GDP growth figures ‘misleading’

GDP is no longer an accurate gauge of economic activity in the economy, according to the ESRI.

It noted that last year GDP shrank by 0.3% but GNP rose by 3.3%.

“Over the last two years, it has become increasingly difficult to unravel recent trends in the economy, much less to forecast developments in the coming year,” the ESRI stated.

“The release, in March of this year, of the national accounts for 2013 raises more questions than it answers.

“The most striking problem these data pose for those watching the Irish economy is the dramatically different trajectory of real GDP and real GNP.”

In its latest review of the economy, the institute is forecasting GDP growth of 2.6% this year and 3.5% next year, although these could be subject to substantial revisions, it said.

The ESRI attributed two key factors to fluctuations in GDP figures over the past few years.

The first of these is the patent cliff in the pharmaceutical sector where generic drugs are increasingly replacing patented products in overall output. Low value generic drugs are causing a big drop off in profits in the sector, which has knock on effects for GDP figures.

The second trend is the amount of sales revenue and profits in the IT sector being moved abroad, even though tech firms have significantly increased employment levels over the past few years.

Again, the GDP figures are skewed by lower profits booked in Ireland, but the domestic economy and the GNP figures have benefited hugely from the increase in real activity.

ESRI chief economist, John Fitzgerald, said using GDP figures for real growth in the Irish economy is now misleading. However, the European Commission uses GDP, which will present problems when calculating the economy’s structural deficit, which is a key part of the fiscal stability treaty, he noted.

Mr Fitzgerald said the Irish economic recovery was being underpinned by a surge in investment.

The ESRI is forecasting an increase in investment of 9.6% this year and 10.4% next year.

Exports are expected to grow by 3.7% in 2014 and 4% in 2015. The current account as a percentage of GNP is forecast at 9.3% this year and 9.9% next year.