Former Central Bank governor Patrick Honohan urges exceptional caution over Irish GDP during pandemic

Former Central Bank governor Patrick Honohan: '2021 is a good time to be exceptionally cautious into reading too much into changes in GDP because they are bouncing around by an enormous amount.'

Former Central Bank governor Patrick Honohan said everyone should be "exceptionally cautious" about reading too much into surging GDP numbers this year as the country seeks to restore living standards to pre-pandemic levels.  

The remarks come amid renewed concern from many economists that the huge distortions caused by multinationals in Ireland's national accounts are showing an overly rosy picture, as the GDP headline figure shows a world-beating double-digit surge in economic growth. 

"2021 is a good time to be exceptionally cautious into reading too much into changes in GDP because they are bouncing around by an enormous amount,” Mr Honohan told the Irish Examiner. 

“It is important that we have a proper indication of how productive our economy is in generating goods and services for people in Ireland and not to get the wrong impression that on the one hand make us go out with a begging bowl or on the other hand to be too extravagant.”

Distortions caused by multinationals

The distortions caused by multinationals in overstating economic growth in Ireland are well known, but the GDP measures are again in the spotlight after purportedly showing that Ireland was the only advanced economy in the world to grow sharply last year, by 6%, even as the Covid-hit global economy slumped.      

In its latest forecasts, the Central Bank forecasts a huge surge of over 15% in GDP this year and growth of over 7% in 2022. In contrast, it forecasts that modified domestic demand, a more accurate reflection of economic activity, will grow 5.5% this year but only after sliding by 5% in 2020 during the worst of the Covid slump. 

Another measure called GNI was developed by statisticians in the wake of the international derision sparked when Ireland's national accounts for 2015 showed the economy surged by over 26%. Those accounts were distorted by the accounting of a small handful of multinationals, including Apple, the Irish Examiner reported at the time.        

Mr Honohan said another measure called actual individual consumption, or AIC, can also be useful, and like GNI is free of the multinational distortions. AIC puts Ireland on "level pegging" with other countries in measuring the differences of prices in different countries, he said.