In a recent assessment of the economic outlook for Ireland for 2016, the DG for Economic and Financial Affairs of EU has heaped praise on the country (see full list of country-specific assessments here: http://ec.europa.eu/economy_finance/eu/forecasts/2016_winter_forecast_en.htm?utm_source=e-news&utm_medium=email&utm_campaign=e-news132). Much of it - justified.
However, a glaring miss in the analysis was a truthful representation of the balance of sources for growth in the economy.
Per EU Commission: “The Irish economy grew again strongly in the third quarter of 2015 although more moderately than earlier in the year. …However, survey indicators point to … GDP growth for 2015 as a whole to 6.9%. In 2016 and 2017, the moderation in GDP growth is expected to continue towards more sustainable rates of about 4% and 3% respectively.”
All of which is fine.
Then the assessment goes on: “While the recovery started in the external sector, domestic demand is now driving GDP growth. It expanded by more than 8% (y-o-y) in the first nine months of 2015, with household consumption growing by 3.5% and investment by over 25%.” I covered the latest figures for Irish national accounts in a series of posts here: http://trueeconomics.blogspot.com/2015/12/131215-irish-national-accounts-3q-post.html, and in particular, domestic demand growth drivers here: http://trueeconomics.blogspot.ie/2015/12/111215-irish-national-accounts-3q-post.html. And as I noted in my analysis, the problem is that Domestic Demand printed by CSO no longer actually reflects purely indigenous economy activity.
EU assessment hints at this: “…as developments in some companies and sectors are boosting investment and imports in the economy. Multinationals have been transferring a number of patents to Ireland. In the first nine months of 2015, these transfers generated a growth in investment in intellectual property of over 100% (y-o-y) and an equivalent increase in services imports. In 2016 and 2017, the fees for the use of these patents are expected to benefit the current account balance and lead to more company profits being booked in Ireland. Conversely, the purchase of airplanes by international leasing companies based in Ireland collapsed in the third quarter of 2015, leading to a large fall in equipment investment. Excluding intangibles and aircraft, core investment was strong, growing by over 11% (y-o-y) in the first three quarters of 2015, despite the delayed recovery in construction activity. The growth in core investment is forecast to continue more moderately in 2016 and 2017.”
All of which goes to heart of the argument that so-called domestic demand-reported ‘investment’ is heavily polluted by MNCs and aircraft purchases. In other words, stripping out effects of MNCs on domestic demand, actual growth has once again been heavily (around 1/2) concentrated in the external (MNCs-led) sectors. And worse, going forward, transfers of patents signal that Irish economy is likely to become even more unbalanced in the future, with tax arbitrage inflows from the rest of the world to Ireland making us ever more dependent on remaining a corporate tax haven in the face of globally changing taxation environment.
Politically correct public communications from the EU Commission won’t put it this way, but we know that behind the scenes, our shenanigans, like the introduction of the ‘Knowledge Development Box’ tax loophole are unlikely to go unnoticed… especially when it leads to a 100% growth in patents offshoring.