons.
The ESRI's John FitzGerald showed in a paper published in May that Irish GNP had been overstated by at least 5% due to the decision of several overseas companies, mainly British and American, to relocate their headquarters to Ireland for tax reasons.

The brief inclusion of multinational profits in Ireland's GNP statistics is skewing the reality of an economy that is flat on its back, writes Dan White



12 July 2013

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The drastic downgrade by the CSO of Irish economic performance confirms what many of us had long suspected, that the Irish economic "recovery", if there ever was one, has run its course.

For at least the past year the Irish economy has been displaying what can only be described as schizophrenic symptoms. On the one hand government ministers and the CSO assured us that the economy had bottomed out and that growth has resumed.

Schizophrenic symptoms

Unfortunately these assertions and statistics were contradicted by the evidence on the ground, with retail sales falling once again, unemployment remaining stubbornly high and the international recession reducing demand for our exports in overseas markets.

So what is really happening in the Irish economy? Is the recovery for real or just a statistical illusion?

The sceptics’ case was strengthened late last month when the CSO drastically downgraded its economic growth estimates for the Irish economy. Instead of the 0.9% economic growth, as measured by GDP, which the CSO had previously estimated for 2012, it is now pencilling in growth of just 0.2%.

For GNP, which excludes multinational profits, the CSO now estimates growth of 1.9% for 2012, down from the 3.4% GNP growth, which it had previously estimated.

Technically back in recession

In fact the underlying picture is even worse than this downgrade suggests. The CSO now estimates that GDP actually shrank by 0.6% in the first quarter of 2013 and that the Irish economy is now technically back in recession.

But what about GNP? While growth was lower than previously estimated for 2012, it still grew by a not insignificant 1.9% in 2012 and the CSO estimates that the growth rate accelerated to 2.9% in the first quarter of 2013.

As GNP excludes repatriated multinational profits it should present a more accurate picture of the true state of the "real" economy. As it is still growing, what’s the problem?

Multinationals skewing statistics

Unfortunately there are growing signs that, just like GDP before them, Irish GNP statistics are being skewed by the activities of the multinationals. In a paper published in May the ESRI’s John FitzGerald showed that Irish GNP had been overstated by at least 5% due to the decision of several overseas companies, mainly British and American, to relocate their headquarters to Ireland for tax reasons.

This means that when the overseas profits of these companies, which are technically "Irish", are repatriated, however briefly, to Ireland they are included in Irish GNP. This is despite the fact that these profits leave just as quickly as they arrived and have no impact on underlying Irish economic performance.

From bad to worse in ‘real’ economy

Meanwhile out there in the ‘real’ economy things are going from bad to worse. Retail sales, generally regarded as the best barometer of the performance of the domestic economy, have now fallen by a cumulative 4.8% in value over the past seven months. Even when motor sales, traditionally the most volatile category of retail sales, are excluded the fall in retail sales since the end of October 2012 was still 2.5%. Coming on top of previous falls, the latest dip in retail sales has been sufficient to tip even more Irish-based retailers over the edge since the beginning of 2013.

Among the latest retail casualties have been Xtra-Vision and HMV, to which receivers were appointed while B&Q, Monsoon and Pamela Scott all went into examinership.

Meanwhile consumer confidence, which showed signs of rallying in mid-2012, has started to slip once again as consumers worry about their job prospects and, on top of all the tax increases imposed over the last five years, face the prospect of having to pay the new local property tax this year and water charges next year.

Low property transaction volumes

House prices are also treading water. While the latest CSO figures show that prices rose slightly in the last two months, transaction volumes remain tiny with just 4,450 houses and apartments changing hands in the first quarter. Based on this level of activity it would take each of the country’s two million houses and apartments an average of more than 110 years to change hands.

The supply of mortgage credit, the essential lubricant without which no housing market can function properly, has virtually disappeared. The banks advanced just €330 million of new mortgages in the first quarter, down 27% on the first quarter of 2012. On an annualised basis that works out at just €1.2 billion, down 97% on the €40 billion of new mortgages which the banks lent in the peak year of 2006.

The fact that over 40% of housing transactions are now for cash dramatically illustrates the fact that, for all intents and purposes, the banks are out of the housing finance market.

Prolonged bout of deflation

The latest consumer price index figures also paint a picture of an economy flat on its back. The annual rate of inflation fell to just 0.4% in May. However, when one excludes categories such as education, tobacco and alcohol, where prices have been pushed by higher government taxes and charges, most prices are now actually falling.

For the first time since the 1930s the Irish economy is experiencing a prolonged bout of deflation. While this might be good news for those on fixed incomes it’s hardly a sign of a robust economy.

So is there any chink of light to be discerned amidst all of this economic gloom?

More competitive prices

While it is still early days, it is gradually becoming clear that the cost and competitiveness gap between Ireland and our competitor economies, which widened massively during the late Celtic Tiger years, is gradually narrowing once again.

Irish consumer prices, which at the peak of the boom were 27% higher than the EU average were "only" 17% higher in 2011. This gap is likely to have narrowed further when the 2013 price comparisons are published next year. Meanwhile the latest international competitiveness rankings from IMD put Ireland in 17th position, up three places on the previous survey.

So can these faint glimmers of hope feed through into an improved performance for the domestic economy? With a general election due by the spring of 2016 at the very latest, the government must be fervently hoping that they do.




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