Patrick Honohan: Irish household prosperity 'a lot lower than is commonly presumed'

GDP measure significantly overstates the size of the Irish economy, says former Central Bank governor

Patrick Honohan: 'When we dig into the available data in the more relevant parts of per capita income and consumption, we find that Ireland’s relative international position is somewhere between eighth and 12th in the European Union.' File picture: Laura Hutton/Photocall Ireland

Ireland is the 12th most prosperous economy in the EU 27, not its wealthiest, when a different and possibly more appropriate measure that looks at household consumption is used, according to Patrick Honohan, a former governor at the Central Bank.

His research, 'Is Ireland really the most prosperous country in Europe?', which was published by the Central Bank, confirms that GDP significantly overstates the size of the Irish economy but also shows that alternative measures developed in recent years to remove the accounting distortions caused by the multinationals could also be overstating the level of prosperity for Ireland's households. 

Mr Honohan said that although being far from comprehensive, a metric, known as "actual individual consumption”, or AIC, of household welfare when adjusted for the relatively high level of retail prices and house prices here, suggest that Irish prosperity is 12th, or around mid-ranking, of all the EU's 27 countries. 

"On this measure, then, Ireland falls behind not only the UK but all six of the original founder members of the EEC, along with Austria and the three Nordic member states," Mr Honohan said in the research.  

"Indeed, Ireland’s AIC per capita is only about 95% of the EU average, down from 115% in 2006-7. No wonder many questioned the quality and extent of economic recovery even before the pandemic hit," he said.

Mr Honohan told the Irish Examiner that his purpose was not to try to set up a new metric for Ireland's economy. He was responding to discussions that Ireland was the second wealthiest after tiny Luxembourg in the EU, on the basis of the GDP measure, he said.

Ireland is still a wealthy country but "this first-in-class ranking is clearly misleading," he said in the research for the Central Bank. 

"Where, then, could Ireland be more accurately ranked? When we dig into the available data in the more relevant parts of per capita income and consumption, we find that Ireland’s relative international position is somewhere between eighth and 12th in the European Union – a lot lower than is commonly presumed," he said. 

"The lower-ranking comes not only from removing the distortions from multinationals but also from taking account of the fact that consumer prices in Ireland are relatively high," he said in the research.