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... 

24/3/2012: QNA 2011 - Part 2

In the previous post (here) we considered 2011 results for NationalAccounts in relation to sectoral composition of GDP and GNP in constant prices terms.

Recall that the headline results are:

• Annual growth in GDP of +0.71% yoy in 2011, with GDP still 9.51% below its pre-crisis peak in constant prices (controlling for inflation)
• Annual contraction in GNP of -2.53% with GNP now down 14.33% on its pre-crisis peak.
• Net factor income outflows to the rest of the world have hit historical peak at €31,801mln outflowing to foreign investors and MNCs net of whatever might have been paid in dividends and other revenues to Irish investors. This figure is now up 16.39% on 2010 and 18.62% on the pre-crisis levels.

As the result of the above, Irish GDP/GNP gap - the measure by which our Government and international agencies overestimate the true size of our real economy - has gone up from 20.61% in 2010 to 24.61% in 2011, marking absolute historical record.

The above chart shows an interesting dynamic. Remember that there are claims being floated about that  there are many so-called uber-rich walking the streets of Ireland. Alas, here's a sticky point. People who are rich in Ireland today clearly do not hold Irish property in any significant proportion of their protfolia, since the can't remain rich with property values down by more than 50% in the country. They are also not holding Irish equities - because these are still substantially down on their pre-peak valuations and because absent banks, there is really not much you could have invested in in terms of Irish shares before the crisis to begin with. This, in turn, implies that to be filthy rich, these individuals must own assets outside Ireland. Assets outside of Ireland pay dividends and some realised capital gains. Which, were they remitted to Ireland, would count as inflows into Ireland and compensate for MNCs and foreign investors expatriations out of Ireland. In other words, either there is no glut of the Irish rich or their assets and profits from these assets are not being on-shored into Ireland. Take your pick, but either way, good luck imposing a wealth tax on the so-called super rich.

The destruction of our national income as opposed to gross domestic product has been spectacular in recent years. As charts below illustrate, we are now well beyond much of hope of ever regaining the pre-crisis trend income levels.

Between 2008 and 2011, Ireland has lost €93.95bn in cumulative GDP (€20,514 per capita) and €75.49bn in terms of GNP (€16,482 per capita) once inflation is factored in. 

The losses accumulated in GNP compared to GDP have been more severe and this means that in 2011 overall, the burden of taxation has risen, not fallen, in the Irish economy when measured against GNP:

Keep in mind that the above chart shows taxes net of subsidies as a share of overall economy, which, of course, is an underestimate of real dynamics as subsidies have risen during the bust. 

In the following post we will deal with some quarterly comparatives and results.

Economics 17/12/10: Q3 2010 National Accounts - part 2

This is the second post on the QNA data for Q3 2010.

Let's take a look at three more dynamic sectoral components of GNP.
Services and industry are now pulling in different directions, which means the proverbial glass on growth is really half-full (or half-empty). Amazingly, construction sector continues to shrink. This is even better illustrated as the sector share of domestic economy:
Now, recall that PMIs for construction sector for November showed continued monthly contraction in sector activity, led by civil engineering (as the rest of the sector has already shrunk by well over 80%). 2011 forecast for new homes completion is now around 9,000 units - and in my view that too is rather optimistic. This means we can expect more bad news out of the sector with a continued knock on effect onto auxiliary services and materials sectors.

Taking a look at GDP and GNP in current prices terms:
For the second quarter in a row, the value of Irish exports was in excess of the value of the country GDP (by 2.94% in Q3 - down from 3.03% in Q2, while in Q3 2009 it was 11% below the level of GDP). Undoubtedly, weakening euro helped here.

Again, in current prices, consumers are still striking, while capital investment has gone even deeper into the negative territory, so that the very partial replacement of amortized stocks that gave it a temporary boost in Q2 before has been exhausted. Government spending is not showing much of a decline.
Take a look at quarterly rates of change in the above components:
We are now an economy that consumes its capital stock, not the one that adds to it for future growth.

Economics 16/12/10: Q3 2010 National Accounts - part 1

This is the first post analysing the latest Quarterly National Accounts data for Q3 2010 released today.

Let's take a big picture view first.
Both the GDP and GNP expanded in Q3, with GNP marking the second quarter of continuous expansion. Real GDP grew +0.5% qoq. Currently, GDP stands at 1.7% higher the lowest point in this recession so far (Q4 2009), but 0.694% below Q3 2009 in current prices. Cumulative Q1-Q3 GDP (seasonally adjusted, constant prices) stands at -1.21% below Q1-Q3 2010 GDP. In other words, year on year we are still in a recession.

Real GNP also rose qoq by 1.1% - a second consecutive quarterly rise following a tiny uplift of 0.1% in Q2. Since GNP measures our actual economy, netting out transfer pricing by the MNCs, it is worth taking a bit of a closer look at the numbers. Net transfers out of this economy, which includes remitted profits, rose 4.573% in Q3 in yoy terms. Over the first three quarters of 2010 this number is up 10.46% relative to 2009. As the result, our GNP was 1.77% below Q3 2009 level and the first three quarters cumulative GNP for 2010 was 3.7% below that of the same period in 2009. By any real metric, this is a raging recession, folks.

The good news from today's figures is that our exports are still growing, and in fact, are still driving economic growth. Total exports grew by 3.6% qoq, though that rate was 7.6% in Q2 2010 and 6.4% in Q1, which implies that Q3 posted a slowdown in exports growth. We now have three consecutive quarters of growth in exports. Which is brilliant news. Year on year, Q3 exports grew by 13.1%, while first three quarters of 2010 posted a rise in exports of 8.9% relative to the same period in 2009.

Irish exporters do deserve some serious praise here. And one other net positive is that we are finally seeing domestic economy benefiting from this exports growth, as evidence by the slight closing of the GDP/GNP gap.

But more on exports later.

As chart above shows, consumer spending and government spending were down, once again.

Consumer spending was down 0.544% qoq - the largest decline in year and a half. In yoy terms, consumer spending was down 1.38% and in Q1-Q3 cumulative terms, personal consumption was down 1.1% on 2009.

Government spending fell 5.053% yoy in Q3 (note that the same yoy decline in Q1 2010 was 6.082%, implying that Government performance on spending side actually worsened during the year), qoq Government spending fell 1.738% in Q3 2010.

Total domestic demand is down 1.7% qoq and 5.1% yoy.

But take a look at the comparatives for the dynamics of private consumption and Government spending since 2005. First, consider both expressed in constant prices:
And next, consider the same expressed in current prices:

In real (inflation-adjusted) terms, Government spending is currently between Q1-Q2 2006, while private consumption is between Q4 2005 and Q1 2006. A close comparison. Once we allow for inflation (in current prices terms), Government spending is currently between Q4 2006 and Q1 2007, while private consumption is between Q4 2005 and Q1 2006. Much less of a match.

Economics 01/07/2010: Recovery or a triple dip?

So the recession is over… or it just went into a triple dip… you have a say.

Today’s QNA for Q1 2010 showed a 2.7% increase in real GDP compared with the final quarter of last year. This brings to an end eight consecutive quarters of economic contraction – the longest recession of all advanced economies to date.

What happened? Have you felt that warm wind of spring back in March and decided that it is time for Ireland Inc to start upward march to renewed prosperity?

Err… not really. What did happen was a simple trick: Deflation took out a bite out of the price level adjustment, as nominal GDP grew a fantastically unnoticeable and statistically indifferent from zero 0.0956%. Yes, that’s right, less than one tenth of one percent. Take a snapshot: in Q1 2010, our MNCs-led exporting economy was better off than in Q4 2009 by a whooping €37 million, while our domestic economy shed another €2,199 million. Don't know about you, I feel so much richer today than back in December 2009...

One has to be sarcastic about the Government that needs a massive deflation to generate economic growth. Industry gains - again driven by MNCs manufacturing - are clearly not supported by domestic services and construction.
Oh, and subsidies-reliant sectors - Government and Agriculture - are going relatively strong. Clearly CAP is recession proof - per chart below - with Agriculture up 84% on Q4 2009. Investment continues to compress: capital formation down 14% qoq, and 30% yoy. And that’s gross! Government spending was down a paltry 0.9% qoq or €96 million – a clear slowdown in deficit reduction efforts. Give it a thought, we will be borrowing this year some €17bn - not accounting for banks alone. At the current rate of Government spending contraction, Q1 2010 reductions in public spending (net!) will cover just 10% of our annual interest bill on one year worth of borrowing!
Consumer spending contracted further by 0.2% supported from hitting much greater decline numbers by services spending and, potentially, 2010 registration plates fetish. Remember, total retail sales are down more than 6% in Q1 2010. Added support to consumer spending was winter freeze, which was a boost to the likes of state-owned ESB and Bord Gas – carbon footprint notwithstanding, good news for state monopolized energy sector.

Time for champagne, then? Perhaps not quite vintage variety yet, but some bubbly? I am afraid not.

There’s another trick to the data: Net exports boomed – as we imported fewer things to consume, invest and use in future production, while Ireland-based MNCs booked on massive profits. So massive in fact that net increases in transfers of profits abroad were literally bang on (take few euros) with net increase in our trade balance.

This has to be the fakest ‘recovery’ one can imagine.

Before charts, illustrating the above, few more points. Services exports were particularly strong (good news):

• volume of goods exports rose 2.4% yoy in Q1 2010,
• volume of services exports was up 9.5% yoy.

Services – the Cinderella of our external trade policies – now account for 46% of total exports.

As MNCs-driven economy steamed ahead, domestic economy continued to contract -0.5% in Q1 2010, in qoq terms. Profits expatriation by the MNCs reached €7.9bn in Q1, up from €7.1 in Q4, and GDP/GNP gap widened to over 20% in quarterly terms.

Should things stay on this 'recovery' course, by the end of this year some 26% of our entire economy's output will be stuff that has nothing to do with our economy. That would put us on par with some serious banana republics out there as an offshore centre. And not that I, personally mind. It's just fine that companies book profits via Ireland Inc. The problem is when we, the natives, start believing the hype that our GDP generates.

Seeing much of a recovery anywhere?

And a more detailed look at exports and imports - the causes of our today's celebration:

As I have pointed out many times before, our MNCs need imported components, goods etc in order to generate exports. So as imports fall, two things come to mind:

1. A serious concern that lower imports might reflect slowing down of MNCs-led exporting; and/or
2. A serious concern that our consumers (dependent on imports) are still running away from our retail sector.

You be the judge as to what really goes on, but either way, this is not a good omen. The 'recovery' might be a Pyrrhic victory.

At any rate, you'd need a microscope to notice that we are out of a recession in the chart below:
But you can clearly see what's going on on that side of economy which generates jobs, pays our bills and actually translates into our standards of living (aside from Government stuff, that is):

Welcome to an MNCs-led recovery, then:
If it doesn't feel like much of a boom, then don't listen to anyone saying 'We've finally turned the corner'. Or be warned it might be a dead-end alley, or worse a brick wall...

Economics 01/07/2009: UK Ad Spend, QNA & US Consumer Confidence

Per Adweek, advertising spend in the UK fell 4% to £18.6bn in 2008. All media experienced declines, apart from internet and cinema fell, according to figures released on 29 June by the Advertising Association. The drop compares with a rise of 4.3% in 2007. Press (newspapers and magazines) was the biggest spending category at £6.8bn in 2008, down 11.8% yoy. TV was the second-biggest spending category (£4.4bn), down 4.9%. Internet spend was third at £3.6bn up 19.1% on 2007. Radio was down 8.5% to £488m, outdoor and transport fell 3.8% to £1bn, while cinema rose 1% to £205m. Three things are worth noting in these figures:

• As consumer confidence and spending collapsed, overall advertising spend stayed surprisingly firm;
• Internet has probably benefited from substitution from costlier print and TV/radio to cheaper on-line advertising. This is potentially a 'recession factor' (in a recession, such substitution is usually a temporary phenomena - once growth returns, the old spending/consumption patterns return rather swiftly), so internet advertising will need to look at adopting some new proposition for selling once the growth cycle restarts;
• The figures do not specify what share of spending contraction can be attributed to lower costs of advertising, in other words, we do not know whether the fall was due to declining client activity or due to improved cost of advertising.
  

More on yesterday's Quarterly National Accounts data. Here is the snapshot of the widening GDP/GNP gap in Ireland - a clear sign of rising weaknesses in domestic sectors:
Note the trend peak in Q1 2005 and the absolute peak in Q4 2006. The first one corresponds to the end of post 2001-2002 correction and the latter to the SSIAs craze sweeping the nation.

Next, to the sectoral contributions to GDP.Our earnings from abroad are negatives and rising in absolute value - those Bulgarian and Romanian properties we've snapped up. Agriculture is overall the least important sector when it comes to GDP contributions. It used to account for 2.54% in Q1 2003, it accounts for 2.51% today (an increase from 2.33% a year ago). I wonder if that yoy increase captures the pumping of dioxins subsidies to pork producers. That was something, as the gravy trains go: Irish pork industry is worth €385mln pa, but in December last, the Government doled out €180mln to the industry in compensation for a one week stoppage (worth just €7.0mln in economic losses).

Then come Public Administration (up slightly from 3% an year ago to 3.25% this Q1, with another pesky side to it in the form of continued inflation in the sector).

Building and construction fell from a high of Q1 output of 8.93% of GDP back in 2006 to 5.99% in Q1 2009.

For what it's worth as an intellectual exercise, were we to invest all overseas property money back in the country, while shutting down:

• Option 1: Agriculture, Building & Construction, and Public Administration all together, we would be still 6% of GDP better off;
• Option 2: Agriculture, Public Administration and all Taxation, we would be 1.9% of GDP better off.

Of course - this is just an accountancy exercise, not a real economic policy, but it does put into perspective the fact that we have a sector accounting for just 2.5% of the economy and yet commanding its own Department with thousands of bureaucrats in employment...


Expecting the expected: US Consumer Confidence has taken a fall, once again, proving that the previous 'rebounds' were just a temporary mathematical correction before new jobs losses and continued weakness in the economy feed through to consumer sentiment. US consumer confidence fell to 49.3 in June from a downwardly revised 54.8 in May, the Conference Board reported Tuesday. Following a large confidence jump in May, consumers grew more pessimistic in June about their present and future. The present situation index declined to 24.8 in June from 29.7 in May, while the expectations index fell to 65.5 from 71.5. Note that the change in expectations was largely in-line with current conditions move, signaling that the US consumers are not exactly treating the current deterioration as temporary decline on significant May improvement.

A lesson for Obama? Don't give tax breaks to the elderly and the poor - give them to the middle classes. Last month improvement in personal income in the US was almost entirely due to Federal tax rebates to the elderly and the poor. This might be fine in the economy that is running at around trend growth, where consumption of non-durables is a problem, but it is not as efficient as a middle class tax break in the economy where precautionary savings are a problem.

A lesson for Ireland? Given that our own economic conditions are much worse than those in the US, and given that the government tax policies in Ireland are intirely internicine, I doubt we can expect significant gains in consumer confidence in months ahead. Instead, we should expect a new wave of layoffs to hit in Autumn 2009 and then again in January 2010.