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... 

11/9/15: 2Q 2015 National Accounts: Recovery on pre-crisis peak

In the first post of the series covering 2Q national Accounts data, I dealt with sectoral composition of growth. The second post considered the headline GDP and GNP growth data. The third post in the series looked at Domestic Demand that normally more closely reflects true underlying economic performance, and the fourth post covered external trade.

In this post, let us briefly consider per capita GDP, GNP and Domestic Demand.

Chart below shows cumulative four quarters per capita GDP, GNP and Domestic Demand based on the latest data for population estimates and the National Accounts through 2Q 2015.

As shown above, Final Domestic Demand on per capita basis was at EUR33,782, up 5.95% y/y in 2Q   2015, closing some of the crisis period gap. Still, compared to peak, per capita Final Domestic Demand is still 13.3% below pre-crisis peak levels in real (inflation-adjusted terms). In part, this is driven by the Personal Consumption Expenditure which, on a per-capita basis was EUR19,163, up 2.1% y/y in 2Q 2015, but down 8% on pre-crisis peak.

GDP per capita rose 5.3% y/y in 2Q 2015 to EUR42,106, down only 0.82% on pre-crisis peak. GNP per capita rose to EUR36,189 up 5.9% y/y and 1.49% ahead of pre-crisis peak.

CONCLUSIONS: With GNP per capita attaining pre-crisis levels back in 1Q 2015, the recovery from the crisis has been effectively completed in real terms in terms of GNP after 28 quarters. In GDP terms, we are now close to regaining the pre-crisis peak levels, with 30 quarters to-date at below the peak. However, recovery is still some distance away in terms of Final Domestic Demand per capita and in terms of Personal Consumption Expenditure. 

10/9/15: 2Q 2015 National Accounts: External Trade

In the first post of the series covering 2Q national Accounts data, I dealt with sectoral composition of growth, using GDP at Factor Cost figures.

The second post considered the headline GDP and GNP growth data.

The third post in the series looked at the Expenditure side of the National Accounts, and Domestic Demand that normally more closely reflects true underlying economic performance,

Now, consider extern trade.

• Exports of Goods and Services were up 13.56% y/y in 2Q 2015 previously having risen 14.17% y/y in 1Q 2015. Over the last 4 quarters, growth in exports of goods and services averaged 14.2% y/y.
• Most of growth in exports of Goods and Services is accounted for by growth in Goods exports alone. These rose 16.36% y/y in 2Q 2015 after rising 16.86% y/y in 1Q 2015. Average y/y growth rate in the last 4 quarters was 18.38%. In other words, apparently Irish exports of goods are doubling in size every 4 years. Which, of course, is simply unbelievable. Instead, what we have here is a combination of tax optimisation by the MNCs and effects of currency valuations on the same.
• Exports of Services also grew strongly in 2Q 2015, rising 10.34% y/y, having previously grown 10.94% in 1Q 2015 and averaging growth of 9.94% over the last 4 quarters. Again, these numbers are beyond any reasonable believable uptick in real activity and reflect MNCs activities and forex valuations.
• Imports of Goods and Services rose 16.9% y/y in 2Q 2015, an increase on already fast rate of growth of 15.46% in 1Q 2015. Unlike exports side, imports side of goods and services trade was primarily driven by imports of services which rose 21.8% y/y in 2Q 2015 (+20.7% y/y on average over the last 4 quarters) as compared to 9.0% growth y/y in imports of goods (+13.5% y/y on average over last 4 quarters).

As the result of the above changes,

• Trade Balance in Goods and Services fell in 2Q 2015 by 1.8% y/y, having previously recorded an increase of 7.4% y/y in 1Q 2015. Combined 1H 2015 trade balance is now up only EUR399 million on same period 2014 (+2.26%).
• Trade Balance in Goods registered 26.9% higher surplus in 2Q 2015, and was up EUR6.206 billion in 1H 2015 compared to 1H 2014 (+28.4%). Trade Balance in Services, however, posted worsening deficit of EUR5.584 billion in 2Q 2015 against a deficit of EUR2.174 billion back in 2Q 2014. Over the 1H 2015, trade deficit in services worsened by EUR5.806 billion compared to 1H 2014 (a deterioration of 136% y/y).

CONCLUSION:

1. Irish external trade continued to show strong influences from currency valuations and MNCs activities ramp up, making the overall external trade growth figures look pretty much meaningless. 
2. Overall Trade Balance, however, deteriorated in 2Q 2015, which means that external trade made a negate contribution to GDP growth. 
3. Over the course of 1H 2015, the increase in overall Irish trade balance was relatively modest at 2.26% with growth in goods exports net of goods imports largely offset by growth in services imports net of services exports.

Stay tuned for more analysis of the National Accounts.

10/9/15: 2Q 2015 National Accounts: Domestic Demand

In the first post of the series covering 2Q national Accounts data, I dealt with sectoral composition of growth, using GDP at Factor Cost figures.

The second post considered the headline GDP and GNP growth data.

Here, let's consider the Expenditure side of the National Accounts, and most importantly, Domestic Demand that more likely reflects true underlying economic performance, removing some (but by far not all) tax activity by the MNCs.

As before, I will be dealing with y/y growth figures throughout the post.

Remember: Final Domestic Demand is a sum of Personal Expenditure, Government Expenditure, and Gross Fixed Capital Formation. Adding to that change in stocks gives us Total Domestic Demand, while adding net exports to Total Domestic Demand and subtracting outflows of factor payments to the rest of the world gives us GDP.

• In 2Q 2015, Personal Expenditure on Goods and Services rose 2.83% y/y, having previously risen 3.71% in 1Q 2015. The rate of growth in 2Q 2015 was, therefore, slower than in 1Q, but faster than in 2Q 2014 (2.28%). Overall, Personal Expenditure added EUR599 million to the economy in 2Q 2015 compared to the same period in 2014, a drop in positive contribution from EUR784 million added in 1Q 2015. Nonetheless, the figures for Personal Expenditure are healthy.
• Net Expenditure by Government on current goods & services rose 1.73% y/y in 2Q 2015, which marks a slowdown on 5.45% rate of growth recorded in 1Q 2015. Rate of growth recorded in 2Q 2015 was also lower compared to 2Q 2014 when Government expenditure rose 3.92% y/y in real terms. This marks 2Q 2015 as the first quarter since 1Q 2013 in which Government expenditure rose slower than Personal expenditure.
• Gross Domestic Fixed Capital Formation posted a massive 34.2% rise y/y in 2Q 2015, compared to already rapid growth of 9.2% recorded in 1Q 2015. It is worth noting that these figures include investments by MNCs tax-registered in Ireland (e.g. tax inversions et al) and vulture funds and other foreign investors' purchases of domestic assets. Over the last 4 quarters, Gross Domestic Fixed Capital Formation growth averaged 18.44%. This line of expenditure contributed EUR2.977 billion to GDP growth in 2Q 2015 and in H1 2015 total contribution was EUR3.781 billion.
• As the result of the above, Final Domestic Demand rose 10.07% y/y in 2Q 2015 - a massive rate of increase, especially compared to 5.34% growth recorded in 1Q 2015 and 6.4% growth recorded in 2Q 2014.

However, despite all the Nama sales and vultures investments, tax inversions and organic growth, Irish Final Domestic demand remains below the levels attained prior to the crisis, albeit the gap is now at only 5.62%:

Chart below shows the extraordinary uplift in Gross Fixed Capital Formation:

We have no idea what drove this uptick, but were Gross Fixed Capital Formation growth running at 1Q 2015 pace in 2Q 2015, this line of expenditure contribution to GDP would have been EUR2.175 billion lower, and overall GDP growth would have been less than 2.1% y/y instead of 6.7%. This just shows how volatile Irish figures are and how dependent they can be to a single line change of unknown nature.

CONCLUSIONS: 

1. Overall, Irish economy posted moderate growth in Personal Expenditure and Government Expenditure in 2Q 2015. Slightly negative news is that growth in 2Q 2015 was slower in these two categories than in 1Q 2015.
2. Gross Fixed Capital Formation posted an unprecedented rate of increase y/y rising 34.2% in 2Q 2015. There is absolutely no clarity as to the sources or nature of this growth, especially considering that traditional investment areas of Building & Construction have been growing at just 1.5% y/y in 2Q 2015. Stripping out growth in this area in excess of 1Q 2015 already rapid expansion would have generated much lower, more realistic growth figure for GDP and for Domestic demand.
3. Final Domestic Demand expanded strongly on foot of Fixed Capital Formation, rising 10.1% y/y in 2Q 2015 almost double the 5.3% rate of growth recorded in 1Q 2015.
4. One area of potential concern is the impact on Domestic Demand (via Gross Fixed Capital Formation) from the MNCs activities via MNCs inverted into Ireland. There are multiple examples of such inversions across various sectors all having potential implications on how we treat investment by such firms in National Accounts. Another area of concern is treatment of capital investments by some financial firms, such as aircraft leasing firms and, increasingly, vulture funds and REITS.

Analysis of external trade flows is to follow, so stay tuned.

10/9/15: 2Q 2015 National Accounts: GDP and GNP Growth

In the previous post covering 2Q national Accounts data, I dealt with sectoral composition of growth, using GDP at Factor Cost figures.

Here, consider the headline GDP and GNP growth data.

First, year on year figures:

• As noted earlier, GDP at factor cost rose 6.52% y/y in 2Q 2015, having previously expanded 6.77% y/y in 1Q 2015. This means that sectoral growth slowed down slightly in 2Q 2015 compared to 1Q 2015, although the slowdown was not very large. Still 2Q 2015 growth was faster than 2Q 2014 growth (6.31%). These are good news. In 2Q 2015, GDP at constant factor cost contributed EUR2.833 billion to overall GDP and over the course of 1H 2015 cumulative y/y contribution was EUR5.576 billion.
• Taxes rose 5.13% y/y in 2Q 2015, having previously grown at 8.06% y/y in 1Q 2015. There is quite a bit of seasonal and within-year timing variations in these series, so we can look at 1H 2015 effects instead. 1H 2015 cumulative taxes contribution to GDP was EUR687 million, which EUR995 million contribution over 1H 2014.
• Subsidies made a positive contribution to GDP growth (or rather - less negative) in 1Q 2015 of EUR58 million, followed by a positive contribution in 2Q 2015 at EUR83 million. Overall, subsidies reduction (subsidies enter as negative into GDP) was EUR141 million in 1H 2015 compared to 1h 2014a swing of EUR321 million in terms of GDP growth in 2015-2014 compared to 2014-2013 periods.
• GDP at constant market prices rose 6.67% y/y in 2Q 2015, down on 7.17% growth recorded in 1Q 2015. So GDP growth was fast in 2Q, but slower than in 1Q. Surprisingly, to some media observers, GDP growth in 2Q 2014 was also higher at 7.0% as compared to 2Q 2015.
• Outflows of profits abroad (MNCs expatriation net of Irish companies repatriation of profits from abroad) jumped in 2Q 2015, moderating overall GNP growth. In 2Q 2015, net factor income for the rest of the world reached EUR8.039 billion compared to 1Q 2015 at EUR7.383 billion and 2Q 2014 at EUR7.013 billion (more on this later).
• As the result, Irish GNP at constant market prices grew strong 5.28% y/y in 2Q 2015, which is nonetheless well below 8.07% growth recorded in 1Q 2015 and below blisteringly high rate of growth of 10.71% recorded in 2Q 2014. Over 1H 2015, GNP expanded by EUR5.2 billion compared to H1 2014, but this growth was slower than the rate of growth recorded in H1 2014 compared to H1 2013 (+EUR5.469 billion).

Again, given markets' surprise at Irish growth (compared to market expectations), here is a chart with a simple polynomial trend in GDP and GNP growth rates:

As chart above shows, both GDP and GNP growth surprised to the downside on trend, not to the upside. Which, again, begs a question: what models are being used to forecast Irish economic performance?

Now, consider GDP/GNP gap:

In 2Q 2015 GDP/GNP gap in Ireland stood at 18.95% - the highest since 2Q 2013 and well above the period average, as illustrated in the chart above. Net factor income outflows ratio to GDP was 15.94% - also the highest reading since Q2 2013. Both, higher gap and higher ratio signal (imperfectly) MNCs activity acceleration built into Irish growth figures, albeit we cannot connect these gaps to specific quarter when activity was actually registered.

Table below summarises y/y growth rates in 2Q 2015 and 1H 2015:

Table below summarises q/q growth rates in 1Q 2015 and 2Q 2015, as well as 2Q 2014:

Summary:

• GDP at constant prices rose 1.87% q/q in 2Q 2015 which marks a marginal slowdown on 1Q 2015 growth of 2.13%. 
• GNP at constant prices rose 1.91% in 2Q 2015 compared to 1Q 2015, reversing the loss of 0.17% recorded q/q in 1Q 2015. Which is also a good outrun.
• In annual growth terms, however, both GDP and GNP came in with slower growth y/y in 2Q 2015 than in 1Q 2015. That said, growth in GDP was very high at 6.67% y/y and growth in GNP was solid and more realistic 5.28% y/y,
• Headline figures, therefore, reflect strong performance, but as noted in the previous note, much of this performance is driven by MNCs-dominated sectors activity.

Stay tuned for the expenditure side of the National Accounts in a later post.

1/8/15: Irish 1Q 2015 Growth: The Real Economy Side

Having previously looked at

• Sectoral growth contributions for 1Q 2015 
• Trends in annual (y/y) growth rates in GDP and GNP, and
• Quarterly (q/q) growth rates

now, let's take a peek at the Domestic Demand component of GDP - the bit that covers Private Consumption, Government Current Expenditures and Gross Fixed Capital Formation.

Looking at real data, not seasonally adjusted:

Personal Expenditure on Goods and Services by Irish households posted 3.78% growth year-on-year in 1Q 2015. This is faster than 4Q 2014 growth of 3.00% and faster than 1Q 2014 y/y growth of 1.56%. The rate of growth is also faster than four-quarters' average of 2.54%. So this is good news. In fact, this is the fastest rate of growth in Personal Expenditure since Q1 2008 and fifth consecutive quarter of y/y growth.

Net Expenditure by Central and Local Government on Current Goods and Services was up 5.91% y/y in 1Q 2015, which is slower than 9.54% y/y growth reordered in 4Q 2014, but faster than 1.46% growth in 1Q 2014. Current rate of growth in Government spending is slightly ahead of the four quarters average of 5.65%.

This is the second fastest rate of Government spending growth since 2Q 2007 and marks 8th consecutive quarter of positive growth in spending, full three quarters longer positive run than for Personal Expenditure. To compare the two series: austerity from 1Q 2013 on implies a rise in Government current (ex-investment) spending of 7.5%, while recovery in the economy means Personal Consumption rising by 5.4% over the same period.

Gross Domestic Fixed Capital Formation (aka a proxy for Investment - proxy because it includes questionable stuff, like aircraft, as well as some of the MNCs-valued investments) was up 4.03% y/y in 1Q 2015 which is miles lower than 20.3% growth registered in 4Q 2014 when scores of punters rushed out to buy property, and when REITs continued to replace vultures in doing the same. Over the last 4 quarters, average rate of growth in Fixed Capital Formation was 12.77% and even back in 1Q 2014 this activity expanded by 10%, so 1Q 2015 was a major slowdown in activity, albeit it remained positive. This might be a healthy sign of structural normalisation in what has been becoming a somewhat overhyped property market, but it can also be a short-term blip. Overall, 1Q 2015 was the slowest y/y growth quarter since the onset of the 'recovery' in the investment markets here in 3Q 2013 and the first quarter in the period when growth rates fell below 10% mark (albeit 1Q 2014 actual expansion was 9.979%).

With the above, Final Domestic Demand (probably the closest we have in the National Accounts to a realist measure of our economic performance) posted a healthy y/y expansion:

As the above chart shows, Final Domestic Demand rose 4.22% y/y in 1Q 2015, slower than 7.51% growth recorded in 4Q 2014 but faster than 3.61% growth in 1Q 2014. Over the last 12 months, average annual rate of growth in the Domestic Demand was 5.31% which makes 1Q 2015 performance relatively less spectacular. Still, 4.22% growth rate is a healthy one.

And it is consistent with the longer term trends:

As chart above shows, upturn in the Final Domestic Demand took place (on trend) around 3Q 2013 and it is gaining some momentum. However, unlike the GDP series - posting full recovery (on rolling 12mo basis) to pre-crisis peak back in Q3 2014, Final Domestic Demand (domestic economy proxy) is still 11% below the pre-crisis peak. So while our MNCs-inclusive economic performance has regained pre-crisis peak, our domestic economy remains quite below the pre-crisis levels of activity.

Table below summarises source of growth in real GNP:

As shown above, single largest contributor to growth in GNP in 1Q 2015 (annual rate of growth) was Net Trade Balance (Exports less Imports) growth in which accounted for 33.81% of the total expansion in GNP. Personal Expenditure was the second largest contributor to growth with 28.83% share. Overall, growth in Final Domestic Demand (domestic economy proxy) was responsible for 55.4% of total growth in GNP over 1Q 2015 compared to 1Q 2014. Interestingly, inventories (Value of Changes in Stocks) accounted for almost 1/5th of total growth in GNP.

31/7/15: Irish 1Q 2015 Growth: Quarterly Growth in GDP and GNP

Having looked at sectoral growth contributions for 1Q 2015 and trends in annual (y/y) growth rates in GDP and GNP, let's take a look at quarterly (q/q) growth rates.

On a quarterly basis:

• GDP at constant prices was up 1.365% q/q in 1Q 2015, which is up on 1.235% growth recorded in 4Q 2014 and on 1.206% growth in 1Q 2014. So we have acceleration in quarterly growth in GDP. We now have five consecutive quarters of positive GDP growth with rates of growth all statistically above zero. Good news.
• GNP, however, posted a decline in q/q growth of -0.762% in 1Q 2015, which contrasts with 3.43% growth q/q in 4Q 2014 and with 1.554% growth q/q in 1Q 2014. This is the first negative growth quarter for GNP after four consecutive quarters of expansion.

Chart above also shows how dramatically higher volatility in GNP growth figures has been in recent years. Over the entire history of the current series (from 1Q 1997), quarterly GDP growth volatility (measured by standard deviation) stood at 2.0076. This fell to 1.42225 over the period from 1Q 2011. So volatility in GDP growth declined over the recent period compered to historical. The opposite happened with GNP, which had historical volatility of 2.24441 and volatility since 1Q 2011 of 2.6658. So volatility increased for GNP.

Let's look at business cycle data. First, chart below shows contractions and expansions based on GDP q/q growth figures alone:

Next, using both GDP and GNP figures:

The two charts above reinforce the argument that we do indeed have a pretty robust recovery, with 4-5 out of the last 5 quarters on solid expansion trend based on both GDP and GNP, five on basis of GDP alone.

So on the net, the results on a quarterly basis are weaker than on the annual basis, with GNP posting an outright contraction. One consolation is that GNP decline of 0.762% q/q in 1Q 2015 is much shallower than Q4 and Q2 2013, as well as all other cases of declines from Q3 2008 on.

However, negative growth in GNP is worth looking closer at, which I shall do in subsequent posts, so stay tuned.

31/7/15: Irish 1Q 2015 Growth: Annual Growth in GDP and GNP

As promised in yesterday's post, I am continuing to cover the latest data on Irish National Accounts for 1Q 2015. In the first post, I looked at GDP at Factor Cost - the sectoral activity feeding into GDP headline numbers.

This time around, let's take a look at real GDP and GNP trends.

First - y/y growth  rates:

• Sectoral activity (measured by the GDP at Factor Cost) added some EUR2.47 billion to the real GDP increase in 1Q 2015 compared to 1Q 2014. This resulted in total real GDP growth of 6.51% y/y in 1Q 2015, up marginally on 4Q 2014 annual rate of growth of 5.98% and significantly higher than 1Q 2014 annual rate of growth of 4.13%.  This is strong performance and the good news. 
• From the top headline number, we now have third consecutive quarter (from 3Q 2014) when 4 quarters cumulative output is in excess of pre-crisis peak levels in real (inflation-adjusted) terms. Which is very good news too. Ironically, on GNP side, we now have four consecutive quarters of cumulated 4Q output in excess of pre-crisis peak. Overall, 1Q 2014 marks the seventh consecutive quarter of positive y/y GDP growth.
• Meanwhile, GNP posted 7.27% growth y/y in 1Q 2015, which was, imagine that, slower than 9.00% expansion recorded in 4Q 2014, but faster than 4.30% growth in 1Q 2014. 
• Normally, we would be exceptionally happy with this rate of GNP growth, but since 2013, GNP figures carry substantial 'pollution' from accelerated tax optimisation schemes known collectively as contract manufacturing. Still, faster growth in GNP than GDP suggests that a lot of growth this quarter is coming from organic, real growth on the ground, although we cannot tell how much exactly.
• Overall, we now have the seventh consecutive quarter of y/y growth in GNP, which is good.

As long-term trends go, the chart below illustrates ongoing recovery in GDP and GNP

As far as the obvious point goes: there is a strong trend recovery in both series, which (sadly, I have to repeat this) is good news. One interesting thing to note is that trend for GNP recovery leads trend for GDP recovery. The reason for this is less pleasant than we like to think: instead of increasing contribution to activity from domestic economy, much of this lead is driven by changes in MNCs tax optimisation schemes, under which:

1. External activity is being booked into Ireland under 'contract manufacturing' schemes; and
2. Many profit-generative activities by MNCs are turning into cost-centre activities (booking higher costs into Ireland).

The latter point can be seen by looking at the relationship between GDP and net factor payments abroad, illustrated below in the form of declining share of GDP accounted for by profits & royalties repatriation abroad. This trend is likely to continue and accelerate as MNCs get to more aggressively use our latest tax 'innovation' - the knowledge development box.

Thus, the chart above gives us some, very indirect, indication of how dodgy are our GNP statistics becoming. Though, more on that in subsequent posts.

In addition to the net income outflows, the chart above shows the trend of declining GDP/GNP gap. Current 1Q 2015 GDP/GNP gap is at 18.07%, against the average over 2013-present of 17.28% and a 3mo average of 15.58%, which suggests two driving factors: higher GDP activity and increased outflow of booked profits, alongside exchange rates effects. The latter factor is important as it further compounds multiple distortions in the data from the MNCs.

In summary, evidence continues to show strong growth performance both in GDP and GNP in real terms, with some lingering questions as to the nature of this growth in relation to the MNCs activities here.

Stay tuned for quarterly growth analysis.

30/7/15: Irish 1Q 2015 Growth: Sectoral Contributions

Some very strong headline figures on Irish growth in 1Q 2015 are out today from the CSO so I will be blogging on these in a number of posts today.

To start with, let's take a look at data on GDP composition at Factor Cost - in other words, contributions of various economic sectors to GDP on output side of the National Accounts. The analysis below references real GDP (adjusted for prices changes).

In 1Q 2015:

• Agriculture, Forestry & Fishing sector posted growth in output of 5.8% y/y. This contrasts with growth of 21.0% recorded y/y in 4Q 2014 and with 16.5% expansion y/y in 1Q 2014. This is the slowest growth in the sector since Q3 2013. Overall, in annual terms, the sector accounted for 2.02% contribution to the overall GDP growth (Factor Cost GDP) or EUR50 million y/y (compared to EUR194 million added by the sector in 4Q 2014). The sector was the second smallest contributor to growth in GDP (at Factor Cost) in 1Q 2015 after Building & Construction. Quarterly growth in the sector was negative: in 1Q 2015 Agriculture et al sector shrunk (on seasonally-adjusted basis) by 30% compared to 4Q 2014 and this contrasts with 25.4% growth q/q recorded in the sector in 4Q 2014.
• Industry (ex-Building & Construction) grew strongly in 1Q 2015, posting y/y expansion of 9.63% compared to 8.71% expansion in 4Q 2014 and 0.56% growth in 1Q 2014. This marks 1Q 2015 as the fastest growth quarter (y/y terms) since Q3 2014 and the second fastest growth quarter (y/y) since Q4 2010. As the result, the sector accounted for 39.1% of all growth recorded in GDP (at Factor Cost) in 1Q 2015. The sector was the single largest contributor to GDP (at Factor Cost) growth in 1Q 2015. A caveat here is that this sector growth is strongly influenced by the MNCs, especially Pharma, Bio and Medical Devices sectors, but more on this when I am covering external sectors performance in subsequent posts. Quarter on quarter growth in Industry (ex-Building & Construction) was much less impressive than annual growth rates. In 1Q 2015, Industry contribution to GDP actually was negative on q/q basis at -0.31% compared to 5.16% growth recorded q/q in 4Q 2014 and 3.35% growth recorded q/q in 1Q 2014.
• Building and Construction sector posted positive y/y growth of 3.26% in 1Q 2015, which contrasts positively with a -0.16% contraction y/y posted in 4Q 2015. However, 1Q 2015 y/y growth was much weaker than 9.66% growth recorded in the sector in 1Q 2014. Overall, Building & Construction sector contribution to growth in GDP (at Factor Cost) stood at 1.38% in 1Q 2015 - the smallest positive contributor to growth in 1Q.
• Distribution, Transport, Software & Communication (DTSC) sector made a strong contribution to growth in 1Q 2015, with activity up 6.5% y/y. The rate of annual growth is relatively steady in the sector, having posted growth of 5.4% in 4Q 2014 and 5.93% growth in 1Q 2014. The sector accounted for 29.1% of total growth in GDP (at Factor Cost) in y/y terms. The caveat applying to these figures is that the sector includes many ICT-related MNCs which have been recently posting growth in tax optimisation-linked activities. Quarterly growth in the sector was also positive, with 1Q 2015 activity up 2.11% on 4Q 2014, after posting growth of 1.05% q/q in 1Q 2014.
• Public Administration & Defence (PAD) sector posted another quarter of annual contraction in activity, shrinking -5.52% y/y in 1Q 2015 after posting -3.09% decline in 4Q 2014. In contrast, the sector expanded by 2.21% in 1Q 2014. Overall, sector made negative contribution of -3.4% to annual GDP (at Factor Cost) growth in 1Q 2015. This marks the largest contraction in annual growth rates in the sector since 2Q 2012.
• Other Services (including rents) sector posted another quarter of steady growth, rising 4.42% y/y in 1Q 2015, having previously posted growth of 4.40% in 4Q 2014 and 4.12% in 1Q 2014. Sector contribution to overall growth in GDP (at Factor Cost) was 30.1% - second largest after Industry ex-Construction.

Chart below summarises sectoral shares of GDP growth in 1Q 2015:

The above clearly shows that the bulk of growth in 1Q 2015 by sector must be compared against growth in exports to attempt to control for MNCs activities before drawing any conclusions about headline growth figures anchoring to the real economy. I will do this in subsequent posts, so stay tuned.

Overall, real GDP at Factor Cost posted growth of 6.1% y/y in 1Q 2015 - a healthy figure compared to 5.28% growth recorded in 4Q 2014 and to 3.87% y/y expansion in 1Q 2014. Thus annual rate of growth accelerated in 1Q 2015 compared to 4Q 2014 and to growth a year ago.  Overall, sectoral activity expanded GDP by EUR2.47 billion in 1Q 2015 compared to growth of EUR2.176 billion in 4Q 2014.

As chart above shows, annual growth rate is currently running above the period average (2012-present) and marks statistically significant rate of annual growth. Which is very good news.

On a quarterly basis, GDP (at Factor Cost) grew by a more modest 0.74% quarterly rate in 1Q 2015, slightly slower than in 4Q 2014 when it expanded 0.79% q/q and much slower than in 1Q 2014 when it grew at 1.57% q/q.  This marks 1Q 2015 as the slowest quarter over the 5 consecutive quarters and the second slowest in 8 consecutive quarters.

Longer-term trends:

Based on annual rates of growth and levels performance, Irish real GDP (at Factor Cost) is on a renewed positive trend. Once again - good news.

Stay tuned for more analysis of the National Accounts figures in subsequent posts.

20/12/2013: Q3 GDP: Is There a Domestic Recovery?

In previous posts, I covered:
1) top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html)
2) expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html), and
3) 3-quarters aggregates changes in GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/20122013-how-real-is-that-gdp-and-gnp.html)


Now, onto the Domestic Demand.

With both GDP and GNP now severely skewed by the transfer pricing going on in the ICT Services sectors in Ireland, it is no longer reasonable to look at either GDP or GNP for the signs of underlying activity gains in the real Irish economy. Instead, we should consider a combination of all three: changes in GDP, GNP and Final Domestic Demand. Final Domestic Demand is defined as a combination of:

• Government spending on goods and services (other than investment goods)
• Government and private investment in the economy, and
• Private household consumption of goods and services

Unlike Total Domestic Demand, Final Domestic Demand excludes stocks built up by businesses.


First, looking at the Q1-Q3 aggregates comparatives based on data that is not seasonally-adjusted and is expressed in constant euros. In Q1-Q3 2013, final domestic demand in Ireland fell 1.41% compared to the same period in 2012 (down EUR1,293 million y/y). Final Domestic Demand is now down 2.89% on the first three quarters of 2011 and is down 21.6% on the same period of 2007.

In other words, over Q-Q3 2013, on aggregate, there is still no recovery in the domestic economy in Ireland.

Second, let's take a look at q/q changes in the GDP, GNP and Final Domestic Demand. For this purpose, we consider seasonally-adjusted constant euros series.

In Q3 2013, Exports of goods and services fell 0.80% q/q on seasonally-adjusted basis. The decline was shallow compared to 4.63% rise in Q2 2013, but it replicates the pattern of 'quarter up, quarter down' established since Q3 2012.

Overall, since Q1 2011 (in other words since the 'adjustment programme' or 'bailout' started) Irish exports of goods and services were up over 6 quarters and down over 5 quarters. Exports-led recovery stacks ups s follows:

• In 1997-2007 average quarterly growth in exports of goods and services in Ireland stood at 2.445%;
• In 2008-present that rate was 0.281% and
• In 2011-present it is 0.4988%

In other words, massive increases in ICT services exports over the period of the crisis are not strong enough to generate significant uplift momentum in exports growth.

GDP at constant market prices rose 1.502% q/q in Q3 2013, marking a second consecutive quarter of growth. In Q2 2013 the rise was 1.023%. Since Q1 2011, GDP rose on a quarterly basis in 7 quarters and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 GDP growth average 1.630% on a quarterly basis;
• Over 2008-present the average is -0.353% and
• Over Q1 2011-present the average is +0.358%

So there is a longer-term recovery on average, based on GDP, but it is weak, consistent with annualised rate of growth of just 1.44%.

GNP at constant market prices rose 1.580% q/q in Q3 2013, marking the first quarter of growth. In Q2 2013 the GNP contracted 0.133%. Since Q1 2011, GNP rose on a quarterly basis in 6 quarters, it was flat at zero in one quarter, and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 GNP growth averaged 1.522% on a quarterly basis;
• Over 2008-present the average is -0.302% and
• Over Q1 2011-present the average is +0.171%

So there is a longer-term recovery on average, based on GNP, but it is weak, consistent with annualised rate of growth of just 0.68%.

Final Domestic Demand at constant market prices rose 2.412% q/q in Q3 2013, marking the second quarter of growth. In Q2 2013 the FDD was up 0.218%. Since Q1 2011, Final Domestic Demand rose on a quarterly basis in 7 quarters, and was down in 4 quarters. Overall recovery comparatives are:

• In 1997-2007 FDD growth averaged 1.621% on a quarterly basis;
• Over 2008-present the average is -0.961% and
• Over Q1 2011-present the average is -0.175%

So there is no longer-term recovery on average, based on Final Domestic Demand, with FDD contracting on average at an annualised rate of 0.70%. There is, however, good news of FDD rising for two consecutive quarters, clocking cumulative growth of just 2.64% over 6 months or 5.34% annualised. The problem is that the levels from which this growth is taking place are low.

As shown above, overall recovery is not yet taking hold in the domestic economy, although there are some gains recorded in the domestic demand that are encouraging and have been sustained over 2 consecutive quarters.

20/12/2013: How Real Is that GDP and GNP Growth in Ireland? Q3 data

In previous two posts, I covered top-level data on GDP and GNP growth in q3 2013 (here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html) and expenditure components of GDP and GNP (here: http://trueeconomics.blogspot.ie/2013/12/19122013-qna-q3-2013-expenditure-side.html).

Now, let's take a look at 3-quarters aggregates. The reason why looking at 3 quarters aggregates makes sense is that q/q changes are volatile, while y/y changes are only reflective of quarter-wide movements in activity. 9-months January-September 2013 data comparatives to a year ago provide a better visibility as to what has been happening in the economy so far during this year.

All analysis below is based on seasonally unadjusted data in constant prices terms.

In 3 quarters (Q1-Q3) of 2013, Personal Consumption of Goods and Services fell 1.22% when compared to the same period in 2012. The series are down 1.93% on Q1-Q3 2011. In level terms, personal consumption is down EUR734 million for the first 9 months of 2013 compared to a year ago.

Expenditure by Central and Local Government on Current Goods and Services was down 0.96% for the 9 months January-September 2013 compared to the same period of 2012 and is down 5.03% on same period in 2011. In level terms, Government spending on goods and services is down EUR178 million in Q1-Q3 2013 compared to a year ago.

Gross Domestic Fixed Capital Formation for the nine months January-September 2013 has fallen 2.90% compared to the same period a year ago (in level terms, -EUR381 million). Compared to the same period in 2011, gross fixed capital formation is now down 4.42%. When we talk about 'big increases' in investment, keep in mind, Q1-Q3 cumulated Gross Fixed Capital Formation was down 55% on the same period for 2007.

Exports of Goods and Services for the nine months January-September 2013 were down 0.8% on the same period a year ago (-EUR1,013 million), but up 0.84% on the same period of 2011. This hardly shows 'robust growth' in exports. Exports composition has shifted once again in favour of Services. Goods exports shrunk over the last nine months by 4.51% compared to same period 2012 (-EUR2,809 million) and are now down 8.29% on Q1-Q3 cumulative for 2011 and down 2.47% on Q1-Q3 2007 too. Meanwhile, exports of services rose 2.77% in Q1-Q3 2013 compared to a year ago (+EUR1,796 million) as per 'Google-tax effect' and these are now up 10.69% on Q1-Q3 2011 and up 21.29% on Q1-Q3 2007. At the rate we are going, pretty soon Barrow Street GDP will exceed that of South Korea, which will make Poly's Pizza more economically important than Geneva.

Sarcasm aside, Imports of goods and services (another driver - via their collapse - of positive GDP and GNP news) are down 0.93% y/y in Q1-Q3 2013 (-EUR908 million) and are down 1.35% on same period 2011. Compared to Q1-Q3 2007 imports of goods and services are down massive 9.49% - the effect that contributes significantly to upside of GDP. Goods imports alone are now down 33.3% on Q1-Q3 2007 and these were down 4% (-EUR1,419 million) on Q1-Q3 cumulative for 2012.

So, let's add few things. In 9 months January-September 2013, relative to the same period of 2012:
1) Personal consumption fell EUR734 million
2) Government consumption fell EUR178 million
3) Domestic Gross Fixed Capital formation fell EUR381 million
4) Exports of Goods and Services fell EUR1,013 million
5) Imports of Goods and Services fell EUR908 million, and
6) Stocks of goods rose EUR503 million.

(1)-(4) subtracted from GDP growth, (5) and (6) added to GDP growth. Which means that the only two positive contributions to growth in our GDP came from: imports decline and stocks of goods held by businesses rise. This is hardly a good news, as both sources of growth are really not about increased/improved activity in the economy.

Thus, GDP at constant market prices fell over the period of Q1-Q3 2013 compared to Q1-Q3 2012 by 0.58% (or EUR706 million). Notice the word 'fell' - whilst there were rises in GDP in Q3 and Q2 in q/q basis, overall so far, 2013 total output in the economy is below that registered for the same period in 2012.

GDP is also down 0.04% on same period 2011 and is down 6.82% on the same period in 2007.

Let me know if you are spotting any positive growth in the above.

Next, the difference between GDP and GNP is formed by the Net Factor Income from the Rest of the World. This also fell in Q1-Q3 2013 compared to the same period of 2012 - down 14.37% y/y (or -EUR3,378 million), which 'contributed' a positive swing to the GNP in the amount of almost EUR3.38 billion. The reason for this? Well, growth-generating fall-off in activity in the phrama sector meant that MNCs were booking lower profits via Ireland and this, allegedly, has a positive effect on our economy… err… on our GNP.

GNP, propelled by stocks accounting tricks, hocus-pocus of transfer pricing and continued decline in imports rose 2.69% in Q1-Q3 2013 compared to Q1-Q3 2012 (up EUR2,670 million = decline in GDP of -EUR706million plus decline in factor payments of +EUR3,378 million). Seriously, folks, this is beginning to look like a joke!

Based on the same physics of transfer pricing miracles, Irish GNP is now 4.16% ahead of Q1-Q3 reading for 2011.

Recap: On expenditure side of the National Accounts, growth in 2013 is not exactly real (for GNP) and not present (for GDP).

Analysis of Total Domestic Demand (aka domestic economy) is to follow. Before then, charts to illustrate the above:

19/12/2013: QNA Q3 2013: Expenditure Side and External Trade

QNA results came in strong at the headline levels for Q3 2013. These were covered here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html

Now, let's take a look at the GDP decomposition by expenditure line. I am referencing throughout non-seasonally adjusted series for y/y comparatives. All in constant prices.

Year on year, personal expenditure on goods and services fell 0.98% in Q3 2013 and the series were up 0.79% on Q3 2011. This is not a good result, but it is an improvement on -1.52 y/y contraction recorded in Q2 2013.

Net Expenditure by Central & Local Govt. on Current Goods & Services rose 0.68% y/y in Q3 2013, after having posted a contraction of -1.73% in Q2 2013. Compared to Q3 2011, net expenditure by Government was down -3.25% in Q3 2013.

Gross domestic fixed capital formation jumped significantly in Q3 2013 up 8.30% y/y albeit from low levels. The series are now up 18.68% on Q3 2011. In Q2 2013, fixed capital formation rose 1.42% y/y, so Q3 2013 data shows some serious improvement.

Exports of Goods and Services (net of factor income flows) rose 0.58% y/y in Q3 2013 and are up only 0.94% on Q3 2011. This is poor given how much we have staked on an exports-led recovery. Worse news: in Q2 2013 exports grew 1.09% y/y, so we are seeing continued slowdown in the rates of growth.

Exports of Goods fell 2.37% y/y in Q3 2013 on foot of a decline of 1.61% in Q2 2013. Exports of goods are now down 7.64% on Q3 2011.

Exports of Services meanwhile picked the slack from Exports of Goods contraction. Exports of Services grew 3.32% y/y in Q3 2013 having previously posted growth of 3.63% y/y in Q2 2013. In other words, strong growth in Q3, but slower than in Q2. Compared to Q3 2011, exports of services are now up cumulative 9.89%.

Imports of Goods and Services fell 1.28% y/y in Q3 2013 and are now up only 0.73% on Q3 2011. The decline was primarily driven by a 3.4% drop in imports of goods and moderated by a decline of 0.11% in terms of imports of services.

Trade Balance grew on foot of stronger trade surplus in services (+EUR747 million in Q3 2013 compared to Q3 2012) and moderated by small decline in trade deficit in goods (-EUR93 million in Q3 2013). Trade balance overall grew by EUR654 million in Q3 2013 compared to Q3 2012, up 6.56% y/y.

Thus, on the expenditure side of the National Accounts, Q3 2013 gains in GDP were supported by 

• Growth in the Net Government Expenditure on Current Goods and Services, Gross Domestic Fixed Capital Formation, and Exports of Services
• Contraction in Imports of Goods and Imports of Services

The GDP dynamics were adversely impacted by declines in:

• Personal expenditure on goods and services,
• Decline in Exports of goods.

Volatility remains a dominant theme in quarterly data analysis, so it is worth looking at the figures for the first 3 quarters of the year. This will be done is the next post.

19/12/2013: Good GDP & GNP Growth Headlines for Q3 2013

Quarterly National Accounts for Ireland were relaxed today by the CSO. The headline numbers are good:

For seasonally-adjusted (allowing for q/q comparatives), constant prices data:
1) GDP at constant market prices rose 1.50% in Q3 2013 compared to Q2 2013, having posted 1.02% growth in Q2 2013 compared to Q1 2013.
2) GNP grew by 1.58% in Q3 2013 compared to Q2 2013, having broken the previous period q/q contraction of 0.13% in Q2 2013 compared to Q1 2013.

For not seasonally-adjusted series (allowing for y/y comparatives), constant prices data:
1) GDP expanded 1.74% y/y in Q3 2013, posting significant improvement on -1.64% y/y contraction recorded in Q2 2013.
2) GNP also posted solid rise, beating increases in GDP. GNP was up 3.87% y/y in Q3 2013 and this is a massive jump on -0.69% contraction recorded in Q2 2013.
3) Q3 2013 marks the first quarter when growth in GDP (q/q terms, seasonally adjusted, constant prices) posted second consecutive quarter growth since Q1-Q2 2011. This is welcome, as the GDP series have been exceptionally unstable in recent years: since Q1 2010 through Q3 2013, there were only two episodes of GDP quarterly growth being consecutively above zero for two quarters period.

In y/y terms, GDP finally broke a string of contractions that lasted 4 consecutive quarters between Q3 2012 and Q2 2013.

CHART 3 to illustrate:

It is also worth noting that GNP expansion was fuelled by decline in MNCs transfers of profits abroad. This is most likely due to a decline in pharma sector profits on foot of patent cliff and, possibly, due to some 'parking' of profits on the side of other MNCs. Retained earnings reflected in the Financial Account of the Balance of Payments rose EUR6.27 billion in Q3 2013.

Two core points, however, so far continued as a trend in the data is that we are still witnessing erratic pattern in growth. The recovery is not convincing, yet, when it comes to trend, but there are some positive signs emerging. These are to be explored in the subsequent posts when I deal with composition of growth sources.

On the net, rebound is encouraging and coupled with expectation for growth in Q4 2013, we might be able to pull off a positive expansion for the year.