20/9/2012: 'Flat growth' and the shrinking Irish economy

Ok, folks... the latest batch of news from CSO and the official 'Green Jerseys' reaction to same would have made a fine candiate for a Nobel literature prize, were they published in a single tome with a heading Literature of Absurd on it...

We have our routine 'Housing market has bottomed out' shrills from the property pushers in the media - despite the fact that property prices continue to fall. We also have the metronome-like 'Unemployment has stabilized' tale, a chapter of gargantuan efforts to avoid mentioning the fact that fewer and fewer people actually work in Ireland, earning living and paying taxes.

Today we have a new pearl: 'Irish economy is growing once again, albeit slowly'.

Complete porkies, if you ask me. Here's the plain and simple reality of what's going on:

In constant market prices terms, Irish GDP based on constant factor cost (in other words, the real activity in the economy carried out by MNCs and domestic enterprises, net of taxes, gross of subsidies) grew 2.3% (+€819 mln) q/q in Q2 2012. Alas, as usual, q/q growth is... err... mostly meaningless. Instead, y/y comparative shows this metric shrinking €300mln (-0.8%).

What's the dynamic here? Oh, not good, either. In Q2 2011, y/y real GDP (constant factor basis) grew 3.21% y/y. In this quarter it shrunk 0.8% y/y... a negative growth swing of 4 percentage points!

Now, adding taxes (net of subsidies) to the above figure produces official real GDP (GDP expressed in constant prices terms). This stood at €40.327 billion in Q2 2012 up €744 mln on Q1 2012 (+1.9% q/q) but down 1.1% (-€442mln) y/y. Now, wait, folks... so official GDP is down y/y. Not up.

What's the dynamics of this change? Oh, well, in Q2 2011 official real GDP was up 2.86% on same period in 2010, so Irish economic growth has overall deteriorated in Q2 2012 compared to same period a year ago by a whooping 3.9 percentage points.

Next step is for us to subtract from our real GDP outflows of payments abroad (net of inflows of income from abroad) - the so-called Net Factor Income From the Rest of the World adjustment. Bear with me here. It is important.

In Q2 2012 we, as economy, have managed to send out €7.219 billion in factor payments abroad, net of what we received from abroad. Sounds a lot? Not really - this is down on €8.397bn in Q1 2012 (which added €1,178mln to our GNP) and it is down €1,385 mln on Q2 2011 (which adds same amount to our GNP compared to Q2 2011 levels).

What the above means? Here's the punchline to reality: as the result of €744mln increase in our GDP and a €1,178mln decrease in our payments abroad, our GNP officially expanded by €1.922bn in Q2 2012 q/q. Meanwhile, due to a contraction in real GDP of €442mln offset by reduction in outflows of income abroad of €1,385mln, our GNP rose €943mln (+2.9%) y/y in Q2 2012.

Thus, real economic activity in Ireland fell, y/y in Q2 2012, but because the MNCs have decided to expatriate less income out of Ireland in Q2 2012, our GNP actually rose.

Why would MNCs decide not to expatriate much of profits? For a number of reasons:

1. Lack of capital investment around the world means corporates have no incentive to move profits out of Ireland outside the immediate objective of boosting reported profits at home;
2. Booming equity markets in the US mean that there is no immediate pressure for US MNCs operating here to ship retained profits out of Ireland's tax heaven;
3. Fall-off in pharma exports from Ireland also took a bite out of the retained profits here.

Any of these have any tangible effect on our real economy? Not really. Actually - none whatsoever. 

In real economic terms, Irish economy shrunk in Q2 2012 by 1.1% (real GDP terms) y/y and that is it, folks. 

One more note. In seasonally adjusted, constant prices terms:

• Personal Consumption of Goods & Services has hit absolute record low in Q2 2012 of €19,598mln for any quarter since Q1 2007.
• Net Expenditure by Central and Local Government on Current Goods and Services has hit an absolute low of €5,934mln in Q2 2012 for the entire period since Q1 2007.
• Gross Domestic Fixed Capital Formation has hit a record low of €3,427mln
• Exports of Goods and Services have posted a contraction on Q1 2012 but are up €1 billion on Q2 2011
• Imports of Goods and Services have posted a q/q contraction of €1.7bn and are now at a historical low for any Q2 period of 2007-present period
• Total domestic demand is now at the absolute lowest point for any quarter since Q1 2007 and is down €1.6bn on Q1 2012 and €1.9 billion on Q2 2011.

This is not flat growth, folks. This is shrinking real economy.

Note: I will post updated charts later tonight. Stay tuned.

21/7/2012: Sunday Times July 15 - No growth in sight

This is an unedited version of my Sunday Times column for July 15, 2012.

This week, the Central Statistics Office published long-awaited Quarterly National Accounts for the first quarter 2012, showing that in January-March real Gross Domestic Product fell 1.1 percent to the levels last seen around Q1 2005. Gross National product is down 1.3% and currently running at the levels comparable with Q1 2003 once inflation is factored in. Rampant outflow of multinational profits via tax arbitrage continues unabated, as GDP now exceeds GNP by over 27 percent.

There is really no consolation in the statistical fact that, as the National Accounts suggest, we have narrowly escaped the fate of our worse-off euro area counterparts, who posted three quarters of consecutive real GDP contraction since July 2011. Our true economic activity, measured by GNP is now in decline three quarters in a row in inflation-adjusted terms.

Our real economy, beyond the volatile quarter-on-quarter growth rates comparatives, hardly makes Ireland a poster child for recovery. Instead, it raises some serious questions about current policies course.

Save for Greece, five years into this crisis, we are still the second worst ranked euro area economy when it comes to overall performance across some nineteen major indicators for growth and sustainability.

Our GDP and GNP have posted the deepest contraction of all euro area (EA17) states. Assuming the relatively benign 2012 forecast by the IMF materialise. Q1 results so far point to a much worse outcome than the IMF envisions. Total investment, inclusive of the fabled FDI allegedly raining onto our battered economy, is expected to fall over 62% on 2007 levels by the year end – also the worst performance in the EA17. Despite our bravado about the booming exporting economy, our average rate of growth in exports of goods and services since 2007 is only the fifth highest in the common currency area.

Ireland’s unemployment is up by a massive 220%, the fastest rate of increase in the euro zone. Employment rate is down 20% - the sharpest contraction relative to all peers. Other than Estonia, Ireland will end 2012 with the steepest increase in government spending as a share of GDP – up 18% on 2007 levels. We have the second worst average structural Government deficit for 2007-2012 excluding banks measures and interest payments on our debt. By the end of 2012, our net Government debt (accounting for liquid assets held by the state) will be up more than eight-fold and our gross debt will rise 354%. In both of these metrics Ireland is in a league of its own compared to all other member states of the common currency area.

The latest data National Accounts data confirms the above trends, while majority of the leading economic indicators for Q2 2012 are also pointing to continued stagnation in the economy through June.

Purchasing Manager Indices (PMI) – the best leading indicator of economic activity we have – are signalling virtually zero growth for the first half of 2012. Manufacturing PMI has posted a robust rate of growth in June, but the six months average remains anaemic at 50.7. The other side of the economy – services – is under water with Q2 activity lagging the poor performance achieved in the first quarter. 

In the rest of the private economy, things are getting worse, not better. Live register was up, again, in June, with standardized unemployment now at 14.9%. Numbers on long-term unemployment assistance up 6.8% year on year. Factoring in those engaged in State-run training schemes, total number of claimants for unemployment benefits is around 528,600, roughly two claimants to each five persons in full employment. Construction sector, the only hope for many long-term unemployed, posted another monthly contraction in June – marking the sharpest rate of decline since September 2011. Retail sales, are running below 2005 levels every month since January 2009 both in volume and value terms. Despite June monthly rise, consumer confidence has been bouncing up and down along a flat trend since early 2010.

Meanwhile, net voted government spending, excluding interest payments on Government debt and banking sector measures, is up 1.9% year on year in the first half of 2012 against the targeted full year 3.3% decrease. Government investment net of capital receipts is down 19.1%. This means that net voted current expenditure – dominated by social welfare, and wages paid in the public sector – is up 3.3% on same period 2011, against projected annual decrease of 2.2%. Although not quite the emergency budget territory yet, the Exchequer performance is woeful.

And the headwinds are rising when it comes to our external trade. By all leading indicators, our largest external trading partners are either stagnant (the US), shrinking (the Euro area and the UK) or rapidly reducing their imports from Europe (the BRICs and other emerging economies).

The question of whether Ireland can grow its economy out of the current crisis is by now pretty much academic. Which means we need radical growth policy reforms.

Look at the global trends. In every five-year period since 1990, euro zone average annual real economic growth rates came in behind those of the advanced economies. As a group, other advanced economies grew by some 15 percentage points faster than the euro area during the pre-crisis decade. Both, before and since the onset of the Great Recession, euro area has been a drag on growth for more dynamic economies, not a generator of opportunities. Within the euro zone, the healthiest economies during the current crisis – Germany, Finland and Austria – have been more reliant on trade outside the euro area, than any other EA17 state.

This is not about to change in our favour. Data for China shows that the US now outperforms EU as the supplier of Chinese imports. Europe’s trade with BRICs is deteriorating. Combined, BRICs, Latin America and Africa account for less than 5% of our total exports. In the world where the largest growth regions – Asia Pacific, Africa and Latin America are increasingly trading and carrying out investment activities bypassing Europe, Ireland needs to wake up to the new geographies of trade and investment.

Given the severity of economic disruptions during the current crisis, Ireland requires nominal rates of growth in excess of 6-7 percent per annum over the long term. To deliver these, while staying within the euro currency will be a tough but achievable task. This requires drastic increases in real competitiveness (focusing on enhanced competition and new enterprise creation, not wages deflation alone) in domestic markets, including the markets for some of our public sector-supplied services, such as health, education, energy, transport, and so on. We also need aggressive decoupling from the EU in policies on taxation, immigration and regulation, including that in the internationally traded financial services, aiming to stimulate internal and external investment and entrepreneurship. We must review our social policies to incentivise human capital and support families and children in education and other forms of household investments.

Like it or not, but the idea that we must harmonize with Brussels on every matter of policy formation, is the exact opposite of what we should be pursuing. We should play the strategy of our national advantage, not the strategy of a collective demise.

Box-out:

Recent decision by the Government to introduce a market value-based property tax instead of the site value tax is an unfortunate loss of opportunity to fundamentally reform the system of taxation in this country. A tax levied on the property value located on a specific site effectively narrows the tax base to exclude land owners and especially those who hold land for speculative purposes in hope of property value appreciation lifting the values of their sites. In addition, compared to the site value tax, a property levy discourages investment in the most efficient use of land, and reduces returns to ordinary households from property upgrades and retrofits. Perhaps the most ridiculous assertions that emerged out of the Government consideration of the two tax measures to favour the property levy is that a site value tax would be less ‘socially fair’ and less transparent form of taxation compared to the property tax. By excluding large landowners and speculative land banks owners, and under-taxing properties set on larger sites, a property tax will be a de facto subsidy to those who own land over those who own property in proximity to valuable public amendments, such as schools, hospitals and transport links. By relating the volume of tax levy to less apparent and more numerous characteristics of the property rather than more evident and directly comparable values of the adjoining land parcels, the property tax payable within any giving neighbourhood will be far less transparent and more difficult and costly to the state to enforce than a site value tax. In a research paper I compared all measures for raising revenues for public infrastructure investments. The study showed that a site value tax is an economically optimal relative to all other tax measures, both from the points of capturing privately accruing benefits from public investment and enforcement. This paper was presented on numerous occasions to the Government officials and senior civil servants in charge of the tax policy formation over the last three years. 

26/3/2012: QNA Q4 2011 - Part 4

In the first post on QNA results for 2011 I covered data for annual GDP and GNP in constant prices terms. The second post focused on GDP/GNP gap and the cost of the ongoing Great Recession on the potential GDP and GNP. The third post focused on quarterly sectoral decomposition of GDP and GNP in constant prices terms. And a short digression from QNA results here showed how difficult it is, really, to reach any consensus on some of Ireland's economic performance parameters.

In this post, let's consider the decomposition of the GDP and GNP on the basis of expenditure lines, as measured in current market prices.

Headline numbers:

• In Q4 2011 personal consumption of goods and services rose 0.9% qoq to €20,319mln, but declined 0.8% yoy. Compared with the same period of 2007 personal consumption is now dow 15.3%. YOY -0.8% contraction in Q4 2011 followed on 2.96% contraction in Q3 2011. In Q4 2011 personal consumption accounted for 52.45% of quarterly GDP, this is actually higher than the share of GDPit took in Q4 2007 (49.89%) - so much for 'unsustainable consumption binge' back at the peak of the Celtic Tiger period.
• Q4 2011 net expenditure by central and local government stood at €5,991mln which was 5.1% down qoq and down 8.1% yoy. This follows on 2.32% contraction in yoy terms in Q3 2011. Relative to Q4 2007 net expenditure by central and local government now stands at -17.1%. However, the share of net government expenditure in overall GDP rose from 15.04% in Q4 2007 to 15.46% in Q4 2011.
• Gross domestic capital formation at Q4 2011 stood at €3,923mln which was up 12.7% qoq, but down 1.9% yoy and the annual decline in Q4 2011 came in after an 18.3% contraction in Q3 2011. Fixed capital formation was down 66.8% in Q4 2011 compared to Q4 2007. In Q4 2007 gross fixed capital formation accounted for 24.56% of GDP, while inQ4 2011 this share fell to 10.13%.

Chart below illustrates the above changes

• Exports of goods and services hit another historic record at €41,766mln in Q4 2011 - a rise of 0.4% qoq and 6.2% yoy. In Q3 2011 exports rose 1.7% yoy. Q4 2011 exports were 8.3% ahead of Q4 2007 and if in 2007 exports accounted for 80.24% of our GDP, in Q4 2011 this share was 107.8% of quarterly GDP. This is a remarkable performance.
• Imports rose 0.4% in qoq terms to €332,904mln in Q4 2011. Q4 2011 imports are up also 0.4% yoy and this follows on a 0.35% contraction in Q3 2011. Relative to Q4 2007 imports are down 5.2%. Back in Q4 2007 imports stood at the level of 72.23% of quarterly GDP. In Q4 2011 this share was 84.93%.
• Net trade surplus hit a record of €8,862mln - third consecutive quarterly record and third consecutive quarter with trade surpluses in excess of €8 billion. Trade surplus was up 0.3% qoq and 34.8% up yoy inQ4 2011, which comes on foot of a 10.60% yoy increase inQ3 2011. Stellar performance. In Q4 2011 trade surplus was 22.88% of GDP and this is up from 8.01% of Q4 2007 GDP. Compared to Q4 2007 trade surplus in Q4 2011 rose massive 130.2%.
• Once again, trade figures confirm the simple reality that exports-led growth is not capable of sustaining economic recovery. Average quarterly trade surplus in 2007 stood at €4,295mln and 2005-2007 average quarterly trade surplus was €4,467mln. In 2009 average quarterly trade surplus rose to €6,234mln, followed by €7,467mln in 2010 and €8,408mln in 2011. In other words, Ireland experienced a massive exports boom for the last 3 years in a row, and yet we are continuing to remain in a recession.

• GDP at current market prices stood at €38,743 in Q4 2011 which is 0.9 below Q3 2011, marking the second consecutive qoq decline, which is consistent with Ireland officially entering a new recession. 
• GDP actually rose in yoy terms by 3.4% inQ4 2011 which comes on foot of a 0.79% contraction in Q3 2011. relative to Q4 2007, GDP in current market prices is now down 19.4%.
• Net factor income from the rest of the world rose 10.8% qoq to -€9,017mln, which marks the first quarter since Q1 2010 when outflows of payments abroad exceeded trade surplus. This attests to the extreme levels of transfer pricing deployed by the MNCs in the Irish economy. Net factor income losses in Irish economy in Q4 2011 were up65.3% year on year, following a 19.5% rise in yoy terms in Q3 2011. Transfer payments abroad rose 28.3 on Q4 2007. Overall, an equivalent of some 23.27% of Irish GDP was paid out in factor payments to foreigners in Q4 2011 which is up from 14.62% in Q4 2007.
• As the result, GNP fell to €30,051mln in Q4 2011 down 2.8% qoq marking the fifth consecutive quarter of qoq declines. Yoy, GNP in current market prices was down a massive 5.4% in Q4 2011 which comes on foot of an equally large 5.16% contraction in Q3 2011. These figures reflect deep recession continuing to ravage the Irish economy. It is incorrect to attribute the entire GNP to solely domestic activity as it includes net exports (trade balance) activity that is not expatriated abroad.
• Overall, Irish GNP in current market price in Q4 2011 stood at 26.5% below the levels attained in Q4 2007. This means that more than 1/4 of the overall domestic and non-transfer pricing MNCs' activity has been wiped off the Irish national accounts during the current crisis.

The chart below highlights the evolution of transfers abroad relative to GDP, GNP and to trade balance. Transfers of income to the rest of the world from ireland has hit 101.75% of the trade surplus in Q4 2011 - rising above 100% for the first times since Q1 2010 when it stood at 101.80%. We are still well behind the levels of 2005-2009 when it averaged 138.74%. Which, given the negative sign with which transfers of income abroad enter the national accounts means that we have loads of room more for reductions in GNP on the back of 'exports recovery'.

25/3/2012: QNA Q4 2011 - Part 3

In part 1 of the QNA analysis we covered annual results for annual GDP and GNP in constant prices terms. Part 2 analysis focused on GDP/GNP gap and losses in national income compared to pre-crisis trend. Here, we cover some quarterly trends for GDP and GNP based on constant prices data.

Let's consider changes by sector:

• Agriculture, forestry and fishing sector output fell 5.1% yoy in Q4 2011 following a 9.34% rise yoy in Q3 2011. In Q4 2011 the sector accounted for just 1.26% of the total quarterly GDP. Compared to Q4 2007 the sector output is now down 6.0%.
• Industry output rose 2.3% yoy in Q4 2011 after rising 6.25% in Q3 2011. The sector is now accounting for 28.34% of the quarterly domestic output. Sector output is now down 3.3% when compared against Q4 2007.
• Building & Construction sub-sector of Industry sector posted yoy decline of 6.7% inQ4 2011 that follows on 39.32% drop in Q3 2011. The sub-sector is now accounting for just 2.62% of total output and is down 55.0% on Q4 2007.
• Distribution transport and communications sector shrunk 0.6% yoy in Q4 2011 which follows 4.99% drop in Q3 2011. The sector accounts for 13.23% of total output and is down 17.3% on Q4 2007.
• Public administration and defence sector shrunk 3.8% yoy in Q4 2011 which follows on a 6.53% contraction in Q3 2011. The sector now accounts for 3.58% of the domestic output and is down 6.5% on Q4 2007.
• Other services including rents output contracted 3.1% yoy in Q4 2011 following on a 5.14% contraction in Q3 2011. The sector accounts for 42.37% of the economy and is down 12.5% on Q4 2007.
• As the result of this, GDPat constant factor cost expanded in Q4 2011 by 1.1% yoy and this follows on a rise of 0.88% in Q3 2011. This metric of domestic output is now dow 10.6% on Q4 2007.
• Taxes net of subsidies are down 2.3% yoy in Q4 2011 and this follows a 2.76% drop in Q3 2011. This accounts for 9.70% of GDP and the category is now down 30.0% compared to Q4 2007.
• Headline GDP at constant market prices rose 0.7% yoy after expanding 0.52% in Q3 2011. The GDP at constant prices in Q4 2011 was 12.8 below that in Q4 2007.
• Net factor income from the rest of the world (aka largely transfer pricing net of receipts by Irish corporates and individuals on their foreign investments) grew 59.9% yoy in Q4 2011 which follows on 7.41% growth in Q3 2007. These transfers now account for 18.51% of our GDP and were running 10.0% ahead of the levels recorded in Q4 2007.
• Headline GNP in constant prices in Q4 2011 fell 7.1% yoy following a 1.18% contraction in Q3 2011. National income in constant prices is now 16.6% below that attained in Q4 2007.
• GDP/GNP gap stood at 18.51% in Q4 2011 slightly down on 20.18% in Q3 2011.

Charts:

More sectoral analysis to follow in the next post.

24/3/2012: QNA 2011 - Part 2

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

Recall that the headline results are:

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

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

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

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

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

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

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

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

13/2/2012: Now - a Greece comparative that doesn't work in our favor

Sometimes those 'We are not Greece' comparatives work our way, sometimes (fortunately enough rarely) they take us in the opposite direction. Take a look at the following two charts from DB Research (hat tip to Zero Hedge). Note: you might want to click on the charts to enlarge.

Chart one clearly shows Ireland's impressive performance with low interest rates, bubble-fueled domestic growth. The chart below shows Ireland's disastrous growth performance since the bubble burst. What's the point, you ask? Ok, half of the period of our rapid decline has been the period of exports boom, the period of our growth has been the period of domestic growth. Irish exports have been on the tear since quarter  9 in the second chart. And yet, the miracle is not happening - the exports-led recovery is still not here.

And look at Greece. And Portugal. And Spain. And Italy. And compare to Ireland. Scary? Glance back at chart 1 above and spot the fall we've taken. Some might say as the consolation that we are still ahead of all the PIIGS in actual national income (do keep in mind - the above charts are GDP, not much more adversely impacted GNP). Ok, let's put it in simpler terms: Greece has fallen from the 10th floor to the 5th floor balcony. We have fallen from the 20th floor to the 10th floor roof terrace. We are still five stories above Greece, but, man it has to hurt more.

26/10/2011: Irish GNP projections under new US tax proposals

Much ignored by irish media so far, the US Congressional proposals to reform corporate tax system are gaining speed and have serious implications for Ireland. In the nutshell, today, US House Ways & Means Committee Chairman Dave Camp described some of his report proposals (see Bloomberg report here), which include:

• Lower corporate tax rate to 25 from 35%
• Exempting 95% of overseas earnings from US tax
• Introducing a tax holiday on repatriated profits

For US MNCs operating in Ireland this will serve as a powerful incentive to on-shore profits accumulated in Ireland. While the full impact is impossible to gauge - it is likely to be significant, running into 50% plus of retained earnings. 

This will, in turn, translate into higher Net Income Outflows from Ireland (see QNA) and thus directly depress our Gross National Product.

I run two scenarios - based on IMF WEO (September 2011) forecasts for Irish GDP, current account and Government expenditure and on historical data from CSO QNA. The baseline scenario assumed that MNCs will expatriate the same share of their profits relative to GDP as they have done before (3 year moving average). The first adjustment scenario adds a 10% uplift on the above scenario and expected growth in GDP to repatriation of profits. The second adjustment scenario adds a 25% uplift. The results are in the charts below.

Pretty dramatic. And this is for rather conservative assumption on increased outflows.

23/06/2011: Quarterly National Accounts Q1 2011

QNA results for Q1 2011 are in today. Some are expected, some are not. Her's a quick snapshot of the core data. Keep in mind - these are initial estimates subject to future revisions.

Seasonally adjusted GDP rose 1.3% qoq. Surprised? You shouldn't be - in 2010 the same Q1 rise was 1.0%.

If a base year chosen for real variables adjustment was 2008 as before Q1 2011, year on year the increase in Q1 2011 was just 0.04%, so annualized growth extrapolated from Q1 result is effectively zero. At the same time, as predicted in my analysis of Q4 2010 results, GNP crashed on the back of strong outflows of net factor income. GNP is now down 4.32% qoq and down 0.65% yoy. The GNP decline was, as I mentioned before, predictable. In Q4 2010 many MNCs parked their profits in Ireland in hope of getting a new repatriation deal out of the US administration in 2011. Thus, they forward-loaded profits into Q1 2011, pushing transfers up and GNP down. Net factor outflows abroad rose to €7,712mln (constant prices seasonally adjusted terms) up 34.3% qoq.

Of course, CSO re-based their data to 2009 for the main series, which means that in constant prices terms, seasonally adjusted:

• Agriculture, Forestry & Fishing sectors output in GVA terms fell 2.2% qoq and rose 4.3% yoy, while still posting a 5.4% decline on the peak
• Industry GVA fell 0.4% qoq and 0.9% yoy to post -4.5% contraction on the peak quarterly performance
• Building & Construction sub-sector of Industry posted a 15.4% contraction qoq and 18.7% fall yoy, to end Q1 2011 at 75.7% below its quarterly historical peak
• Distribution, Transport & Communications sector grew 1.3% qoq, but still down 0.9% yoy and 15.7% below peak
• Public Administration and Defence shrunk 0.7% qoq and 2.2% yoy - not exactly what you'd expect in the age of severe austerity. The sector GVA is now 8.2% below its peak
• Other Services, including rents show 0.7% increase qoq and 1.7% decline yoy and are 8.3% below the peak
• Taxes net of subsidies were 2.2% down qoq and 2.2% down yoy, showing overall decline of 36.6% on the peak, implying that savings from austerity are not catching up with declines in taxes net of subsidies
• GDP in constant market prices and seasonally adjusted terms, based on GVA, had risen 1.3% qoq and is flat at +0.04% yoy and down 11.5% on peak
• GNP based on GVA is down 4.3% qoq, down 0.65% yoy and is 15.4% below its quarterly peak
  

Thus, the GDP/GNP gap has widened once again. On GVA basis (constant prices seasonally adjusted) the gap is now 19.62% up from 14.93% in Q4 2010 and 19.07% in Q1 2010. This is the record quarterly GDP/GNP gap in the history of the series.
So on the basis of GVA (Gross Value Added), Irish economy (GDP) grew solely on the back of Distribution, Transport & Communications sector expansion (qoq) and Other Services, including rents (qoq). For all the boom in manufacturing we are experiencing, industry still contracted qoq. Year-on-Year, the only positive contributor to GDP was Agriculture, Forestry and Fishing sector. Not exactly a boom time, folks.

Now, take a look at the expenditure basis of GDP calculations. Chart below illustrates:

Let's take a closer look. In constant market prices, seasonally adjusted:

• Personal consumption of goods and services fell 1.88% qoq and 2.72% yoy. This was the first time since Q2 2005 that personal consumption fell below €21 billion in any quarter. Relative to peak quarter performance, Q1 2011 consumption stands at -12%
• Net expenditure by central and local government has declined 1.93% qoq and 4.16% yoy, reaching -10.3% decline on peak historical quarterly performance. If you think that this austerity, then let's put it into euro value terms. Q1 2011 net government expenditure was just €131mln below Q4 2010 and €290mln below Q1 2010. Relative to the peak quarterly expenditure, Q1 2011 spending was down just €765mln or annualized savings of less than €3.1 billion. Not to say this is not a painful correction, but hardly a sign of severe austerity and certainly not enough to undo our €17 billion-odd annual deficit
• Gross domestic fixed capital formation improved - at last, posting 1.08% gain qoq, although still 8.85% below Q1 2010. Relative to peak, investment in fixed capital is now 59.2% below historical quarterly high
• Exports of goods and services boomed once again, rising 3.79% qoq and 6.85% yoy (an annual rate consistent with the IMF forecasts, but well behind the projections by the DofF and ESRI). Relative to historical peak Q1 2011 exports were 0.9% above historical high
• Imports have fallen 0.34% qoq providing positive contribution to GDP, but are up 3.79% yoy. Imports are now 10.6% below quarterly historical high
• Thus, GDP at constant market prices was 1.26% above Q4 2010 and 0.04% above Q1 2010, while GNP was 4.32% below Q4 2010 and 0.65% below Q1 2010.
  

In other words, GDP was supported in growth by Gross domestic fixed capital investment, smaller stocks drawdown, exports increases and imports declines. Qoq, net exports (exports minus imports) grew by €1,557m (20.6%) at constant 2009 prices. Domestic demand, on the other hand, declined by €990m (-3.1%) over the same period with personal consumption down by 2.9%.
Note the line showing trade surplus net of transfers of factor income abroad - after 3 quarters of registering positive net trade surplus, Irish economy has posted another deficit in Q1 2011 of €358mln. In other words, the value of all of our trade, once imports and profits of MNCs are accounted for, is negative, broadly speaking.

27/03/2011: Annual GDP and GNP - few lessons to be learned

I haven't had time to update QNA numbers on the blog, but here's a nice preview charts of analysis to come.

First annual GDP and GNP:
When I often say that over the last 3 years we've lost a war, I mean it: relative to peak 2007 levels, our real GDP is down 12%, our GNP is down 16%. Our 2010 GNP clocked the level of 2003-2004 average, erasing 7 years of growth. Our GDP is now at the level of 2004-2005.

What about the composition of our GDP and GNP?

The above is just a snapshot. Here are headline figures:

• Agriculture, forestry & fishing sector output in constant prices is now 10% down on 2007 (remember - we were supposedly having a boom in this sector in 2010 according to the various CAP-dependent quangoes, and still the preliminary output came out at a miserly €3,328 million - the lowest in 8 years).
• Industry had a better year, with output rising to €48,111 million, up on €45,841 million in 2009, but still 7% down on 2007.
  
• Building & construction sector shrunk 58% on 2007 levels, posting output worth just €5,754 million in 2010, down on €8,433 million in already abysmal 2009.
• Distribution, Transport and Communications sector shrunk 13% in 2010 relative to 2007. 2010 sector output was €21,509 million against 2009 level of €21,845 million.
• Other services have fared better than other sectors, posting a decline of 6% on 2007 levels. In 2010 the sector brought into this economy €71,828 million against €73,823 million recorded in 2009.
• Public Administration and Defence - the sector that has been allegedly (per our Government and Unions claims) hit very hard by the austerity has managed to "contribute" €6,243 million in 2010 - slightly down on €6,416 million in real euros in 2009. Relative to peak 2007 levels, Public Administration and Defence "contribution" to our GDP/GNP has fallen by a whooping ZERO percent. That's right - zero percent. In 2007 the 'sector' posted GDP contribution of €6,266 million.
• Taxes, net of subsidies, have fallen 31% in 2010 relative to 2007 and 'contributed' just €16,027 million in 2010 compared to €16,807 million in 2009. Tax hikes are working marvels for the Government, then. Keep on the course, Captain!
• Net Factor Income from the Rest of the World has increased steadily from 2007 levels, posting an outflow of -€29,313 million in 2010, up on outflow of -€28,184 in 2009 and a massive 31% above 2007 levels. These outflows represent the GDP/GNP gap that has expanded from 15.17% local minimum in 2006 to 21.67% today.
  

Now, let's take a look at percentage contributions to GDP and GNP from each line of QNA:
So while economy shrunk, Public Administration and Defence grew in overall importance as a share of GDP.

Economics 22/8/10: Fundamentals of investing in IRL Inc - IV

This is the last post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. The first post (here) covered analysis of current account dynamics, the second post (here) dealt with General Government balance, third post (here) highlighted differences in GDP and income. This post deal with residual fundamentals such as inflation, unemployment and population.

In terms of inflation we are not doing too well. Since 2000 Ireland remains expensive. More expensive than Switzerland, despite our massive bout of deflation. This, of course, does not account for the fact that Swiss residents get much better quality public sector services than we do, for less money spent. But that's a matter of a different comparison that I touched upon earlier (here, here and here).

So Chart 12 shows our inflation performance.

Chart 12:

You wouldn't be picking Ireland for your investment if you were concerned with real returns or with effects of inflation on economy's ability to carry debt.

If population growth is really a longer term dividend, we should expect Ireland Inc to overtake Switzerland by now in terms of prosperity (Chart 13). After all, our 1980s and 1970s'-born cohorts are currently at the peak of their productivity. But recall per capita GDP... so far, there isn't really any evidence that growth in population leads to higher growth in GDP once scale effects are taken out of equation.

Chart 13:

Would you have invested in Ireland's debt if you were thinking about Ireland's ability to repay on the basis of lower costs of unemployment and greater proportion of labour force at work? Take a look at Chart 14.

Chart 14:

Well, not really. Swiss and Lux make for a much more compelling case here and not just in the current crisis environment.

So here's our real problem that is not a function of cyclical dynamics, but a structural one. Our employed are carrying much greater burden of providing for the rest of our population than Switzerland (Chart 15).

Chart 15:

Factor in that Irish public sector is larger, in relative-to-population terms than Swiss... and you have an even greater discrepancy in terms of the true earning capacity of the Irish economy.

Which brings us to the issue of productivity and back to the topic of exporters carrying the burden of the entire economy out of the recession. Apart from the construction boom, economy-wide income per person working is lower in Ireland than in either Switzerland or Lux since the 1980s. Even at the peak of the largest real estate bubble known to any other European country in modern history, our 2008 GDP per person employed was still not that much greater than that of Switzerland (Chart 16).

Chart 16:

May be, just may be it was because our wealthy developers all wanted a fine Swiss watch, while no Swiss investors wanted our bungalows in Drogheda or apartments in Tallaght? which is the same as to say - the Swiss are productive to the point of the rest of the world wanting their goods and services. We are productive only to the extent of the rest of the world wanting goods and services produced by MNCs and few indigenous exporters based here. But their productivity is high in gross terms and low in net terms (recall current account analysis in the first post). Unless we can dramatically increase the number of exporters while simultaneously upping the net value added in their operations to Swiss levels, there's no chance external trade can carry this economy out of the recession.