3/8/20: Ireland's Real Surreal Economy

In recent months, I have mentioned on a number of occasions the problem of Ireland's growing GDP-GNI* gap. The gap is a partial (key, partial) measure of the extent to which official GDP overstates true extent of economic activity in Ireland.

In general terms, GDP is an estimate of the total value of all goods and services produced within a nation in a year. The problem is, it includes capital and investment inflows into the country from abroad and is also distorted by accounting manipulations by domestic and foreign companies attributing output produced elsewhere to output produced in the country. In Ireland's case, this presents a clear-cut problem. Take two examples:

1. An aircraft leasing company from Germany registers its 'capital' - aircraft it owns - in Dublin IFSC. The value of aircraft according to the company books is EUR10 billion. Registration results in 'new investment inflow' into Ireland of EUR10 billion and all income from the leases on these aircraft is registered to Ireland, generating annual income, of, say EUR100 million. EUR 10.1 billion is added to Irish GDP in year of registration and thereafter, EUR 0.1 billion is added annually. Alas, none of these aircraft ever actually enter Ireland, not even for services. Worse, the leasing company has 1/4 employee in Ireland - a lad who flies into Dublin once a month to officially 'check mail' and 'hold meetings', plus an Irish law firm employee spending some time - say 8 hours a week - doing some paperwork for the company. Get the idea? Actual economic activity in Ireland is 12 hours/week x EUR150 per hour x usual multiplier for private expenditure = say, around EUR230,000; official GDP accounting activity is EUR100 million (in years 2 on) and EUR10.1 billion (in year 1).
2. A tech company from the U.S. registers its Intellectual Property in Ireland to the tune of EUR10 billion and attributes EUR 2 billion annually in sales resulting from the activities involving said property from around the world into Ireland. The company employs 1,000 employees in Dublin Technology Docks. Actual economic activity in Ireland is sizeable, say EUR 7 billion. Alas, registered - via GDP - activity is multiples of that. Suppose IP value grows at 10% per annum. In year 1 of IP transfer, company contribution to GDP is EUR 2 billion + EUR 10 billion + EUR 7 billion Normal Activity. In Year 2 and onwards it is EUR 2 billion + 10%*EUR 10 billion + EUR 7 billion Normal Activity. 

Now, normal GNI calculates the total income earned by a nation's employees and contractors, etc, and businesses, including investment income, regardless of where it was earned. It also covers money received from abroad such as foreign investment and economic development aid.

So GNI does NOT fully control for (1) and (2). Hence, CSO devised a GNI* measure that allows us to strip out (1) above (the EUR 10 billion original 'investment'), while leaving smaller parts of it still accounted for (employment effects, appreciation of capital stock of EUR 10 billion, etc), but largely leaves in the distorting effects of (2).  Hence, GNI* is a better measure of actual, real activity in Ireland, but by no means perfect.

Still, GNI*-GDP gap is telling us a lot about the nature and the extent of thee MNCs-led distortion of Irish economy. Take a look at the chart next, which includes my estimates for GDP-GNI* gap for 2020 based on consensus forecasts for the GDP changes in 2020 and the indicative data on flows of international trade (MNCs-dominated vs domestic sectors) implications for potential GNI* changes:

As it says in the chart, Irish GDP figures are an imaginary number that allows us to pretend that Ireland is a super-wealthy super-duper modern economy. These figures are a mirage, and an expensive one. Our contributions to international bodies, e.g. UN, OECD et al, is based on our GDP figures, and our contributions to the EU budget are, partially, based on GNI figures. None are based on GNI*. For the purpose of 'paying our way' in global institutional frameworks, we pretend to be a Rich Auntie, the one with a Gucci purse and no pension. For the purpose of balancing our own books at home, we are, well, whatever it is that we are, given GNI*. 

This distortion is also hugely material in terms of our internal policies structuring. We use international benchmarks to compare ourselves to other countries in terms of spending on public goods and services, public investment, private entrepreneurship etc. Vast majority of these metrics use GDP as a base, not GNI*. If we spend, say EUR10K per capita on a said service, we are spending 14% of our GDP per capita on the service, but 23% of our GNI*. If, say, Finland spends 20% of its GDP per capita on the same service, we 'under-spend' compared to the Finns on the GDP basis, but 'over-spend' based on GNI* basis.

There is a serious cost to us pretending to be a richer, more developed, more advanced as an economy, than we really are. This cost involves not only higher contributions to international institutions, but also potential waste and inefficiencies in our own domestic policies analysis. Gucci purse and no pension go hand-in-hand, you know... 

12/12/15: Irish National Accounts 3Q: Post 6: Measuring Recovery

In previous posts, I have covered:

1. Irish National Accounts 3Q: Sectoral Growth results 
2. Year-on-year growth rates in GDP and GNP in 3Q 2015 
3. Quarterly growth rates in GDP and GNP 
4. Domestic Demand and
5. External trade side of the National Accounts 

Now, as usual, let’s take a look at the evolution of 3 per-capita metrics and trace out the dynamics of the crisis.

In 3Q 2015, Personal Expenditure per capita for the last four quarters totalled EUR 19,343, which represents an increase of 2.78% on four quarters total through 3Q 2014. Relative to peak 4 quarters total (attained in 4Q 2007), current levels of Personal Expenditure on Goods & Services on a per capita is 7.14% below the peak levels. In other words, 7 and 3/4 of the years down, Personal Expenditure on a per capita basis is yet to recover (in real terms) pre-crisis peak.

Per capita Final Domestic Demand (combining Personal Expenditure, Government Expenditure and Fixed Capital Formation) based on the total for four quarters through 3Q 2015 stood at EUR 34,616, which represents an increase of 7.75% y/y. This level of per capita Demand is 11.19% lower than pre-crisis peak attained in 4Q 2007. As with Personal Expenditure per capita, Final Demand per capita is yet to complete crisis period recovery, 7 and 3/4 of the years down.

On the other hand, GDP per capita stood at EUR 42,870 on a cumulative 4 quarters basis, which is 6.2% above the same period for 2014 and is 0.98% above the pre-crisis peak (4Q 2007). Hence, GDP per capita has now fully recovered from the pre-crisis peak and it ‘only’ took it 7.5 years to do so.

GNP per capita has recovered from the crisis back in 2Q 2015, so at of Q3 2015, 4-quarters aggregate GNP per capita stood at EUR 36,508 which is 5.85% ahead of the same period through Q3 2014 and is 2.39% above pre-crisis peak. In other words, it took 7 and 1/4 years for GNP per capita to regain its pre-crisis peak.

It is also worth looking at the potential levels of output per capita ex-crisis.

To do so, let’s take average growth rates for 4 quarters moving aggregate GDP. GNP and Domestic Demand, for the period 1Q 2002 through 4Q 2007. Note 1: this period represents slower rates of growth than years prior to 1Q 2002. Note 2: I further removed all growth rates observations within the period that were above 5 percentage points for GDP and GNP and above 4% for Final Demand, thus significantly reducing impact of a number of very high growth observations on resulting trend.

Here is the chart, also showing by how much (% terms) would GDP, GNP and Domestic Demand per capita have been were pre-crisis trends (moderated by my estimation) to persist from 4Q 2007:

I’ll let everyone draw their own conclusions as to the recovery attained.

1/8/15: Irish 1Q 2015 Growth: Recovery on Pre-Crisis Peak

In previous posts, I have looked at:

• Sectoral growth contributions for 1Q 2015;
• Trends in annual (y/y) growth rates in GDP and GNP;
• Quarterly (q/q) growth rates; and
• Domestic Demand component of GDP.

So now, let's try to answer that persistent question: has Irish Economy regained pre-crisis peaks of economic activity?

To do so, we need two things:

1. We need 12-months running sum of total activity measured by GDP (mythical metric for Ireland), GNP (increasingly also mythical metric, but slightly better than GDP); and Final Domestic Demand (basically an approximation for the real, domestic economy); and
2. We need population figures to get the per-capita basis for the above metrics.

We can compute all metrics in (1) based on actual CSO data. But we cannot know exactly our population size (CSO only provides estimates from 2011 through 2014 and no estimates for 2015). So I did a slightly cheeky approximation: I assumed that 2015 will see increase in Irish population of similar percentage as 2014. This is cheeky for two reasons: (1) population change can be slightly more or less than in 2014 due to natural reasons; and (2) emigration might be different in 2015 compared to 2014. Specifically, on the second matter, there has been some evidence of slower emigration out of Ireland and there have been some migrants coming into Ireland on foot of MNCs hiring.

Still, this is as good as things get, so here are the numbers, all referencing inflation-adjusted (real) variables:

Irish Personal Consumption per capita (not shown in the chart above) on 12 months total through 1Q 2015 stood at around EUR19,074.79 or 8.4% lower than pre-crisis peak in 4Q 2007. Meanwhile, Final Domestic Demand per capita was some 15.43% below pre-crisis average. Irish GDP per capita was around 2.4% lower than at pre-crisis peak. However, Irish GNP per capita in 1Q 2015 based on 12 months total was 0.2% above pre-crisis peak.

So in simple terms, by one metric of three, we are back at pre-crisis peak levels in per capita, inflation-adjusted terms. This metric is somewhat better than GDP per capita, but not perfect by any means and is getting worse, not better, in terms of measuring the real activity on the ground. Still, after 8 years, the recession cycle is complete in terms of GNP. It is still ongoing in terms of Domestic Demand.

7/3/15:Euro Area GDP per capita: the legacy of the crisis

I have posted previously on the decline in GDP per capita during the current crises across the euro area states, the US and UK. Here is another look:

Let's take GDP per capita at the peak before the crisis.

For some countries this would be year 2007, for others 2008. Keep in mind, many comparatives in the media and by analysts treat the peak as 2008. This is simply not true. Only 89countries of the sample of 20 countries comprising EA18, plus US and UK have peaked their GDP per capita in real terms in 2008, the rest peaked in 2007. Hence, for the former countries, the GDP per capita decline started in 2009 and the for the latter in 2008. Now, take GDP per capita declines cumulated over the years when the GDP per capita was running, in real terms, below the peak. Again, the sample of the countries is not homogeneous here: for some countries, GDP per capita regained pre-crisis peak by 2011 (Germany, Malta and Slovak Republic), by 2013 (Austria and U.S.) and by 2014 (Latvia). For all the rest of the countries, the GDP per capita peak was not regained through 2014.

Now, let's plot the overall cumulated losses over the years of the crisis (over the years from the crisis start through either the year prior to regaining pre-crisis GDP per capita levels for the countries where this was attained, or through 2014 for the countries that did not yet recover pre-crisis levels.

Chart below plots these in euro terms (remember, this is loss through end of crisis or 2014 per capita) (note figures for UK and US are in their respective currencies, not Euro):

Thus, per above, in Greece, cumulative GDP per capita losses during the crisis (through 2014) amount to around EUR42,200, while in Malta cumulative losses from the start of the crisis through the end of the crisis in 2011 amounted to around EUR500 per capita.

Since the crisis was over, before 2014, across 6 countries (in other words the regained their pre-crisis peak GDP per capita levels in inflation-adjusted terms), it is worth to note that through 2014, in these countries, losses have been reduced.  In Austria, through 2014, cumulative losses on pre-crisis GDP per capita levels stood at EUR 2,107 per capita, in Germany there was a cumulative gain of EUR4,078 per capita, in Latvia a cumulative loss of EUR5,696 per capita, in Malta a cumulative gain of EUR1,029 per capita, in Slovak Republic a cumulative gain of EUR1,352 per capita and in the U.S. a cumulative loss of USD258 per capita

Taking the above figures covering either gains  or losses from the start of the crisis in each country through 2014 as a percentage of the pre-crisis peak GDP per capita, the losses/gain due to the crisis through 2014 amount to:

And that chart really tells it all. 

16/10/2014: Stating the Obvious, yet the Un-mentionable

With all the talk about 'inflation is too low' in Europe, let me put it to you succinctly: It is not the inflation, stupid! It is income, aka consumers capacity to sustain demand...

In real terms, and with illicit drugs and prostitution factored in, whilst counting in addition bogus R&D reclassifications and other 'bells and whistles' of national accounts, only TWO of the Euro Area 12 'rich' economies have managed to regain their pre-crisis real GDP per capita peak: Germany and Austria. One of them - Germany - has no demographic driver for increased demand. So go figure: price inflation is low because incomes are low! Not because monetary authorities are not doing something. Nor because Germany is dragging Europe down. May be, because, in part, fiscal authorities have taxed the daylights out of people. And may be because banks have shoved so much credit into households prior to the crisis than few can borrow much more to sustain unsustainable (judging by income growth) consumption growth.

So again: It is not the inflation that is too low, stupid! It is income, aka consumers capacity to sustain demand, that is too low...

17/9/2014: Belarus v Ukraine: Income per Capita

Someone just asked me a question as to what is the relative income in Belarus vs Ukraine. Here is the data on GDP per capita basis (PPP-adjusted to reflect exchange rates and price levels differences) for main CIS countries (click to enlarge):

Note: as Ukraine is now a programme country for the IMF, forecasts end at 2014.

Sorted. Enjoy.

On related note, here are some other comparatives including Belarus and Ukraine: http://trueeconomics.blogspot.ie/2014/09/992014-russias-risks-are-up-but-still.html see table at the bottom of the post.

19/6/2014: Nominal Consumption in Ireland: 6 years of uninterrupted declines

As I blogged yesterday, Eurostat released data on individual consumption and GDP per capita for EU28 for 2013. There are different metrics for measuring income and spending per capita and I blogged on the Actual Individual Consumption and GDP per capita indices relative to EU28 yesterday here.

Updating the database for the other metric: Nominal Expenditure per Inhabitant, Actual Individual Consumption in Euro terms, here are the results:

Over recent years, Ireland sustained significant declines in consumption spending per person living in the country. How severe were these declines? Compared to pre-crisis average (2003-2007) our consumption was down 2.8% in 2013. This is the second most severe impact of a recession on households' consumption after Greece.

As the result of this decline, our ranking has deteriorated as well. In 2008, Ireland's consumption per capita ranked third in the EU28. In 2013 and 2013 we ranked 11th. If in 2007 Ireland's households' consumption exceeded that of the EU15 average by more than 31%, in 2013 this declined to only 5%.

Lastly, in raw numbers terms, our consumption expenditure per inhabitant in 2013 stood at EUR21,565 - below that of any other advanced euro area economy, save the 'peripherals'.

At its peak in 2007, our consumption expenditure per inhabitant was EUR24,978. More ominously - and in line with the dynamics in Domestic Demand reflected in our National Accounts - Irish individual consumption has now declined in nominal terms in every year starting from 2008, although the rate of decline y/y dropped to 0.19% in 2013, against decline of 0.32% in 2012, 0.48% in 2011, 2.9% in 2010, 9.9% in 2009 and 0.35% in 2008.

Remember: we have booming consumer confidence, claims of improving retail sales (not much of evidence of such) and generally positive outlook on the economy… and yet, consumption (aka demand) is declining, year after year after year for six years straight... uninterrupted.

18/6/2014: Ireland's Consumption & Income: Comparatives to EU

Eurostat released comparatives for GDP per capita and Actual Individual Consumption across the EU28 for 2013. And the results are bleak - for the likes of Ireland and rest of the 'periphery'.

Full release is here.

Key takeaways:

Chart 1 plots actual individual consumption in EU28. Ireland at 97 is in a poor 12th position, below EA18 average of 106.0 and below EU28 average of 100. Ireland is on par with Italy and is ahead of only 'peripheral' and Eastern European states.

But we are in an honourable 5th position when it comes to GDP per capita, thanks to the massive tax optimisation by MNCs driving our economy's aggregate numbers. At 126 reading for Ireland, we are well ahead of EA18 reading of 108 and EU28 reading of 100:

As I noted in my WallStreet Journal oped (here), Ireland is suffering from a tax-optimisation induced 'resource curse'. Here is the illustration:

Note: three countries under the EU Commission tax probe are the top three in the size of the gap between GDP per capita and individual consumption. Luxembourg is by far the leader here - partially due to same causes that drive Ireland's and Netherlands' gaps (MNCs tax optimising) and partially due to the fact that much of Luxembourg's labour force resides outside Luxembourg. Which means it's gap of 91.3% is over-exaggerating pure effects of tax optimisation on its economy.

So here we have it: Ireland's allegedly spending-happy consumers are below EU average, while our allegedly employment-generating MNCs are driving up activity that is not translating into actual spending by people living here... It's a resource curse, on par with what is happening in Luxembourg, Switzerland and Norway.

23/12/2013: Long term growth in Advanced Economies and Ireland

Long range growth figures are a fascinating source of insight into what is happening in the economies over decades. Here's the data on GDP growth in advanced economies (29 countries) for 1980-2013. All figures are computed by me from the IMF data.

Let's start with a long view.

Chart below shows growth in real GDP per capita cumulated over 1980-2013 period:

The chart above clearly shows that after 33 years spanning periods of growth and two crises, Ireland is well-ahead of all euro area and Western economies in terms of cumulated growth in real GDP (the series are based on GDP expressed in constant prices in national currencies).

What the chart above does not show is that:

• In the period of 1980-1989 Irish growth run at an annualised rate of 1.8% per annum, earning us 17th rank out of all 29 economies
• In the period of 1990-1999 Irish growth run at an annualised rate of 5.6% per annum, earning us 1st rank out of all 29 economies
• In the period of 2000-2009 Irish growth run at an annualised rate of 0.74% per annum, earning us 17th rank out of all 29 economies
• In the period of 2010-2013 Irish growth run at an annualised rate of 0.65% per annum, earning us 17th rank out of all 29 economies

What does the above suggest? One: it suggests that our 'catching up' period of the 1990s was very robust: we outperformed the group average growth rate by a factor of x2.66 times.
Two: it also suggests that the 'catching up' period was not followed by sustainable growth momentum, as our growth rates declined in 2000-2013 period to those below the rates recorded in the 1980-1989 period and once again fell below those for the majority of advanced economies average.
Three: With our catch-up growth still putting us well ahead of the average in cumulated growth terms, including the growth rates for comparable catch-up economies, it is unlikely that we are due another 'catching up' period of growth any time soon. In other words, we need to get organic, sustainable growth sources to continue expanding in the future.

Chart below shows our performance across the above metric by decade:

Our performance, once adjusted for FX rates and price differentials tells a slightly different story: once we control for currencies movements, it turns out that we were less exceptional than based on comparatives for GDP expressed in national currencies:

• In the period of 1980-1989 Irish growth run at an annualised rate of 5.6% per annum, earning us 17th rank out of all 29 economies. The average growth for all of the 29 economies was 6.4% and median was 5.8%, so we were below average, but not that much different from the median.
• In the period of 1990-1999 Irish growth in GDP per capita pop-adjusted run accelerated to an annualised rate of 7.6% per annum, earning us 1st rank out of all 29 economies. The average for the 29 economies fell to 4.0% and the median to 3.8%. This was the period of our catch-up. So instead of x2.66 rate of growth relative to the average, we got x1.90 times the average.
• In the period of 2000-2009 Irish growth in GDP per capita PPP-adjusted run at an annualised rate of 2.6%% per annum, earning us 21st rank out of all 29 economies, which averaged growth rate of 3.05% and median of 2.9% per annum. The period marked the end of our catching up and the on-set of our bubble-driven growth that still was less than average or median.
• In the period of 2010-2013 Irish growth run at an annualised rate of 2.7% per annum, earning us 17th rank out of all 29 economies, against their average of 2.2%, but a median of 3.0%. This confirmed the growth trends in 2000-2009.
• Beyond our own case, note the steady decline in the advanced economies average growth rates by decade.

Do note two interesting facts emerging from the above, based on both GDP in national currencies and GDP PPP-adjusted:

• By both metrics of GDP per capita growth, Ireland in 2000-2009 had growth lower than Ireland in the abysmal 1980s (that is the effect of the massive crisis covering years of 2008-2010).
• By both metrics of GDP per capita growth, 2010-2013 period (after we officially 'emerged' from the Great Recession) have been worse than the dreaded 1980s.

One last chart, showing evolution of GDP per capita over time:

22/12/2013: Most Important Charts of the Year: via BusinessInsider

A new set of The Most Important Charts from BusinessInsider.com is out, this time covering the full year:
http://www.businessinsider.com/most-important-charts-2013-12

My contribution is here: http://www.businessinsider.com/most-important-charts-2013-12#constantin-gurdgiev-trinity-college-dublin-85

The full chart:

Note: 2013 marks the fifth consecutive year of the European growth crisis. Amidst the recent firming up in global conditions, it is important to remember that per capita GDP (in US Dollar terms) in both the euro area and the UK remains below the pre-crisis peaks. In absolute terms, euro area cumulated 2008-2013 losses in GDP per capita range from EUR 1,311 for Malta to EUR 56,496 for Ireland, with the euro area average losses of EUR 20,318. No advanced economy within the EU27 has managed to recover cumulative losses  in GDP per capita to-date. On average, euro area GDP per capita in 2013 is forecast to be 9.7% lower than pre-crisis. Across other advanced economies, the GDP per capita is expected to be 8.4% higher in 2013. While this makes the euro area a strong candidate for growth in 2014-2015, absent apparent catalysts for longer term gains in value added, and TFP and labour productivity expansion, a European recovery can be a short-lived bounce-back, rather than a dawn of a New Age.

Sources: Author own calculations based on IMF data.

There is an earlier version of the same chart I prepared, covering also the duration of the crisis and its extent using as a metric GDP per capita in constant prices in national currency (not USD):