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... 

11/5/20: G7: Fading into Economic Absurdity

G7 is a rather exclusive club of the 7 'largest' and, according to their own aspirations, most important - economically and geopolitically - economies. Except, of course, it isn't.

The latest IMF data (through 2019) and forecasts (for 2020-2021) published last month show just how bizarre the geopolitical influencer game got over the recent years and just how more bizarre it is likely to get over the next two.

Here are the actual ranks of the countries based on their GDP, taking into account exchange rates and price levels differences (the PPP adjustment).

And before you jump at myself, yes, PPP is imperfect. But it is much better than a simplistic U.S. dollar equivalence. 2014-present have taught us this lesson via what has happened in Russia: in dollar terms, the country should have disintegrated by now in another revolution of some color or flower or a cactus variety. Yet, when you look at the Government finances, Russia is doing really well, and when you look at the aggregate society, the pain of the 2014-on crises, devaluations, losses of income and declines in exports revenues has been real, but sustainable to-date. Why? Because Russia does not live on the US dollars when it comes to spending and investing in its economy. And, correspondingly, Russian geopolitical influence did not wane on foot of the economic troubles, dollar-valued economic decline and rounds and rounds of sanctions, including Russia's ejection from the G7+1/G8 grouping. Incidentally, this also explains why China isn't bothered by the G7 'leadership', nor does India miss its place in the group.

So, here we go, that table:

As I noted before, current G7 composition includes 4 member states which are not in the top 7 economies in the world. That means that 57 percent of the group members should not belong to the group. Worse, two of these four members are not even in top 10 economies worldwide, including 16ht ranked, but geopolitically quite loud Canada, which is just a hair-whisker away from being overtaken by globally not-too-noticeable Spain.

Better yet, Australia that loves presenting itself as some anchor of leadership in Asia-Pacific is not making it into top 20 economies in the world, having crashed out of its 19th place back in 2014 to 21st place by 2019. Australia's economic might is a bit lesser than its strategic bark, lagging behind Thailand, not to mention Indonesia.

Meanwhile, of course, the G7 excludes the largest economy in the world, as well as world's 3rd, 6th, and 7th economies. One might argue about Communism in China. One might also argue that Russia should be excluded from G7 because, well, we just don't like the Russkies as long as they are alive. But, excluding India, while including Canada and Italy?! India's economy is larger than the economies of the UK, France, Italy and Canada combined!  Excluding Indonesia? Indonesia's economy is just 3.3% shy of Italian and Canadian economies added together.

Here is a breakdown of official vs size-based groups of G7 and G20 as the share of the global GDP PPP-adjusted in 2014 vas 2019:

The above goes some distance explaining why G20 currently leads in global policy coordination the G7, and why G7 is rapidly falling out of relevance: back in 2014, G7 members states accounted for 32% of the global GDP based on PPP-adjustment; in 2019 they accounted for 30%. Based on the IMF forecasts, by the end of 2021, this number will likely be around 28%. Meanwhile, the share of global GDP accruing to the 7 largest economies in the world has risen from 54% in 2014 to 55% in 2019, and is forecast to rise to 56% in 2021. In other words, the actual G7 will be twice larger than the official G7.

6/5/20: 1Q 2020 US GDP:

From Factset: "The decrease in first-quarter real GDP was largely driven by the 7.6% decline in consumer spending, which subtracted 5.3% from the total GDP number. Investment was also a drag on growth, while an improvement in the trade deficit partially offset these negatives. We may see downward revisions to these numbers with the next two data revisions, and second-quarter growth is expected to be far worse. Analysts surveyed by FactSet are currently expecting a 29.9% contraction in Q2."

Yeeks!

7/2/20: Mapping Real Economic Debt 2019

A neat summary map of the real economic debt as a share of the national economies, via IIF, with my addition of Ireland's benchmark relative to its more accurate measure of the national income than GDP:

Yep, it is unflattering... albeit imperfect (there is some over-estimate here on the corporate debt side).

1/8/19: Wages vs GDP growth: when economic growth stops benefiting workers

I have posted earlier some data on the gap between real GDP and real disposable income per capita in the U.S. (see here: https://trueeconomics.blogspot.com/2019/08/1819-debasement-of-real-disposable.html) that evidences the longer-term nature of the ongoing debasement of real incomes in the repeated cycles of financialisation of the U.S. economy. Here is another view of the same subject matter:

Per chart above, consistent with my arguments in the case of disposable income, U.S. labor incomes have been sustaining ongoing deterioration relative to overall economic growth since at least the 1970s. In fact, the current expansionary cycle (yellow line) shows relatively benign speed of deterioration in real wages or labor income share of total real GDP, although the length of the cycle means that the total end-of-recession-to-present decline of ca 54 percent is deeper than that in the expansion of the 2000s (decline of 50 percent).

A different view of the same data is presented below, plotting historical gap between wages and GDP over longer horizon and showing expansion-periods' averages, contrasted against Trump Administration tenure average:

Once again, all evidence points to the decreasing, not increasing rate of wages fall relative to GDP over the years.

Of course, the effects are cumulative, which means that our perceptions of labor share collapse and the amplifying pressure on labor income earners in the economy is warranted.

1/8/19: Debasement of Real Disposable Income share of GDP: Historical Trends

I have been crunching some data recently on the historical gap between real GDP growth and wages/income of households. Some of this work will be forthcoming in an article due later this month, so keep an eye out for it. Some of it is post-dating the article submission. Here is an example of the latter. The following chart plots index of real GDP from 1Q 1959 through 1Q 2019 against the index of real disposable income per capita. Both indices are set at 100 at 1959 average.

There are 5 distinct periods over which growth in real GDP moved further and further away from growth in real disposable income. All are associated with monetary accommodation periods post-recessions, and all are associated with increasing post-recession financialization of the U.S. economy and financial or real estate asset booms.

Interestingly, the current rate of acceleration in the gap between economic growth and disposable income growth is... underwhelming. It pales in comparison to what was witnessed in the 1980s, 1990s and 2000s. To see this, consider the chart showing this gap by itself:

Despite our commonly-expressed public, media and analysts' perceptions of the declining share of economic growth going to disposable personal incomes being a new (current) phenomena, the reality of historical data paints a different picture. Most of declines in the share of economic activity accruing to wages, bonuses and investment and retirement incomes have taken place in previous decades, with the ratio of real GDP to real disposable income being relatively stable from the start of 2013 on. Prior to that rate of the decline in the relative share of disposable income has been less sharp from 1999 through 2012, when compared against all other decades.

The debasement of real incomes has been a steady and historical continuous process over the last 60 years.

20/6/19: The 'Mental' Bits of Economic Fundamentals

My article on the statistical mishaps in the U.S. and Irish economic data for the Manning Financial: https://cfc.ie/2019/06/11/economic-outlook-by-dr-constantin-gurdgiev/.

13/12/15: Irish National Accounts 3Q: Post 6: Exports and MNCs

In the previous 6 posts, I covered:

1. Irish National Accounts 3Q: Sectoral Growth results;
2. Irish year-on-year growth rates in GDP and GNP;
3. Quarterly growth rates in Irish GDP and GNP; 
4. Irish Domestic Demand (Household Consumption, Government Spending and Public and Private Investment)
5. Irish external trade; and
6. Evolution of per-capita metrics and the dynamics of the crisis.

So let’s get down to the last post on the matter of Irish National Accounts for 3Q 2015: the subject of Irish economy’s dependency on MNCs… err… exports that is.

Real Exports as a share of Irish real GDP stood at 120.1% in 3Q 2015, the second highest proportion on record, down from 123.0% in 2Q 2015 which was record-breaking level. Similarly, Nominal Exports as a share of nominal GDP fell from 127.2% in 2Q 2015 (highest on record) to 122.7% (second highest).

This is a remarkable set of numbers, driven predominantly by the activities of MNCs in Irish economy, and a number that is a signifier of all that is wrong with our National Accounts. Unlike countries that serve as a basis for production, Ireland serves as a basis for both some production of goods and services, but also as a platform for large scale tax optimisation. Vast majority of our exports are accounted for by MNCs trading from here, with large share of activity not taking place here, but being booked into Ireland from abroad. This distorts actual levels and value of production, but it also distorts the metrics of this economy’s openness to trade.

As the result on much of the MNCs activities, profits derived in Ireland by MNCs can go four ways:

1. They can be booked into tax havens (in which case they register as outflows from Ireland or Irish imports);
2. They can be booked in Ireland as profits and retained here (in which case they accrue to our National Accounts);
3. They can be registered here and then repatriated abroad (in which case they register as outflows of factor income); and
4. They can be booked into here and then expatriated, but remain on our books, as long as the MNCs is domiciled here (e.g. company created as an Irish entity via inversion).

We have zero ability to tell how much exactly do MNCs derive in profit from activities here and tax optimisation through here. But we do have a number that partially captures (3) above. This is provided by Net Factor Income Outflows to the Rest of the World and here is the chart showing how it evolved over time relative to Exports:

Do note that over 2011 - present period, average net outflow of factor payments abroad has fallen as a share of Exports from 17.5% in the period of 1Q 2002 - 4Q 2010 to 15.1%, the lowest period average on record. In other words, during the last 4 and 3/4 years MNCs operating from Ireland have been expatriating fewer profits abroad than in other periods in history. Question is: what happens to these retained profits over time? Obviously, these MNCs have absolutely no interest in re-investing these profits in Ireland (there is neither the scale for such reinvestment, nor the need). This suggests that either these profits are being parked until such a time as when they can be expatriated for the purpose of funding MNCs investments around the world, or the MNCs overall switched to declaring lower profits as a share of their exports.

Truth is - we do not know what is going on, though we do know that something is afoot.

Overall, however, Irish economic miracle’s dependence on MNCs-driven exports growth is growing, whilst transparency of MNCs operations here (at least as far as the National Accounts go) is declining. Happy FDI days are upon us… as long as the U.S., OECD, EU, and the rest of the host of states and organisations hell-bent on ending the free for all tax optimisation by corporates aren’t looking…

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.

12/12/15: Irish National Accounts 3Q: Post 5: External Trade

In the first post of the series, I covered Irish National Accounts 3Q: Sectoral Growth results. The second post covered year-on-year growth rates in GDP and GNP, while the third post covered quarterly growth rates in GDP and GNP. The fourth post covered Domestic Demand.

Now, consider external trade side of the National Accounts.

Irish Exports of Goods & Services stood at EUR62.52 billion in 3Q 2015, a rise of 12.4% y/y, after posting growth of 13.5% y/y in 2Q 2015 and 15.5% growth in 3Q 2014. Over the last four quarters, Irish Exports of Goods & Services grew, on average, at a rate of 13.4%, implying doubling of exports by value roughly every 5.5 years. If you believe this value to be reflective of a volume of real economic activity taking place in a country with roughly 1.983 million people in employment, you have to be on Amsterdam brownies. Over the 12 months through 3Q 2015, Irish economy has managed to export EUR235.67 billion worth of stuff, or a whooping EUR27.828 billion more than over the same period a year before. That’s EUR118,845 per person working at home or at work in Ireland.

Now, moving beyond the total, Exports of Goods stood at EUR34.062 billion in 3Q 2015, up 16.07% y/y - a doubling rate of 4.5 years. Exports of goods were up 16.03% y/y in 2Q 2015 and 16.9% in 3Q 2014, so over the last 12 months, average rate of growth in Exports of Goods was 18.01%. In other words, Irish Exports of Goods (physical stuff apparently manufactured here) are running at a rate of increase consistent with doubling of exports every 4 years.

Exports of Services are still ‘lagging’ behind, standing at EUR28.458 billion in 3Q 2015, up 8.2% y/y in 3Q 2015, having previously risen 10.5% in 2Q 2015. Both rates of growth are below 13.9% heroic rate of expansion achieved in 3Q 2014. Over the last four quarters, average rate of growth in Irish Exports of Services was 8.6%, to EUR107.29 billion.

However, in order to produce all these marvels of exports (and indeed to sustain living and consumption), Ireland does import truck loads of stuff and services. Thus, Imports of Goods and Services overall rose to EUR52.788 billion in 3Q 2015, up 18.9% y/y and beating 16.5% growth in 2Q 2015 and even 18.75% growth in 3Q 2014. Over the last four quarters average rate of growth in Imports of Goods and Services was impressive 17.6%.

Some of this growth was down to increased consumer demand. Imports of Goods alone rose 5.1% y/y in Q3 2015, compared to 8.1% in 2Q 2015 and 16.7% in 3Q 2014 (over the last four quarters, average growth rate was 10.1%). Imports of Services, however, jumped big time: up 27.9% y/y in 3Q 2015, having previously grown 21.8% in 2Q 2015 and 20.2% in 3Q 2014 (average for the last four quarters is 22.6%). Of course, imports of services include imports of IP by the web-based and ICT and IFSC firms, while imports of goods include pharma inputs, transport inputs (e.g. aircraft leased by another strand of MNCs and domestic tax optimisers) and so on.

Both, exports and imports changes are also partially driven by changes in the exchange rates, which are virtually impossible to track, since contracts for shipments within MNCs are neither transparent, more disclosed to us, mere mortals, and can have virtually no connection to real world exchange rates.

All of which means that just as in the case of our GDP and GNP and even Domestic Demand, Irish figures for external trade are pretty much meaningless: we really have no idea how much of all this activity sustains in wages & salaries, business income and employment and even taxes that is anchored to this country.

But, given everyone’s obsession with official accounts, we shall plough on and look at trade balance next.

Ireland’s Trade Balance in Goods hit the absolute historical record high in 3Q 2015 at EUR15.602 billion, up 32.4% y/y and exceeding growth rate in 2Q 2015 (+27.5%) and 3Q 2014 (+17.2%). Meanwhile, Trade Balance in Services posted the largest deficit in history at EUR5.87 billion, up almost ten-fold on same period in 2014, having previously grown by 154% in 2Q 2015.

Thus, overall Trade Balance for Goods and Services fell 13.4% y/y in 3Q 2015 to EUR9.732 billion, having posted second consecutive quarter of y/y growth (it shrunk 0.51% y/y in 2Q 2015).

As chart above shows, overall Trade Balance dynamics have been poor for Ireland despite the record-busting exports and all the headlines about huge contribution of external trade to the economy. On average basis, period average for 1Q 2013-present shows growth rate averaging not-too-shabby 5.1% y/y. However, this corresponds to the lowest average growth rate for any other period on record, including the disaster years of 1Q 2008 - 4Q 2012 (average growth rate of 24.3% y/y).

11/12/15: Irish National Accounts 3Q: Post 4: Domestic Demand

In the previous posts of the series, I covered Irish National Accounts 3Q: Sectoral Growth results;  year-on-year growth rates in GDP and GNP; and quarterly growth rates in GDP and GNP.

Now, let’s look at the Domestic Demand.

Personal Expenditure on Goods & Services rose 3.63% y/y in 3Q 2015 in real terms, posting a stronger growth than in 2Q 2015 (+2.91%) and in 3Q 2014 (+1.11%). Over the last four consecutive quarters, growth in Personal Expenditure on Goods & Services averaged 3.36%. All of this is strong and encouraging, as Personal Expenditure on Goods & Services is one of the few figures still remaining in the National Accounts that are unpolluted by the MNCs activities and as such is a significant reflection of the strength of the real economy.

Despite the rise in 3Q 2015, current level of Personal Expenditure on Goods & Services remains 7.85% below pre-crisis peak levels.

Still, in 3Q 2015, Personal Expenditure on Goods & Services contributed EUR779 million to y/y growth in GDP and GNP, which is up on EUR616 million growth contribution in 2Q 2015 and on EUR236 million growth in 3Q 2014.

Expenditure by Government on Current Goods & Services fell in 3Q 2015 (down -1.38% y/y or -EUR94 million). This compares to growth of 1.82% y/y in 2Q 2015 and 3.23% growth in 3Q 2014. Over the last four quarters, Expenditure by Government on Current Goods & Services growth averaged strong 3.95% - faster than growth in Persona Consumption.

As with Personal Consumption, Government Expenditure is still down on pre-crisis peak levels, in fact, it is down more than Personal Consumption at -13.1%.

Gross Domestic Fixed Capital Formation continued to post literally unbelievable readings in 3Q 2015, rising 35.8% y/y, compared to 34.2% increase recorded in 2Q 2015 and to 10.1% rise in 3Q 2014. 3Q 2015 y/y growth figure was the highest on record and there is a clear pattern of dramatic increases over 4Q 2014, 2Q 2015 and 3Q 2015, with last four quarters average growth rate at 24.9% implying that Irish economy’s capital stock should be doubling in size every 3 years. This is plain bonkers and is a clear signifier of distortions induced into the Irish economy by the likes of Nama, vulture funds and MNCs.

Based on our official accounts, whilst building and construction (including civil engineering etc) added only EUR44 million to GDP in 3Q 2015, Fixed Capital Formation jumped by EUR3.1 billion over the same period of time.

Still, even with this patently questionable accounting, Irish Gross Domestic Fixed Capital Formation remains 11.8% below pre-crisis peak levels.

With all three components of Final Domestic Demand still under pre-crisis peak levels performance, Final Domestic Demand ended 3Q 2015 some 7.0% below pre-crisis peak. However, Final Domestic Demand did post strong growth, rising 10.2% in 3Q 2015 compared to 3Q 2014, with rate of growth in 3Q basically consistent with 10.1% expansion recorded in 2Q 2015, and up strongly on 3.1% y/y growth recorded in 3Q 2014. Over the last four quarters, Final Domestic Demand growth rate averaged 8.35%.

However, virtually all of growth in Final Domestic Demand was accounted for by Fixed Capital Formation - the only component of the Domestic Demand that is impacted by the MNCs. In 3Q 2015, growth in Final Domestic Demand stood at EUR3.782 billion, of which EUR3.098 billion came from Fixed Capital Formation side.

One additional point is worth making with respect to the expenditure side of Irish National Accounts in 3Q 2015. In last quarter, EUR497 million (or 37.6% of total GNP growth y/y) came from the expansion in the Value of Physical Changes in Stocks. This is not insignificant. In 3Q 2015, compared to 3Q 2014, Personal Expenditure in Ireland contributed EUR779 million, while Changes in the Value of Stocks contributed EUR497 million. Absent this level of growth in stocks, Irish GNP would have been up only 3.43% y/y instead of 5.5% and taking into the account last four quarters average changes in Stocks, the GNP would have been up just 2.8%. In other words, quite a bit of Irish GDP and GNP growth in 3Q 2015 was down to companies accumulating Physical Stocks of goods and services, sitting unsold.

A key observation, therefore, from the entire National Accounts series is that one cannot talk about Irish economy ‘overheating’ or ‘running at its potential output’ anymore: all three headline growth figures of GDP growth (+6.84% y/y in 3Q 2015), GNP growth (+5.50% y/y) and Domestic Demand growth (+10.23% y/y) are influenced significantly by MNCs and post-crisis financial and property markets re-pricing. In the surreal world of Irish economics, the thermometer that could have told us about economy’s health is simply badly broken.


Stay tuned for analysis of Irish External Trade figures next.

10/12/15: Irish National Accounts 3Q: Post 3: Quarterly GDP and GNP Growth

In the first post of the series, I covered Irish National Accounts 3Q: Sectoral Growth results (http://trueeconomics.blogspot.ie/2015/12/101215-irish-national-accounts-3q-part.html).

The second post covered year-on-year growth rates in GDP and GNP (http://trueeconomics.blogspot.ie/2015/12/101215-irish-national-accounts-3q-post.html)

Now, consider quarterly growth rates analysis.

While things were bustlingly rosy for GDP and GNP based on year-on-year growth figures, the picture is much more mixed when it comes to quarterly growth rates.

Firstly, GDP at constant factor costs rose 1.43% q/q in 3Q 2015, down from 2.4% growth recorded in 2Q 2015 and on 2.54% growth recorded in 3Q 2014. In so far as this reflects sectoral activity, this slower 3Q 2015 growth is hard to interpret.

Taxes at constant factor costs actually fell 1.49% q/q in 3Q 2015, having risen just 0.37% q/q in 2Q 2015. 2014 3Q contraction was much sharper at 6.65%.

GDP at constant market prices rose 1.37% q/q in 3Q 2015, once again posting slower rates of growth than in 2Q 2015 (+1.89%) and in 3Q 2014 (+2.06%). The current rate of q/q growth in GDP was the slowest in 3 quarters, but remains significant (above 1.33% average for the period of 1Q 2013 - 3Q 2015.

GNP surprised to a downside, falling 0.81% q/q in 3Q 2015, having previously posted growth of 1.35% in 2Q 2015 and having expanded 2.71% in 3Q 2014. In fact, 3Q 2015 is the worst quarter-on-quarter growth result for GNP since 4Q 2013 and the second quarter of negative growth over the last 4 quarters (previous one was in 1Q 2015 at -0.24%).

Over the first three quarters of 2015, GNP growth averaged 0.1%, which compares poorly to 1.97% average for the first three quarters of 2014 and 3.21% average growth posted for the first 3 quarters of 2013, and ditto for 2012.

The key takeaways here are:

1. Q/Q GDP growth remains robust, but is now the lowest in 3 consecutive quarters;
2. Q/Q GNP growth has turned negative once again in 3Q 2015, posting the worst reading for any quarter since 4Q 2013.
3. Meanwhile, net factor income outflows to the rest of the world are booming, hitting (on seasonally adjusted basis) the highest level since 4Q 2011 and the second highest level on record. 

In other words, MNCs extraction of profits from the economy is ramping out, which is helping the Exchequer and pushes up GDP, but also is leading to GNP growth lagging that of GDP.


Stay tuned for more analysis coming up.

10/12/15: Irish National Accounts 3Q: Post 2: Annual GDP and GNP Growth

In the first post of the series, I covered Irish National Accounts 3Q: Sectoral Growth results (http://trueeconomics.blogspot.ie/2015/12/101215-irish-national-accounts-3q-part.html).

Now, consider data for GDP and GNP aggregates. Starting with seasonally unadjusted data (real variables) to allow for y/y comparatives.

Taxes at Constant Factor Costs:

• In 3Q 2015, Taxes at Constant Factor Costs rose at 6.95% y/y, having previously posted an increase of 6.04% in 2Q 2015 and a rise of 1.67% y/y in 3Q 2014. Taxes at Constant Factor Costs added EUR403 million to official GDP in 3Q 2015, a rise on the increase of EUR279 million in 2Q 2015 and a massive jump compared to the y/y uplift of EUR95 million in 3Q 2014. This clearly correlates with the data from the Exchequer and most likely is dominated by unexpected (and unexplained) growth in corporation tax receipts. 
• Over nine months through September 2015, Taxes at Constant Factor Costs rose EUR1.129 billion (+7.05%) compared to the same period of 2014. This rise now accounts for 16.9% of the increase in GNP over the same period. 

GDP at Constant Market Prices:

• GDP rose incredible 6.95% y/y in 3Q 2015, having previously posted growth of 6.84% y/y in 2Q 2015, both up on 3.75% growth in 3Q 2014. Year on year, 3Q 2015 rose EUR3.384 billion, which was up on 2Q 2015 growth of 3.234 billion, with both quarters posting massive uplift compared to 3Q 2014 growth of EUR1.757 billion.
• In 3 quarters of 2015, GDP rose by EUR9.943 billion which corresponds to annual growth of 7.04% and amounts to 148% uplift compared to the rise in GNP.

GNP at Constant Market Prices:

• -GNP rose 3.18% y/y in 3Q 2015, less than half the rate of increase in GDP. This comes on foot of the 5.5% y/y growth in 2Q 2015 and lower than 3Q 2014 growth of 3.68%. 
• Over the 9 months through September 2015, Irish GNP grew cumulative EUR6.694 billion (+5.58%) compared to the same period of 2014. This is appreciable growth, but it is far short of the GDP expansion over the same period. 

Per chart above, both GDP and GNP continue on the upward trend, albeit at different rates of growth. This divergence is now translating into widening (once again) GDP/GNP gap. In 2Q 2015, the GDP/GNP gap stood at 18.9%. In 3Q 2015 the gap widened to 21.65% - the largest since 1Q 2012 and well above the average of 17.8% for the period from 1Q 2013 through 3Q 2015. This gap used to reflect most of the over-statement of actual economic activity due to the MNCs trading in the Irish economy, but it no longer does, as new accounting standards now push up (superficially) or investment (via R&D reclassification in recent years, and through the upcoming ‘Knowledge Development Box’) and as MNCs continue to alter their pattern of profit flows through Ireland.

The latter aspect is reflected in rising volatility of Net Factor Income Flows which rose to 17.8% as a share of GDP in 3Q 2015, the highest level since 1Q 2012.

Incidentally, Net Factor Income for Rest of the World stood at a whooping EUR9.264 billion in 3Q 2015 - the highest level on record. Over nine months through September, MNCs-driven outflows of payments from Ireland exceeded inflows of payments into Ireland by a massive EUR24.67 billion which is 15.2 percent higher than for the same period of 2014.

Here is a comparative to ponder: in the first three quarters of 2015, GNP rose EUR6.69 billion on the same period of 2014, while net outflows of factor payments out of Ireland rose EUR3.25 billion, almost 1/3 of the increase in GDP and 1/5 of the increase in GNP.

Still, it is worth noting that for all of the above caveats, based on 4 quarters rolling cumulative measure, Irish GDP is now 6.97% above pre-crisis peak and is 6.78% ahead of where it was a year ago. For GNP, current 4 quarters cumulative reading is 8% ahead of pre-crisis peak and 6.45 above last year’s reading.


Stay tuned for quarterly growth rates analysis coming up next.

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.

19/6/2015: Two charts plotting long term GDP crises and cumulative growth

One hell of a neat chart plotting cases of largest GDP drops in history (since 1950) by country and period:

via @FT, h/t @ReutersJamie 

Note Russia, Ukraine, Georgia and rest of the former USSR.

Now, using IMF database, and referencing the first year when there is sufficient consistent level of data covered in the database (1993), here is a chart plotting 50 lowest growth states in the global economy in terms of cumulative real GDP increases between 1993 and 2014:

Have fun with this.

18/9/2014: Irish GDP Q2 2014: Sectoral Decomposition

Quarterly National Accounts for Q2 2014 for Ireland have been published by the CSO and the numbers are so-far encouraging. I will be blogging on these through out the day, so stay tuned.

In this first post on QNA results for Q2 2014, let's take a look at the seasonally un-adjusted data (allowing for year-on-year comparatives) for real GDP by sector:

All sectors output rose 7.4% y/y in real terms in Q2 2014 marking second consecutive quarter of growth and significantly outperforming 3.3% growth y/y recorded in Q1 2014. Q2 all sectors output is now at EUR42.157 billion which is the highest reading for any quarter on record.

compared to Q1 2011 output now is 10.8% higher and we are running at the rate of output some 6.3% above the 2006-2007 quarterly average.

The above is undoubtedly good news.

Sectoral growth rates (y/y) breakdown as follows:

Summary of the above charts:

• Agriculture, Forestry & Fishing sector posted a massive rose in output of 13.9% y/y in Q2 2014 coming on foot of an already significant growth of 9.3% y/y in Q1 2014. This marks fourth consecutive quarter of growth in the sector, with sector activity now up 58.1% in real terms on Q1 2011 and 28.3% ahead of 2006-2007 quarterly average.
• Industry activity rose 6.47% y/y marking the first quarter of increases. Activity shrunk 5.09% in Q1 2014. The sector performance has pushed output 6.6% above Q1 2011 levels but is still running 5.74% below 2006-2007 quarterly average. Still, good news is that growth is back.
• Distribution, Transport, Software & Communication sector expanded by 11.3% y.y in Q2 2014 after posting growth of 10.6% y/y in Q1 2014. This marks second consecutive quarter of growth in the sector. Sector activity is now up 3.11% on Q1 2011 and is still down 2.51% on 2006-2007 levels.
• Public Administration and Defence sector grew 3.75% y/y in Q2 2014, marking second consecutive quarter of y/y growth in a row. In Q1 2014 the sector grew by 3.67% y/y. Despite all the austerity, sector activity is now up 1.62% on Q1 2011 but overall activity is down 8.9% on 2006-2007 quarterly average.
• Other Services sectors posted growth of 2.7% y/y in Q2 2014 and 3.9% growth in Q1 2014. Q2 2014 marked 13th consecutive quarter of positive y/y growth in the sector. Sector activity is up 9.6% on Q1 2011 and is 8.75% ahead of 2006-2007 quarterly average.
• Building & Construction sector posted growth of 8.99% y/y in Q2 2014 which comes after 7.63% growth in the sector in Q1 2014 and marks 7th consecutive quarter of growth. Good news, however, are moderated by the realisation that levels of activity in the sector are still running 53% below those of 2006-2007 although sector has managed to grow output by 4.4% on Q1 2011.
• Transportable Goods Industries and Utilities sector posted y/y growth of 6.3% in Q2 2014, compensating for the decline of 5.9% registered in Q1 2014. Sector activity is now 6.7% ahead of Q1 2011 and 3.13% ahead of 2006-2007 quarterly average.

Key conclusion: strong performance in growth y/y in key sectors of the economy in Q2 2014 showing no sector contracting against 2 sectors contracting y/y in Q1 2014. As expected, Q2 output came in with stronger readings than Q1 and indications are Q3 2014 is likely to be also ahead of Q1 expansion rates.

Stay tuned for more QNA data analysis here.

3/7/2014: Irish GDP Q1 2014: Riches of Drugs Trade & R&D 'Investments' Raining Upon Us

CSO published revised Quarterly National Accounts now in compliance with Eurostat latest requirements based on European System of National and Regional Accounts (ESA) framework. This resulted in an uplift in GDP and GNP figures due to two main sources:

• ESA 2010 framework changed the treatment of research and development (R&D) expenditure. Per CSO: "Under ESA95, R&D expenditure was treated as an ancillary cost to the main production of an enterprise, while under ESA2010, R&D expenditure is recognised as capital investment." This is rather stretching: a business 'invests in R&D' and the outcome is either unsuccessful or successful. In the case of unsuccessful outcome, R&D allocation gets written off, so it does not register in business activity as a negative entry offsetting wages and purchases paid for in the process of R&D expenditure being undertaken. In case of success, the resulting IP or product are entered in either as new capital or new value added. Again, these are not netted against R&D spending, as far as I understand. So R&D spending as investment implies double counting the expenditure as value added over time. Looks questionable to me.
• ESA also requires that an estimate for illegal activities should also be included in GDP calculations. This is not separated into a different line-item in QNA, so we have no idea where these additions were made. Also, significantly, it is unclear how imports of illegal goods and services are factored in - are these accounted for on gross imports side? Are these netted out of GDP calculations?

The adjustments resulting from these two changes are large. Overnight, 2013 GDP growth is now +0.2% as opposed to -0.3% before the above revisions kicked in. That's a swing of half of a percentage point!

More than that: In 2013, Irish GDP was supposed to have been EUR164 billion before the revisions. Hookers, illegal drugs, all other sorts of stuff that would land you in Mountjoy, plus R&D reclassifications pushed this to EUR174.8 billion - a full EUR10.8 billion richer we are not, but the Government now has a claim to make that we are and it is all thanks to the FG/LP 'leadership' and all this sort of publicity.

This is just meaningless. Country output comparatives and analysis across years and levels have been now rendered effectively bogus by the combination of
1) Massive tax transfers by the services sector MNCs
2) Massive profits shifting by the traditional MNCs
3) Estimates (or rather guesses) of the illicit trade activities; and
4) Politically correct treatment of R&D spending.

It is worth noting that in Ireland, R&D expenditure has been repeatedly questioned due to the suspicion that much of it (especially for indigenous companies) involves 'investments' in process and management R&D - i.e. activities that normally have nothing to do with invention or creation of anything new, but rather have more to do with marketing and sales.

With this in mind, one simply cannot ignore the National Accounts releases, so in the next few posts I will start analysis of the new, revised data.

Bear in mind, however, that today's 'gains' reported for Q1 2014 are artificial or superficial or plain bogus and have little connection to the reality on the ground. We are not made better off by counting cocaine sales and trips to 'Happy Endin' massage parlours and we are not being made richer by spending on R&D - we might get returns on that R&D, but these returns would count into the normal (pre-revision) GDP when they do take place.

18/6/2014: IMF on Irish Economic Growth: Sunshine is Still Awaiting the Future

Per IMF: "Growth is expected to firm to about 2.5  percent from 2015, with a gradual rotation to domestic demand despite little support from credit initially. Risks appear broadly balanced in the near term, but are tilted to the downside over the medium term, in part owing to risks to reviving financial intermediation which is important for sustaining job rich domestic demand growth."

Ah, the dreams… Firstly, actual IMF projection is for growth ow 2.4% not 2.5% in 2015. That 2.5% based on Fund own forecast will only arrive in 2016, not 2015. Secondly, per IMF previous forecasts (see next post), that 2.5% growth was supposed to hit us in 2015 (based on December 2013 forecast), reach 2.7% in 2015 based on June 2013 forecast and reach 2.5% in 2014 based on June 2012 forecast… so that 2.5% growth is, as before, still a mirage on the horizon...

"Strong domestic indicators and an improving external environment support staff projections for real GDP growth of 1.7 percent in 2014. Recent World Economic Outlook projections put growth of Ireland’s trading partners at 2 percent, driving export growth of 2.5 percent." Oops… but a tar ago the Fund said in 2014 we shall have 3.5% exports expansion… In fact, the fund downgraded Irish exports growth from 3.7% in 2015 to 3.6% between December 2013 and today's forecasts.

"Final domestic demand is expected to expand by 1.1 percent, led by investment, with significant upside potential given the investment surge in the second half of 2013. A modest ó percent increase in private consumption reflects rising incomes driven by job creation and improving consumer confidence. Public consumption will remain a drag on domestic demand as public sector wage costs continue to decline under the Haddington Road agreement." Wait… so consumption and domestic investment are booming. And IMF is moving forecast for 2014 for final domestic demand from 0.4% in December 2013 to 1.1% now. But materially, IMF forecast did not change that much: it was 1% for 2014 in June 2013, 1.1% in June 2012 and 1.4% in May 2011. And this is against a shallower GDP base since then! In other words, growth is improving forward because it disappointed in the past...

Summary:

Neat summary of risks around recovery: "prospects appear broadly balanced in 2014–15 but tilted to the downside over the medium term. Staff’s growth projections lie at the bottom end of the forecast range for 2014, and near the median for 2015, with sources of upside to both exports and domestic demand. Key risks include:

• External demand. Ireland’s openness (exports at about 110 percent of GDP) makes it vulnerable to trading partner growth, such as a scenario of protracted slow global growth, or if escalating geopolitical tensions were to notably affect EU growth.
• Financial market conditions. The substantial spread tightening despite high public and private debts faces some risk of reversal, perhaps linked to a surge in global financial market volatility. Although the direct fiscal impact would be modest owing to long debt maturities, adverse confidence effects would likely slow domestic demand.
• Low inflation. Ongoing low inflation in the euro area would lower inflation in Ireland, slowing declines in debt ratios and dragging on domestic demand in the medium term.
• Bank repair shortfalls. As firms’ internal financing capacity is drawn down, sustaining domestic demand recovery will depend increasingly on a revival of sound lending, where substantial work remains ahead to resolve high NPLs to underpin banks’ lending capacity."

Surprisingly, IMF lists no risks relating to households or SMEs, despite pointing at these in relation to the banks. Which implies that the Fund sees no difficulty arising in the households and SMEs sectors from banks aggressively pursuing bad debts, but it sees risk of this to the banks. I am, frankly, puzzled.

You can see the virtual flat-lining of Irish economy in 2012-2013 here:

Next post: IMF growth projections: a trip through the years...

2/6/2014: Europe in the 'Happi-Ending' Data Parlour

The EU has discovered, at last, a new source of economic growth. Just about enough to deliver that magic 1%+ expansion for 2014 that the economical zombified currency block has been predicting to happen for years now. The new growth will come not from any new economic activity or value-added, but from including into the official accounts activities that constitute grey or black markets - transactions that are often illegal - drugs, prostitution, sales of stolen goods, and so on.

The basis for this miracle is the 2010 European System of Accounts which requires (comes September this year) of all EU states to include in official GDP (and GNP) accounts all "illegal economic actions [that] shall be considered as transactions when all units involved enter the actions by mutual agreement. Thus, purchases, sales or barters of illegal drugs or stolen property are transactions, while theft is not."

Wait a sec. Here's a funny one: stealing property is not a GDP-worthy activity, but selling stolen property is… It is sort of "breaking the leg is not adding to our income, but fixing a broken leg is" logic.

The rational behind harmonised treatment of grey and black markets data is that some states, where things like prostitution are legal, already include these services in GDP calculation, while others do not. Thing are, per EU, not comparable for, Netherlands and Luxembourg because of the Red Lights districts operating in one openly, and in another under the cover. From Autumn this year, all countries will do the same. And they will also add illegally-sold tobacco and alcohol

Prostitution is legal in Germany, the Netherlands, Hungary, Austria and Greece; some drugs are decriminalized in the Netherlands. Italy started to add some illegal activities into its GDP ages ago - back in 1987, the country added to its accounts estimates of the shadow economy: off-the-books business transactions which make up ca 20% of Italian GDP. This boosted Italian GDP by 18% overnight - an event that is called il sorpasso because it drove Italian GDP up to exceed that of the UK.

Poland did same earlier this year, with its GDP about to start covering proceeds from prostitution, drugs trafficking, alcohol and tobacco smuggling. Based on GUS (the CSO of Poland) estimates, in 2010 these accounted for some 1.17% of GDP.

Outside the EU, other countries are also factoring in illicit trade and transactions into their GDP. South Africa has been at this game since 2009, with GDP revised up by a modest 0.2% to take account of unobserved economy.

With 'new activities' added, Italy's GDP is expected to rise 2% in 2014, while French GDP will boll in by 3.2%, UK boost will be 'modest' 0.7%. And so on… Spain's shadow economy runs in excess of 20% of GDP. If bribes (some are voluntary, others can be extorted) are included, Europe's GDP will take a massive positive charge.

Here is the UK note on 'methodologies' to be used in estimating the new 'additions'. It is worth noting that the UK already includes illegally smuggled tobacco and alcohol estimates into its GDP, and these add some £300mln to the economy. Here is the Danish government report on the same, showing smuggling accounting for 2% of GDP adjustment. This is from 2005 when the Government adopted inclusion of some of the illegal activities into its GDP calculations. And dating even further back, the OECD guidebook on inclusion of illegal activities into accounts: here. Here is a fascinating paper from 2007 on Croatia's accession to the EU, meeting Maastricht Criteria targets and inclusion of illegal transactions into GDP.

The net result: deficits and debt levels will officially fall compared to GDP. Even private debts, still rising for now, will see rates of growth slowing down...

Of course, Ireland's Stuffbrokers have rejoiced at the thought of CSO boosting the GDP by counting in activities that can land one in jail. Per Irish Examiner report (here): "Davy chief economist Conall MacCoille said while the inclusion of the statistics might help the Government reach its deficit target of 4.8%, the activity is contributing nothing to the exchequer. “Of course we are delighted to see the CSO capture as much economic activity in the GDP figures as possible, but the fact is that this activity is not taxed. If might help push up the GDP figure, but it will not contribute anything to the exchequer,” he said."

Read: Happy times (higher GDP) could have been even happier (tax revenues boost), but we'd settle for anything that might push up the value of Government bonds... (Who's one of the largest dealers selling said bonds?...)

Thus, do expect congratulatory statements about 'austerity working', 'reforms yielding benefits' and 'recovery taking hold' blaring out of radio and TV sets next time pass the 'Happi-Ending' Massage Parlour or a methadone clinic…

Next step: Yanukovich era corruption 'activities' added to Ukraine's GDP. That should lower country CDS from sky-high 960s to Norwegian 13s… Happy times finally arriving to world's economic basket cases, riding on a dodgy stats bandwagon.

3/5/2014: Crisis Impact Comparatives: GDP changes 2007-2013

A very interesting map plotting changes in the GDP across various European countries since 2007:

My own calculations using IMF database and showing more up-to-date data and broader set of GDP metrics covering all advanced economies ex-Luxembourg, San-Marino, and Latvia (you can click on the image to enlarge):

One sample of just European economies:

And two sets of summary tables pooling together Euro area 'peripherals' plus Iceland:

We can't really say we are much better off than Iceland, and we are certainly to-date worse off than Portugal, although we are better off than Greece.