Thursday, May 7, 2015

7/5/15: The Surreal Industrial Production in Ireland: Q1 2015

Irish Industrial production figures for Q1 2015 are confirming what has become a serious joke for many analysts: Irish growth figures are now so distorted by various multinational tax optimisation tricks, there is little point looking at much of the GDP and GNP growth coming from the official accounts.

Take a look at comparatives for seasonally-adjusted indices of volume of production across 'Modern' and 'Traditional' sectors:

Year-on-year, Q1 2015 volumes of production rose 31.73% across all Industries. In the Traditional sectors, production increased 13.1%, while in Modern sector production rose 48.7%. Guess which sector is dominated by the MNCs?

Now, take a look relative to crisis period trough:

  • Across industries, since the bottom was hit in the crisis period (in 1Q 2013), production rose 47.3% - implying quarterly rate of growth of 4.96%. 
  • Across Traditional sectors, output rose 20.42%, implying quarterly growth rate of 1.56%; and
  • Across Modern sectors output rose 78.613%, implying quarterly rate of growth of 7.52%.

Guess why is one sector growing at a rate that is almost 5 times the rate of growth in another sector? It can't be due to 'most productive labour force' we allegedly have, for both Traditional and Modern sectors have access to the same labour force. It can't be due to our 'pro-business institutions and culture', for both sectors have equal access to these, presumably. It can't be due to our 'Knowledge Economy', for - setting aside the questionable nature of its existence - both sectors can rely on knowledge in the economy equally. Wait… perhaps it is down to the difference between MNCs ability to access tax optimisation schemes which are down to international accounting methods, whilst traditional sectors firms have to pay the going headline rate of tax on their real activities? For that is, pretty much, the only fundamental long term difference between the two sectors.

But let's drill a little deeper. See the following chart:

What the above shows is the source of growth in the Modern Sectors - aka Chemicals and Pharmaceuticals - a sector that has managed to post growth of 109.2% on trough (from 1Q 2013). Yep, year on year the sector has expanded output by 60.76%. You'd have to wonder - what on earth can propel pharma to these rates of growth? The answer is the 'miracle' of contract manufacturing - a scheme whereby something not produced in Ireland, gets booked as if it was produced in Ireland.

This we call growth. To the amazement of the European politicians and the amusement of the more shrewd investment markets analysts who are starting to laugh at our PMIs, our GDP, our GNP... and so on...

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