Plenty to be worried about ahead of budget
The artificially inflated figure has led to confidence in Ireland’s statistics being undermined, with economists left in the dark on the true health of the economy.
The Central Bank has suggested the CSO should publish a more meaningful measure of economic activity, not least because the current GDP data distort fiscal aggregates such as Ireland’s debt/GDP ratio heading into Budget 2017.
Last week’s data helped fill in the picture. We know that Ireland’s multinational sector supposedly grew by 101% in 2015 but the indigenous sectors saw a more modest 4.4% decline.
Certainly, the underlying growth rate is more in tune with the 2.4% gain in employment last year and 4.5% rise in consumer spending.
But that doesn’t explain what happened in the multinational sector.
The CSO has shown the extraordinary boost in GDP reflected the transfer of intellectual property assets in Ireland last year.
This means global revenues and profits from multinational companies are now counted in Irish GDP.
This means Irish goods exports surged to €196bn last year from €115bn in 2014, even though they may not be produced in Ireland.
Ridiculous as it may seem, Apple iPhones produced in China and sold in Europe may now be counted as an Irish export — artificially inflating our GDP data.
Unfortunately, the distortions in Irish GDP growth last year may not be a once-off.
It appears multinational companies are continuing to relocate intellectual property from offshore locations such as Bermuda. So it may be that 2016’s GDP figures are also inflated.
This isn’t only a problem in gauging how quickly Ireland’s economy is expanding, but also in framing budgetary policy.
This is most evident in Ireland’s debt/GDP ratio. At face value, Ireland is in the clear — with the debt/GDP ratio now set to fall to 75%.
However, measured against our tax revenues, Ireland’s debt still looks high at 285%, well above the euro area average of 200%.
The tide of international opinion now seems to be moving against indefinite quantitative easing by central banks to help stimulate the economy.
Indeed, the IMF’s autumn policy meetings are examining ways for governments to stimulate growth through higher capital spending. We may now be seeing the beginning of the end for QE.
If so, this should serve as warning to government that current benign conditions in global bond markets may not last.
The other development urging caution is Brexit. Theresa May’s speeches at last week’s Conservative Party conference appear to have put the UK on course for a hard Brexit.
Here, the economic fallout may be substantial for Ireland. Sterling has already fallen to 90p against the euro, squeezing profit margins amongst indigenous manufacturers and the agriculture sector.
Should Britain leave the single market in 2019, the UK will now have to face EU tariffs and quotas on its exports, and presumably, will retaliate in kind.
Some commentators have pointed to the UK’s relatively low share in our exports, currently close to 17.5%. However, once again the multinational sector distorts the data, understating our true exposure to the 90p sterling exchange rate and UK economy.
Stripping out multinational companies from industry shows that 40% of exports by indigenous manufacturing firms goes to the UK. Half of agricultural exports are destined for the UK.
These companies not only face the competitive loss from the euro’s appreciation against sterling, but now the uncertainty of what trading arrangements may be in place by 2019.
These are clearly worrying developments heading into Budget 2017.
Although the government deficit is now forecast to fall to just 0.9% of GDP this year, the uncertainies still point to a cautious approach.
The White Paper published by the Department of Finance this weekend showed a neutral budget would allow the government to achieve a balanced budget next year.
However, in the political atmosphere the possibility of a budget that stands still has never been more remote.
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