27/4/18: Global growth and Ireland's prospects: 2018-2019

My article for last weekend's edition of Sunday Business Post on the implications of peak cycle in global growth for Ireland: https://www.businesspost.ie/business/risks-global-growth-cloud-irelands-future-414819.

21/6/16: Real Ireland and the New 'Fiscal Space'

My comment for the Sunday Business Post on the Summer Statement by the Irish Government, covering fiscal space for 2016-2021 is available here: http://www.businesspost.ie/comment-sorry-real-ireland-youre-low-on-list-of-government-priorities/.

16/3/16: ESRI and Imaginary Numbers: Irish Economy Forecast 2016-2017

My article for Sunday Business Post on latest ESRI forecasts for the Irish economy 2016-2017: http://www.businesspost.ie/esri-report-irelands-growth-rate-increasingly-resembles-imaginary-numbers/.

18/2/16: Fiscal Space By Numbers: Village Magazine January 2016

This is an unedited version of my column for Village Magazine, December 2015.

Two recent events highlight the true nature of the ongoing Irish economic recovery.

Firstly, ahead of the infamous Ireland-Argentina Rugby World Cup match, the press office of the main Irish governing party, Fine Gael, produced a rather brash inforgraphic. Charting projected growth rates in real GDP for 2015 across all Rugby World Cup countries, the graph put Ireland at the top of the league with 6.2 percent forecast growth. “FACT: If the Rugby World Cup was based on economic growth, Ireland would win hands down,” shouted the headline.

Having put forward a valiant performance, Irish team went on to lose the game to Argentina, ending its tour of the competition.

Secondly, within weeks of publication, Budget 2016 – billed by the Government as a programme for the ‘New Ireland’ – has been discounted by a range of analysts, including those with close proximity to the State as representing the return of the fiscal policy of electioneering. Worse, judging by the public opinion polls, event the average punter out there has been left with a pesky aftertaste from the political wedding cake produced by the Merrion Street on October 13^th.

Tasteful or not, the public gloating about headline growth figures and the fiscal chest-thumping that accompanied the Budget 2016 did not stretch far from reality. Official growth is roaring, public finance are in rude health, and the Government is back in business of handing out candies to kids on every street corner. The air is so filled with the sunshine of recovery, the talk about the Celtic Tiger Redux is back on the chatter menu for South Dublin partygoers.

Ireland by the numbers

Irish Government is now projecting full year 2015 inflation-adjusted growth to come in at 6.2 percent followed by 4.3 percent in 2016. Less optimistic, the IMF puts 2015-2016 growth forecasts for the country at 4.9 percent and 3.8 percent, respectively. Still, this ranks Ireland at the top of the advanced economies growth league, with second place Iceland set to grow by 4.8 percent and 3.7 percent over 2015 and 2016, respectively. The only other advanced economy expected to post above 4 percent growth in 2015 is Luxembourg. Which is a telling bit: of all euro area member states, the two most exposed to tax optimization schemes are growing the fastest. Though only one has a Government gushing publicly about that fact. No medals for guessing which one.

The problem is: the headline official GDP growth for Ireland means preciously little as far as the real economy is concerned. The reason for this is the composition of that growth by source and, specifically, the role of the Multinational Corporations trading from Ireland. We all know this, but keep harping about the said ‘metric’ as if it mattered.

Based on the figures for the first half of 2015 (the latest available through the official national accounts), Irish economy grew by EUR6.4 billion or 6.9 percent in terms of real GDP compared to the first half of 2014. Gross National Product, or GDP accounting for the officially declared net profits of multinational companies, expanded by a more modest 6.6 percent over the same period.

Other distortions arising from this structural anomaly at the heart of Irish economic miracle are the effects of foreign investment funds and companies on capital side of the National Accounts. Back in 2014, the European Union reclassified R&D spending as investment, superficially inflating both GDP and GNP growth figures. Since then, our investment has been booming, outpacing both jobs creation and domestic public and private sectors’ demand. In more recent quarters, capital investment has been outperforming exports growth too. Which begs a question: what are these investments about if not a tail sign of corporate inversions past and the forewarning of the changes in the economic output composition in anticipation of our fabled ‘Knowledge Development Box’?

Beyond this, the legacy of the financial crisis adds to artificial growth statistics. Irish ‘bad bank’, Nama, and its vulture funds’ clients are aggressively disposing of real estate loans and other assets bought at a cost to the taxpayers. Any profits booked by these entities are counted as new investment here. Once again, GDP and GNP go up even if there is virtually nothing happening to buildings and sites being flipped by these investors.

And while we are on the subject of the old ways, last month Ireland became a domicile of choice for an upcoming merger between Pfizer and Allergan – two giants of the global pharma world. Despite numerous claims that Ireland no longer tolerates so-called ‘tax-driven corporate inversions’ (a practice whereby U.S. multinationals domicile themselves in Ireland for tax purposes), it appears that  we are back in the same game. Just as we are apparently back into the game of revenue shifting (another corporate tax practice that sets Ireland as a centre for booking global sales revenues despite no underlying activity taking place here), as exemplified by the Spanish Grifols announcement earlier in October.

All of these growth sources also benefit from weaker euro relative to the dollar and sterling, courtesy of the ECB printing presses.

Looking at the national accounts for January-June 2015, Gross Fixed Capital Formation accounted for EUR3.8 billion or almost 60 percent of total GDP growth over the last 12 months, or nearly 3/4 of all growth in GNP.

In simple terms, the real economy in Ireland has been growing at closer to 3.5 or 4 percent annual rate in 2015 – still significant, but less impressive than the 6 percent-plus figures suggest.

Kindness for the Exchequer

Still, the above growth has been kind for the Irish Government. In the nine months though September 2015, Irish Exchequer total tax receipts rose strong EUR2.75 billion, or 9.5 percent year-on-year. Just over 45 percent of this increase was due to unexpectedly high corporate tax receipts that rose 45.7 percent year-on-year. Vat receipts increased EUR742 million or 8.3 percent year-on-year, while income tax posted a more modest rise of EUR677 million up 5.7 percent. While both VAT and Income Tax receipts came in within 1-2 percentage points of the Budgetary targets, Corporation Tax receipts over-shot the target by a massive EUR1.21 billion or 44.2 percent.

As chart below shows, in the first nine months of 2015, Corporation Tax receipts have not only outperformed the previous period trend for 2007-2014 and the historical average for 2000-2014, but posted a massive jump on the entire post-crisis ‘recovery’ period.  Both the levels of tax receipts and the rate of annual growth appear to be out of line with the underlying economic performance, even when measured by official GDP growth.

CHART: Corporation Tax: Cumulative Outrun, January-September, Euro Millions

Source: Data from Department of Finance

                              

This prompted the by-now-famous letter from the outgoing Governor of the Central Bank, Professor Patrick Honohan to the Minister for Finance in which Professor Honohan politely, almost academically, warned the Government that a large share of the current growth in the economy is accounted for by the “distorting features” – a euphemism for tax optimising accounting. Per letter, “Neglecting these measurement issues has led some commentators to think that the economy is back to pre-crisis performance”.

Professor Honohan’s warning reflects the breakdown in sources of growth noted earlier, with booming multinationals’ activity outpacing domestic economic expansion. The same is confirmed by the recent data from labour markets. For example, whilst official unemployment in Ireland has been declining over the recent years, labour force participation rates have remained well below pre-crisis averages and are currently stuck at the crisis period lows.  In simple terms, until very recently, jobs creation in Ireland has been heavily concentrated in a handful of sectors and professional categories.

Of course, this column has been saying the same for months now, but for Irish official media, the voice of titled authority is always worth waiting for.

The Revenue attempted to explain the Exchequer trends through October, but the effort was half-hearted. Per Revenue, the UER800 million breakdown of Corporation Tax receipts outperformance relative to target can be broken into EUR350 million of the “unexpected” payments; EUR200 million to “early” payments; and EUR200 million to ‘delayed’ repayments. Which prompted a conclusion that the surge in tax receipts was “sustainable”.

Turning back to fiscal management side of accounts, Irish debt servicing costs at end of 3Q 2015 fell EUR296 million or 5.9 percent compared to January-September 2014. The key driver of this improvement was refinancing of the IMF loans via market borrowings and, of course, the ECB-driven decline in bond yields. Neither are linked to anything the Government did.

Spurred by improving revenue side, however, the Government did open up its purse. Spending on current goods and services (excluding capital investment and interest on debt) has managed to account for just under one tenth of the overall official economic growth in the first half of 2015. In other words, even before the Budget 2016 was penned and the print of improved revenues was visible on the horizon, Irish austerity has turned into business-as-usual.

Talking up the future

As the result of the tangible – albeit more modest than official GDP figures suggest – economic recovery, Budget 2016 unveiled this month marked a large scale U-turn on years of spending cuts and tax hikes.  Even though the Government deficit is still running at 2.1 percent of GDP and is forecast to be 1.2 percent of GDP in 2016, the Government has approved a package of tax cuts and current spending increases worth at least EUR3 billion next year. The old formula of ‘If I have it I spend it’ is now replaced by the formula of ‘If I can borrow it I spend it’.

Which means that in 2016, Ireland will run pro-cyclical fiscal policy for the second year in a row, breaking a short period of  more sustainable approach to fiscal management. Another point of concern is the fact that this time around, just as in 2004-2007, expansionary budgeting is coming on foot of what appears to be one-off or short-term boost to Exchequer revenues. Finally, looking at the composition of Irish Government spending plans, both capital and current spending sides of the Budget and the multi-annual public investment framework include steep increases in spending allocations of questionable quality, including projects that potentially constitute political white elephants and electioneering.

In short, the Celtic Tiger is coming back. Both – the better side of it and the worst.

17/2/16: EU Commission Analysis of the Irish Economy Own Goal

In a recent assessment of the economic outlook for Ireland for 2016, the DG for Economic and Financial Affairs of EU has heaped praise on the country (see full list of country-specific assessments here: http://ec.europa.eu/economy_finance/eu/forecasts/2016_winter_forecast_en.htm?utm_source=e-news&utm_medium=email&utm_campaign=e-news132). Much of it - justified.

However, a glaring miss in the analysis was a truthful representation of the balance of sources for growth in the economy.

Per EU Commission: “The Irish economy grew again strongly in the third quarter of 2015 although more moderately than earlier in the year. …However, survey indicators point to … GDP growth for 2015 as a whole to 6.9%. In 2016 and 2017, the moderation in GDP growth is expected to continue towards more sustainable rates of about 4% and 3% respectively.”

All of which is fine.

Then the assessment goes on: “While the recovery started in the external sector, domestic demand is now driving GDP growth. It expanded by more than 8% (y-o-y) in the first nine months of 2015, with household consumption growing by 3.5% and investment by over 25%.” I covered the latest figures for Irish national accounts in a series of posts here: http://trueeconomics.blogspot.com/2015/12/131215-irish-national-accounts-3q-post.html, and in particular, domestic demand growth drivers here: http://trueeconomics.blogspot.ie/2015/12/111215-irish-national-accounts-3q-post.html. And as I noted in my analysis, the problem is that Domestic Demand printed by CSO no longer actually reflects purely indigenous economy activity.

EU assessment hints at this: “…as developments in some companies and sectors are boosting investment and imports in the economy. Multinationals have been transferring a number of patents to Ireland. In the first nine months of 2015, these transfers generated a growth in investment in intellectual property of over 100% (y-o-y) and an equivalent increase in services imports. In 2016 and 2017, the fees for the use of these patents are expected to benefit the current account balance and lead to more company profits being booked in Ireland. Conversely, the purchase of airplanes by international leasing companies based in Ireland collapsed in the third quarter of 2015, leading to a large fall in equipment investment. Excluding intangibles and aircraft, core investment was strong, growing by over 11% (y-o-y) in the first three quarters of 2015, despite the delayed recovery in construction activity. The growth in core investment is forecast to continue more moderately in 2016 and 2017.”

All of which goes to heart of the argument that so-called domestic demand-reported ‘investment’ is heavily polluted by MNCs and aircraft purchases. In other words, stripping out effects of MNCs on domestic demand, actual growth has once again been heavily (around 1/2) concentrated in the external (MNCs-led) sectors. And worse, going forward, transfers of patents signal that Irish economy is likely to become even more unbalanced in the future, with tax arbitrage inflows from the rest of the world to Ireland making us ever more dependent on remaining a corporate tax haven in the face of globally changing taxation environment.

Politically correct public communications from the EU Commission won’t put it this way, but we know that behind the scenes, our shenanigans, like the introduction of the ‘Knowledge Development Box’ tax loophole are unlikely to go unnoticed… especially when it leads to a 100% growth in patents offshoring.

10/12/15: Irish National Accounts 3Q: Part 1: Sectoral Growth

CSO released data for national accounts for Ireland, so in the next few posts I will be covering headline results. As usual, starting with sectoral accounts, showing decomposition of growth by sector. All data is based on seasonally unadjusted figures, allowing for y/y comparatives and expressed in real terms.

Agriculture, Forestry and Fishing sector contribution to GDP:

• Real activity in Agriculture, Forestry and Fishing sector rose strong 16.0% y/y in 3Q 2015 a rate of growth that was more robust than 9.97% expansion recorded in the sector in 3Q 2014. This is the fastest pace of y/y growth in 3 quarters, and especially welcoming given that 2Q 2015 growth came in at negative -2.87% y/y. Overall, Agriculture, Forestry and Fishing sector contributed EUR210 million to GDP growth in 3Q 2015, which amounts to 7% of total 3Q 2015 expansion in GDP y/y. On a cumulative 3 quarters basis, Agriculture, Forestry and Fishing sector expanded its activity by EUR200 million or +5.67% y/y, which is well below same period 2014 growth that stood at EUR502 million and +16.58%. 
• One key conclusion from the above figures is that Agriculture Forestry and Fishing has expanded robustly over both 3Q 2015 and on the cumulative basis over the first nine months of 2015. Which is good news.

Industry sector contribution to GDP:

• Overall Industry, including construction posted expansion of 16.08% y/y in 3Q 2015, which compares favourably to 5.15% growth in 2Q 2015 and to 4.23% growth y/y in 3Q 2014. Industry contribution to GDP growth over the first nine months of 2015 stood at EUR3.519 billion up 10.17% y/y. This is an improvement on the sector contribution over the first nine months of 2014 which stood at EUR2.25 billion (+6.95% y/y).
• Within Industry sector, Transportable Goods Industries and Utilities sub-sector activity rose 17.83% y/y in 3Q 2015 - a pace of growth well ahead of 5.51% growth in 2Q 2015 and 3.70% in 3Q 2014. Over the first nine months of 2015, Transportable Goods Industries and Utilities sub-sector added EUR3.412 billion to our GDP (+10.97% y/y), which vastly outstrips EUR1.913 billion added by the sub-sector to the economy over the first nine months of 2014. 
• So, our second core conclusion from these data is that Transportable Goods Industries and Utilities sub-sector - dominated strongly by MNCs - has been growing at unbelievably high rates of 10.97% y/y over the first 3 months of 2015. This is consistent with sector activity more than doubling in less than 7 years - a rate of expansion that consistent with a rapidly growing emerging economy, rather than with a mature economy. The Transportable Goods Industries and Utilities sub-sector was responsible for 54.3% of total growth in GDP over 3Q 2015 and 39% of total growth in Irish GDP over the period of 1Q-3Q 2015. Again, these are simply incredible figures, suggesting high degree of distortions from MNCs accounting practices and, potentially, exchange rates changes.
• Building and Construction sub-sector of Industry showed much more modest rates of growth, with 3Q 2015 y/y expansion at 3.49%, better than 1.52% growth recorded in 2Q 2015, but less than 7.8% growth in 3Q 2014. Construction sector contributed 1.47% to the overall gains in Irish GDP over 3Q period. For the first nine months of 2015, cumulative y/y growth in Building and Construction sub-sector output amounted to just EUR108 million (+3.09% y/y) which is three times slower in terms of the rates of growth recorded in the sub-sector over the same period of 2014.
• Our third core conclusion, therefore, is that traditional activity - proxied by Building and Construction sub-sector is growing in Ireland at rates probably closer to 3.5-4 percent - appreciable and positive, but not as massive as 6.8% growth recorded by the sectoral GDP (GDP at factor cost).

Distribution Transport Software and Communication (DTSC) sector activity:

• Distribution Transport Software and Communication sector activity grew at 8.28% y/y in 3Q 2015, which is slower than 11.2% growth recorded in 2Q 2015, but faster than 7.52% growth penned in 3Q 2014. The sector contributed EUR1.05 billion to GDP expansion in 3Q 2015 which amounts to 35.1% of the total growth in the GDP at factor cost. On the 9 months cumulative basis, Distribution Transport Software and Communication sector activity grew by EUR3.38 billion (+9.7% y/y) in 2015 compared to 2014.
• Once again, robust rates of growth in the sector are most likely reflective of the shifting MNCs strategies relating to tax optimisation, plus, potentially, the effects of exchange rates changes.

Public Administration and Defence sector contribution to GDP at factor cost:

• Public Administration and Defence sector activity shrunk 0.97% y/y in 3Q 2015, which is shallower contraction that -4.37% decline y/y in 2Q 2015 and -2.58% drop y/y in 3Q 2014. On a 9 months basis, Public Administration and Defence sector activity reduced our GDP at factor cost by EUR167 million (-3.59%). 
• 3Q 2015 contraction in sector activity was the shallowest in 5 quarters.

Other Services (including Rent) sector activity:

• Other Services (including Rent) activity rose 3.84% y/y in 3Q 2015, having previously posted 4.35% expansion in 2Q 2015 and 5.23% growth in 3Q 2014. 
• The sector contributed 22.9% of total growth in GDP at factor cost in 3Q 2015. 

As chart above shows, GDP at factor cost posted rates of growth above 2012 - 3Q 2015 average in every quarter since Q1 2014. Also, since 1Q 2015, rates of growth have been running above pre-crisis period average (Q4 2002-Q4 2007).

All of this is good, with positive dynamics in trends:

However, growth by sources remains unbalanced and most likely reflects skew in favour of MNCs-led sub-sectors:

Key conclusions are:

• Irish sectoral growth shows strong aggregate figures, with GDP at factor cost expansion over the first nine months of 2015 amounting to EUR8.831 billion (+6.91%) year on year, which is stronger than growth recorded over the same period of 2014 (EUR5.852 billion or +4.80% y/y).
• Sectoral contribution to growth show continued evolution of unbalanced economy skewed in favour of MNCs-led sectors, with Transportable Goods Industries and Utilities sector accounting for 38% of total growth recorded over the first nine months of 2015 compared to the same period of 2014, followed by Distribution Transport Software and Communication (38% share of total growth) and Other Services (including Rent) (+24% share). (Note: these shares add up to more than actual GDP at factor cost due to the ways in which CSO computes GDP at factor cost totals)
• All indications are that despite the MNCs bias in the figures, domestic activity did improve and is currently running at higher rates than in 2Q 2015 and over the first nine months of 2014.

Stay tuned for more analysis. 

7/10/15: Irish economic Activity & PMIs: 3Q 2015

Irish quarterly PMIs for 3Q 2015 posted a marginal improvement in growth conditions compared to 2Q 2015, further strengthening on the already fast pace of economic activity expansion. This overall momentum was driven solely by gains in growth momentum in Services sectors.

Manufacturing PMI averaged 55.2 in 3Q 2015, down marginally on 55.8 in 2Q 2015 and marking the slowest pace of activity expansion since 1Q 2014. 3Q marks second consecutive growth of weakening PMIs. Still, current running rate signals strong growth in the sector.

Services PMI posted a reading of 62.8 in 3Q 2015, up on already high reading of 61.8 in 2Q 2015. This is the highest reading since 2Q 2006 and marks second consecutive quarter of increases in the index. Overall activity signal from the 3Q PMI averages is for an outright boom in the sector.

Construction PMIs (with data only for July-August) fell in 3Q 2015 to 59.1 from 2Q 2015 reading of 62.1. Nonetheless, growth, as singled by PMI, remained robust in 3Q 2015.

Overall, PMIs continue to signal robust rates of economic activity growth in the Irish economy over the course of 3Q 2015. 

Usual caveats, however, apply to interpreting the links between PMIs and actual production and value added in the sectors. Historically Irish Manufacturing and Services PMIs exhibit statistically insignificant correlation with real activity in both sectors, as well as GDP and GNP growth. At the very best, Services PMI data is capable of explaining at most around 11 percent of total variation in GDP, while at the worst, Manufacturing PMI explains at most 5.6 percent of total variation in GNP.

22/6/15: IMF Review of Ireland: Part 1: Growth & Fiscal Space

IMF published conclusions of its Third Post-Program Monitoring Discussions with Ireland.

The report starts with strong positives:

"Ireland’s strong economic recovery is continuing in 2015, following robust growth of 4.8 percent in 2014. A range of high frequency indicators point to an extension of the solid recovery momentum into 2015, with growth increasingly driven by domestic demand as well as exports. Job creation continued with employment growth of 2.2 percent year-on-year in the first quarter of 2015, bringing the unemployment rate down to 9.8 percent in May."

Actually, based on EH data from CSO, employment growth was even stronger: 2.67% y/y in 1Q 2015 (see here: http://trueeconomics.blogspot.ie/2015/06/20615-irish-employment-by-sector-latest.html). The survey data is slightly different from the QNHS data.

"Tax revenues rose 11 percent year-on-year during the first five months of 2015, while spending remained within budget profiles, so the fiscal deficit for 2015 is expected to be 2.3 percent of GDP, outperforming the budget targets."

"Banks’ health has improved, but operating profitability remains weak and, despite the recent progress in the resolution of mortgages in arrears, 17.1 percent of mortgages have been in arrears for over 90 days, and of these, almost 60 percent have been in arrears for over 2 years."

All so far known, all so far predictable.

Here is what IMF thinks in terms of forward outlook.

On Fiscal side: "The deficit is likely to come in well below budget again in 2015. This welcome progress should be locked by avoiding any repeat of past spending overruns. The deficit reduction projected for 2016 is too modest considering Ireland’s high public debt and strong growth, making it critical that revenue outperformance— which appears likely— be saved as the authorities intend."

Wait, Spring Statement by the Government clearly does not suggest 'saving' of revenue outperformance as intended policy objective. If anything, spending these 'savings' is on the cards. So a bit more from the IMF:

"Medium-term spending pressures related to demographics and public investment indicate a need to build revenues and it is critical that any unwinding of savings in public sector wages be gradual. Tax reforms should be focused on areas most supportive of job creation and productivity while protecting progress achieved in base broadening."

Again, this does not bode well with the Spring Statement intentions to unwind, over two years, reductions in public sector earnings costs, and reducing tax burden at the lower end of the tax base. Whether these measures are right or wrong, IMF seems to ignore them in their analysis, as if they are not being planned.

And slightly adding depth: "Staff estimates that improvement in the primary balance in structural terms is modest in 2016, at about ¼ percent of GDP, as the reduction in the overall deficit partly reflects an expected decline in the interest bill and a narrowing of the output gap." In other words, efforts / pain are over. We are cruising into improved performance on inertia. IMF does not exactly like that: "A stronger adjustment, of at least a ½ percent of GDP, would also be appropriate in 2016 in view of Ireland’s high public debt and strong growth, implying an overall deficit target of about 1.5 percent of GDP. However, it appears most likely that revenues will exceed official projections, which are for tax revenue growth before measures that is significantly below nominal GDP growth, and also given that revenue outperformance has underpinned Ireland’s track record of over delivering on fiscal targets for a number of years." Wait, what? Not spending cuts drove Irish effort? Revenue outperformance? Aka - taxes and indirect taxes and hidden charges.

So the good boy in the back of the classroom needs to get slightly better: "The commitment of the Irish authorities to comply with their obligations under the Stability and Growth Pact, including the Expenditure Benchmark, means that revenue outperformance in 2016 and later years will not be used to fund additional expenditure; the need for a change from the past procyclical pattern of spending the revenues available was a key lesson drawn from the crisis that is firmly embedded in their new fiscal policy framework."

Yeah, that in the year pre-election? Are they mad, or something?

Just in case anyone has any illusions on what the Fund thinks about the forthcoming injections of pain relief planned by the Government, here it is, slightly hidden in the lengthy discourse about longer-term risks. "Looking to the medium term, sizable adjustment challenges indicate a need to build revenues while the limited fiscal space should be used to support durable growth. The authorities’ expenditure projections account for demographic pressures as growing cohorts of both young and old increase demands for education and health services. …Staff recommended that the authorities consider steps to raise revenues to help address these pressures…"

More revenue to be raised. And yet the Government aims to cut taxes. Oh dear...


Back to the positives: IMF upgraded its growth projections for short-term forecasts:

"Compared with the 2015 Article IV consultation concluded in late March, growth projected for 2015 is revised up to almost 4 percent from 3½ percent, with a more modest increase in 2016." 2016 growth is now projected to be at 3.3% from 3.0% projected at the end of March 2015. 2017 growth forecast was lifted from 2.7% in March to 2.8% now. However, 2018 forest was balanced down to 2.5% now from 2.6% in March report.

Back in March, private consumption was expected to grow 1.5% in 2015, 1.6% in 2016, 2.0% in 2017. This is now revised up to 1.6% in 2015, 1.9% in 2016, with 2017 remaining at 2.0%.

However, IMF revised down its projections for gross fixed investment growth. In March report, the Fund forecast investment to grow 9.5% in 2015, 7.5% in 2016 and 6.0% in 2017. This time around, IMF expects investment growth of 9.2% in 2015, 7.3% in 2016 and 5.5% in 2017.

Interestingly, IMF also introduced some modest upgrades to Irish net exports, though it noted that given exceptionally high rates of growth in goods exports in recent months, even the upgraded forecast might be too pessimistic.

However, with all said and done, the IMF still produces a slightly cautious medium-term outlook: "Staff’s medium-term outlook is little changed from that in the 2015 Article IV consultation, with medium-term growth on the order of 2½ percent being similar to the 3 percent projected by the Irish authorities in their recent Stability Programme Update (SPU)." Which means that, in basic terms, Irish official forecasts are probably within error margin of the IMF forecasts, but are a bit more optimistic, nonetheless.

Quite interestingly, IMF finds no substantive risks to the downside for Ireland, going effectively through motions referencing Greece and domestic debt overhang. Even interest rates sensitivity of the massive debt pile we carry deserves not to be cited as a major concern.

28/4/15: There is a Spring... There was a Statement...

This Spring Statement was a lengthy and over-manned delivery of the vintage "A Lot Done. More to Do." 2002 FF slogan. As such, it is inevitable that the Statement ended up sounding like a self-congratulatory pre-electioneering platform announcement with some promises for the future. And you can read the Department document here: http://budget.gov.ie/Budgets/2015/Documents/SPU%20for%20Web.pdf in its full glory.

'Entrepreneur' or 'Entrepreneurship' are words not mentioned in the document. Self-employed are cited only once, in reference to timing of tax receipts the Government expects from them. Part-time workers - the crucial category that can drive up ranks of early stage entrepreneurs and can be a source for huge gains in productivity if their skills are increased forward - deserves only two mentions, both relating to the unemployment reductions trends to-date. Quality of jobs creation is un-addressed. And so on...

In his speech, Mr Noonan said the government is in a position to implement another expansionary Budget this year and every year out to 2020 “if this is deemed prudent and appropriate.” The "if" part - crucial as it may be - is hardly enforceable, once the train of spending rolls out into the station.

The Government deserves credit. The national deficit was reduced from €15 billion to €4.5 billion over 2011-2015. This was achieved with less tax increases and expenditure cuts than forecast at the onset of 2011. Minister Noonan is correct. But much of this was down to good fortunes from abroad. And still is. And, based on the Department of Finance projections still will be, if one to trust their outlook for the exchange rates, exports growth and jobs growth.

Per Minister Noonan, the state has, this year “fiscal space of the order of € 1.2 billion and up to € 1.5 billion… for tax reductions and investment in public services." So, “the partners in Government have agreed that [this] will be split 50:50 between tax cuts and expenditure increases …in Budget 2016.”

Does that make much sense? Well, no. 2014-2015 cumulated decrease in deficit can be broken down into:
- 50% from increased tax revenues,
- 14% to GDP growth,
- 9% to reduction in net Government expenditure and
- 27% other factors.
Jobs creation and wealth creation both require reducing burden of State and taxation on self-employed and early stage entrepreneurs. Who, both, went totally unmentioned in the Spring Statement. Domestic demand growth - that supposed to contribute 2/3rds of 2015 growth and more than 3/4 of 2016 growth - requires reducing household and corporate debt and stimulating domestic investment - preferably not in property sector. These too went un-mentioned in the Spring Statement.

Instead, we got Minister Howlin watershed discovery that the Government creates wealth.

Which is scary and even scarier in the context of missing real wealth creators in the Statement: the Government's role in wealth creation should be to remove itself from managing it as much as possible. But see more on this below.

Minister Noonan warned that returning to the days of “if I have it I’ll spend it” or the “even if I don’t have it I’ll spend it” policy stance taken by the opposition over the past four years, was by far the biggest risk to economic growth and job creation. He might be right, but his plan for expansionary Budgets into 2020 is more of a policy stance consistent with "I might have it, so I'll spend it".

“We must never again repeat the boom and bust economic model. Over the remainder of this decade we expect all sectors of the economy to contribute to growth and employment.”

He is right on this and the Government said much the same over and over again. But it is hard to see any coherent strategy emerging from the Government's numerous reiterations of Jobs and Growth plans and white papers on how broad growth can be delivered. To-date, the Government projected the same policy approach to growth as its predecessor - targeted supports and tax incentives. Not levelling the playing field, getting rid of state inefficiencies, political interference and tax-and-spend redistribution of resources. Note: this is not about redistribution of income. It is about allowing the economy to grow without political meddling and favouritism.

The Spring Statement was not much of a departure from the same. In the statement, the Minister mentions just one 'red line' policy item - the 12.5% corporation tax. Everything else is more of an IOU based on "if - then". Which suggests that this Government has little in terms of new economic growth ideas beyond corporate tax measures.

Mr Noonan said the mistakes that left the country on the verge of bankruptcy in 2010 must never again be repeated. Which begs a question: does Minister Noonan recognise the mistakes, linked to 2010, that this Government also participated in - willingly or not? Banks recapitalisations were carried out in 2011 on foot of 2010 policy decisions. Troika MOU - shaped in 2010 - was implemented by this Government. Bondholders bailouts were completed by the present Government on foot of mistakes made by the previous one.

Minister Noonan also referenced a promise to "give people security around their income and their pensions". But it is very hard to see how this can be achieved, given lack of any serious progress on dealing with legacy debts and the 50:50 split between tax reductions and expenditure increases in Government budgets forward. And on the point of debt, we do have a massive Government debt, now being augmented by the quasi-Government non-Government debt of the likes of Irish Water et al. Remember, expenditure increases do not improve people's incomes and pensions, except for the select few in State employment and contracting. Nor do they improve Government ability to deleverage its own debt.

And on that note, the Department of Finance says little about actual interest rates, but does project relatively benign debt-related costs through 2020. Which might be tad optimistic, given we are currently scraping the bottom of the historical rates barrel. The Department says that "While unlikely in the short term, higher policy-induced interest rates would have a dampening impact on Ireland’s economic activity. Simulations suggest that a 1 percentage point increase in policy interest rates could reduce the level of GDP by almost 2½ percentage points by 2020. This effect is especially pronounced given the large debt overhang. Such a deterioration in the economy would add almost 1 percentage point to the budget deficit by 2020". I know we all 9ok, not 'we' but almost 'all') expect the current interest rates to stay here forever, because, obviously the ECB is not going to raise them any time in the future under the 'new normal' of complete oblivion to the reality. But here's a bad news: current ECB rates are some 300bps below the pre-crisis average. And if we are moving out of crisis, that average is moving closer and closer in time. So for testing that 100 bps rate rise that the DofF did in the Spring Statement: try 300 bps next. And see the whole promise of the golden future go puff in a cloud of smoke.

Moving on through the Statement: it is also hard to spot any serious momentum for pensions reforms that can really be productive in restoring some capability of the private sector workers to secure pensions. The Government has all but abandoned the idea of pensions reforms in the public sector - the biggest drain on pensions resources in the country.


In summary, the Spring Statement is a call to the voters to support the status quo based on the idea that 'our continuity is less painful than opposition's change'. Which, of course, is an equivalent to giving a granny a choice of being mugged by the "Thank you, Mam" lads with school ties or by the rude villains in clowns' wigs. It is a choice. Just not the one many would order on their elections' menu after six years of economic and social bloodletting. 

Irish Times summed this up as "The spring statement can be seen as a political exercise in which Fine Gael and Labour adopt a common fiscal plan for the election campaign to come." (see http://www.irishtimes.com/business/economy/spring-statement-analysis-assumption-nothing-goes-askew-1.2191971?utm_content=sf-man) and my favourite political analyst in this country, summed it up much better: http://thejacktrack.blogspot.ie/2015/04/michael-noonans-2-billion-return-to.html?spref=fb who says: "there was a haunting echo of Bertie Ahern and Charlie McCreevy resonating through the halls of his Department, and with it the emergence of a disturbing - if hardly, at this stage, surprising - sense that in Ireland there is no such thing as a lesson learned, only a lesson observed."

25/3/15: IMF on Ireland: Risk Assessment and Growth Outlook 2015-2016

In the previous post covering IMF latest research on Ireland, I looked at the IMF point of view relating to the distortions to our National Accounts and growth figures induced by the tax-optimising MNCs.

Here, let's take a look at the key Article IV conclusions.

All of the IMF assessment, disappointingly, still references Q1-Q3 2014 figures, even though more current data is now available. Overall, the IMF is happy with the onset of the recovery in Ireland and is full of praise on the positives.

It's assessment of the property markets is that "property markets are bouncing back rapidly from their lows but valuations do not yet appear stretched." This is pretty much in line with the latest data: see http://trueeconomics.blogspot.ie/2015/03/25315-irish-residential-property-prices.html

The fund notes that in a boom year of 2014 for Irish commercial property transactions "the volume of turnover in Irish commercial real estate in
2014 was higher than in the mid 2000s, with 37.5 percent from offshore investors." This roughly shows a share of the sales by Nama. Chart below illustrates the trend (also highlighted in my normal Irish Economy deck):

However what the cadet above fails to recognise is that even local purchases also involve, predominantly, Nama sales and are often based on REITs and other investment vehicles purchases co-funded from abroad. My estimate is that less than a third of the total volume of transactions in 2014 was down to organic domestic investment activity and, possibly, as little as 1/10th of this was likely to feed into the pipeline of value-added activities (new build, refurbishment, upgrading) in 2015. The vast majority of the purchases transactions excluding MNCs and public sector are down to "hold-and-flip" strategies consistent with vulture funds.

Decomposing the investment picture, the IMF states that "Investment is reviving but remains low by historical standards, with residential construction recovery modest to date. Investment (excluding aircraft orders and intangibles) in the year to Q3 2014 was up almost 40 percent from two years earlier, led by a rise in machinery and equipment spending."

Unfortunately, we have no idea how much of this is down to MNCs investments and how much down to domestic economy growth. Furthermore, we have no idea how much of the domestic growth is in non-agricultural sectors (remember, milk quotas abolition is triggering significant investment boom in agri-food sector, which is fine and handy).

"But the ratio of investment to GDP, at 16 percent, is still well below its 22 percent pre-boom average, primarily reflecting low construction. While house completions rose by 33 percent y/y in 2014, they remain just under one-half of estimated household formation needs. Rising house prices are making new construction more profitable, yet high costs appear to be slowing the supply response together with developers’ depleted equity and their slow transition to
using external equity financing."

All of this is not new to the readers of my blog.

The key to IMF Article IV papers, however, is not the praise for the past, but the assessment of the risks for the future. And here they are in the context of Ireland - unwelcome by the Ministers, but noted by the Fund.

While GDP growth prospects remain positive for Ireland (chart below), "growth is projected to moderate to 3½ percent in 2015 and to gradually ease to a 2½ percent pace", as "export growth is projected to revert to about 4 percent from 2015". Now, here the IMF may be too conservative - remember our 'knowledge development box' unveiled under a heavy veil of obscurity in Budget 2015? We are likely to see continued strong MNCs-led growth in 2015 on foot of that, except this time around via services side of the economy. After all, as IMF notes: "Competitiveness is strong in the services export sector, albeit driven by industries with relatively low domestic value added." Read: the Silicon Dock.

Here are the projections by the IMF across various parts of the National Accounts:

So now onto the risks: "Risks to Ireland’s growth prospects are broadly balanced within a wide range, with key sources being:

• "Financial market volatility could be triggered by a range of factors, yet Ireland’s vulnerability appears to be contained. Financial conditions are currently exceptionally favorable for both the sovereign and banks. A reassessment of sovereign risk in Europe or geopolitical developments could result in renewed volatility and spread widening. But market developments currently suggest contagion to Ireland would be contained by [ECB policies interventions]. Yet continued easy international financial conditions could lead to vulnerabilities in the medium term. For example, if the international search for yield drove up Irish commercial property prices, risks of an eventual slump in prices and construction would increase, weakening economic activity and potentially impacting domestic banks." In other words, unwinding the excesses of QE policies, globally, is likely to contain risks for the open economy, like Ireland.
• "Euro area stagnation would impede exports. Export projections are below the average growth in the past five years of 4¾ percent, implying some upside especially given recent euro depreciation. Yet Ireland is vulnerable to stagnation of the euro area, which accounts for 40 percent of exports. Over time, international action on corporate taxation could reduce Ireland’s attractiveness for some export-oriented FDI, but the authorities see limited risks in practice given other competitive advantages and as the corporate tax rate is not affected."
• "Domestic demand could sustain its recent momentum, yet concerns remain around possible weak lending in the medium term. Consumption growth may exceed the pace projected in coming years given improving property and labor market conditions. However, domestic demand recovery could in time be hindered by a weak lending revival if Basel III capital requirements became binding owing to insufficient bank profits, or if slow NPL resolution were to limit the redeployment of capital to profitable new loans." Do note that in the table listing IMF forecasts above, credit to the private sector is unlikely to return to growth until 2016 and even then, credit growth contribution will remain sluggish into 2017.

And the full risk assessment matrix:

Oh, and then there is debt. Glorious debt.

I blogged on IMF's view of the household debt earlier here: http://trueeconomics.blogspot.ie/2015/03/25315-imf-on-irish-household-debt-crisis.html and next will blog on Government debt risks, so stay tuned.

25/3/15: As Bogus Is, Bogus Does... IMF on Irish MNCs-led Growth

The IMF has published its Article IV consultation paper for Ireland and I will be blogging more on this later today. For now the top-level issue that I have been covering for some time now and that has been at the crux of the problems with irish economic 'growth' data: the role of MNCs.

My most recent post on this matter is here: http://trueeconomics.blogspot.ie/2015/03/24315-theres-no-number-left-untouched.html

IMF's Selected Issues paper published today alongside Article IV paper covers some of this in detail.

In dealing with the issues of technical challenges in estimating potential output in Ireland, the IMF states that "Irish GDP data volatility and revisions make it difficult to assess the cyclical position of the economy in the short-run. Ireland’s quarterly GDP growth data are among the most volatile of all European Union countries, more than twice the variability typically seen."

The IMF provides a handy chart:

And due to long lags in reporting final figures, as well as volatility, our GDP figures, even those reported, not just projected, are rather uncertain in their nature:

However, as IMF notes: other structural issues with the economy, besides poor reporting timing and quality and inherent volatility, further 'complicate' analysis:

"Multinational enterprises (MNE) accounting for one-quarter of Irish GDP can vary their output substantially with little change in domestic resource utilization. As shown in a recent study, MNEs represent only 2.1 percent of the number in enterprises in Ireland but slightly over half of the value added in the business economy. MNE output swings, sometimes related to sectoral idiosyncratic shocks (e.g., the “patent" cliff” in 2013...), can occur with little apparent change in
domestic resource utilization."

In other words, there is little tangible connection between output of many MNEs and the real economy. And the latest iteration of tax optimisation schemes deployed by the MNCs is not helping the matters: "The sharp increase in offshore contract manufacturing observed in 2014 is another example of such a shock. Such shocks to the productivity of the MNE sector may be best treated as shifts in potential GDP, because the result is a change in GDP without any significant change in resource tensions or slack in the
economy."

But MNCs are important for Ireland's tax base, right? Because apparently they are not that important for determining real rates of growth. Alas, the IMF has the following to say on that: "Swings in the value added of MNEs contribute substantially to variations in Irish GDP. Yet such swings are not found to have a significant effect on [government] revenues."


How big of an effect do MNCs have on the real economic growth as opposed to registered growth? IMF obliges: "The gross value added excluding the sectors dominated by MNEs behaves quite differently from aggregate GDP in some years. For example, in 2013 it grows by 3 percent at a time when official GDP data
were flat." In other words, the real, non-MNCs-led economy shrunk by roughly the amount of growth in the MNCs to result in near-zero growth across the official GDP.

However, since 2013 (over the course of 2014) a new optimisation scheme emerged as the dominant driver of manufacturing MNCs-led growth: contract manufacturing. IMF Article IV itself contains a handy box-out on that scheme, so important it is in distorting our GDP and GNP figures. Per IMF: "In 2014, multinational enterprises (MNEs) operating in Ireland made greater use of offshore
manufacturing under contract."

A handy CSO graphic illustrates what the hell IMF is talking about:

As covered in the link to my earlier blog post above, "Goods produced through contracted manufacturing agreements are treated differently in the national accounts than in customs measures of trade. As these goods do not cross the Irish border, they are not included in customs data on exports. If, however, the goods remain under the ownership of the Irish company, they are recorded as exports in the national accounts. Payments for manufacturing services and patent and royalty payments are service imports in the national accounts, offsetting in part the positive GDP impact of contracted manufacturing."

And to confirm my conclusions, here is IMF on the impact of contract manufacturing (just ONE scheme of many MNCs employ in Ireland) on Irish growth figures: "Contracted manufacturing appears to have had a significant impact on GDP growth in 2014 although it is difficult to make a precise estimate. Customs data on goods exports rose by 2.8 percent y/y in volume terms in the first nine months of 2014. In contrast, national accounts data on exports rose 12 percent in the same period. The gap between these two export measures can be attributed in part to contracted production, but could also reflect other factors like warehousing (goods produced in Ireland but stored and sold overseas) and valuation effects." Note: I cover this in more detail in my post.

"Assuming conservatively that contract manufacturing accounted for about half of the difference between customs and national accounts data, the implied gross contribution to GDP growth in the first three quarters of 2014 from contract manufacturing is 2 percentage points. However, there is a need to take into account the likelihood that service imports were higher than otherwise, but it is not possible to identify the volume of additional service imports linked to contract manufacturing."

One scheme by MNCs accounts for more than 2/5ths of the entire Irish 'miracle of growth'. Just one scheme!

And now… to the punchline:

Update: Seamus Coffey commented on the 2013 figure for domestic (real) economy cited above with an interesting point of view, also relating to the broader issue of the Contract Manufacturing: http://twishort.com/DTShc and his blogpost on the subject is here: http://economic-incentives.blogspot.ie/2015/03/the-growth-effect-of-contract.html

24/3/15: There's no number left untouched: Irish GDP, GNP and economy

According to Bloomberg, US companies are stashing some USD2.1 trillion of overseas cash reserves away from the IRS: http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes?hootPostID=ffda3e167ae0ebabc3da4188e9bd22de

Ireland is named once in the report in a rather obscure case. Despite the fact we have been named on numerous other occasions in much larger cases. But beyond this, let's give a quick wonder.

1) Last year, exports of goods in Ireland leaped EUR89,074 million based on trade accounts with Q1-Q3 accounts showing exports of EUR66,148 million compared to the same period of 2013 at EUR65,381 million - a rise of 1.01% or EUR767 million. Full year rise was EUR2,075 million. So far so good. Now, national accounts also report exports of goods. These show: exports of goods in Q1-Q3 2013 at EUR69,731 million and exports of goods in Q1-Q3 2014 at EUR78,835 million, making y/y increase of EUR9,104 million. Full year 2014 - EUR108.989 billion a rise of EUR15.98 billion y/y. The discrepancy, for only 3 quarters, is EUR8,337 million or a massive 6.1% of GDP over the same period. For the full year it is EUR19.92 billion or 11% of annual GDP. Much of this difference of EUR19.92 billion was down to 'contract manufacturing' - yet another novel way for the MNCs to stash cash for the bash… IMF estimated the share of contract manufacturing to be at around 2/3rds of the annual rise in Q1-Q3 figures. Which suggests that around EUR7.4 billion (once we take account of imports of goods) of Irish GDP rise in 2014 was down to... err... just one tax optimisation scheme. That is EUR7.4 billion of increase out of EUR8.275 billion total economic expansion in the MiracleGrow state of ours.

2) Last month, Services activity index for Ireland posted a massive spike: overall services activity rose 12.59% y/y, the dynamic similar to what happened in Q2-Q3 last year with goods exports (Q1 2014 y/y +8.2%, Q2 2014 y/y +12.9% and Q3 2014 y/y +17.9%). Even more telling is the composition of Services growth by sectors: wholesales & retail trade sector up 8.83% (a third lower than the overall growth rate), transportation and storage - ditto at 8.4%, admin & supportive services +2.91%. Accommodation and food services posted rapid rise of 14.03% and professional, scientific & technical activities rose 13.97%. Meanwhile, tax optimisation-driven information & communication services activity was up 21.15%. What could have happened to generate such an expansion? Anybody's guess. Mine is 3 words: "knowledge development box" - a non-transparent black-box solution for tax optimisation announced as a replacement for the notorious "double-Irish" scheme. So let's suppose that half of the services sectors growth is down to MNCs and will have an effect on our 'exports'. In Q3 2014 these expanded by 13.4% y/y and in Q2 by 10.8% - adding EUR5,560 million to exports. January data on services activity suggests, under the above assumption, roughly the same trend continuing so far, which by year end can lead to a further MNCs-induced distortion of some EUR11 billion to our accounts on foot of Services sectors exports.

Take (1) and (2) together, you have roughly EUR21-22 billion of annual activity in the export areas of services and goods sectors that is likely (in 2015) to be down to MNCs washing profits through Ireland through just two schemes.

Then there are our factor payments abroad - what MNCs ship out of Ireland, in basic terms. As our total exports of goods and services been rising, the MNCs are taking less and less profit out of Ireland. Chart below sums these up. While profitability of MNCs is rising - a worldwide trend - Ireland-based MNCs remittances of profits are falling as percentage of exports. 2008-2012 average for the ratio of net remittances to exports is 18%, which suggests that even absent any uplift in profit margins, some EUR27.5 billion worth of profits should have been repatriated in Q1-Q3 2014 instead of EUR22.16 billion that was repatriated - a difference of EUR5.36 billion over 3 quarters or annualised rate of over EUR7.1 billion. Factoring in seasonality, the annualised rate jumps to closer to EUR8 billion.

On an annualised basis, for full year 2014, exports of goods and services from Ireland rose y EUR23.28 billion year-on-year, while net exports rose EUR3.784 billion. Meanwhile, profits repatriations (net) rose only EUR719 million. Aptly, for each euro of exports in 2013, Ireland's national accounts registered 74.2 cents in net factor payments abroad. In 2014 this figure hit historical low of 69.1 cent.

My guess is, MNCs have washed via Ireland close to EUR30 billion worth of profits or equivalent of 17.1% of 2013 full year GDP and close to 16.5% of 2014 GDP. Guess what was the GDP-GNP gap in 2013? 18.5 percent. And in 2014? 15.4%. Pretty darn close to my estimates.

Let's check this figure against aggregate differences in 2008-2014 GDP and GNP. The cumulated gap between the two measures, in nominal terms, stands at EUR201.3 billion, closer to EUR204 billion once we factor in seasonality in Q4 numbers to the estimate based on Q1-Q3 data. The above estimate of EUR29.97 billion in 'retained' profits implies, over 7 years a cumulated figure of EUR209.8 billion, or a variance of EUR827-1,200 million. Not much of a margin of error. I'll leave it to paid boffins of irish economics to complete estimates beyond Q3 2014, but you get the picture.

And now back to points (1) and (2) above: how much of the Irish growth in manufacturing and services - growth captured by one of the two exports accounts and by the likes of PMI metrics and sectoral activities indices is real and how much of it is an accounting trick? And what about other schemes run by the MNCs? And, finally and crucially, do note that contract manufacturing and knowledge development box types of tax optimisation schemes contribute to both GDP and GNP growth, thus completing the demolition job on Irish National Accounts. There is not a number left in this economy that is worth reading.


Update: we also have this handy graphic from the BusinessInsider (http://uk.businessinsider.com/us-corporate-cash-stashed-overseas-2015-3?r=US) charting the evolution of U.S. MNCs stash of cash offshore:

Ah, those U.S. MNCs err... FDI... mattresses...

26/2/15: 'Kermit The IMF' on Irish Growth: It's Not Easy Being Greeen...

This is an unedited version of my column in the Village Magazine for February 2015

January IMF review of the economic situation in Ireland rained a heavy dose of icy water over the already overheating Government spin machine, and much of the IMF concerns centre around exactly the same themes that were highlighted in these very pages last month.

Top of the IMF worries list is growth.

Budget 2015 assumed GDP expansion of 3.9 percent in 2015, with 3.4 percent average growth from 2016 through 2018. The IMF forecasts growth of 3.3 percent in 2015, 2.8 percent in 2016 and “about 2.5 percent thereafter”. In simple terms, over 2015-2018, cumulative growth forecast discrepancy between IMF and the Government is now just shy of 3.3 percent. Put differently, based on IMF forecasts, Irish Government may be significantly overestimating economic prospects of the country.

Source: IMF and Department of Finance

The drivers behind IMF’s skeptical view of our prospects are exactly in line with those discussed in this column before. Exports growth is likely to be much shallower than the Government anticipates, while the domestic demand is still subject to massive debt overhang carried by households and companies.

As an aside, the IMF assessment of the Budget 2015 measures is far from confirming the mainstream Irish media and Irish Left’s view. The IMF had this to say about the measures: “Income tax cuts that increase the already strong progressivity of the system are the main items. While not significant to the revenue intake, reductions in property taxes by 14 local authorities, including Dublin, are a setback for collections from this recent broadening of the tax base.” Doing away with the tax breaks is fine, if it is done in the environment of falling distortionary taxes. Still, coupled with elimination of the property capital gains relief, the entire Budget 2015 was hardly a transfer from the poor to the rich, but rather a net tax increase on the upper earners, especially the self-employed professionals, relative to lower waged.

But back to the impact of growth risks on our Government’s balance sheet. Consider the IMF estimates for public debt dynamics.

Firstly, note that public debt fell from 123 percent of GDP in 2013 to 111 percent of GDP at the end of 2014. Impressive as this change might be, it is driven by one-off changes and not by any significant debt drawdowns. Consolidation of the IBRC into General Government accounts and its subsequent liquidation first pushed Irish Government debt up by 6.2 percent of GDP (EUR12.6 billion) in 2013 and then cancelled most of the same in 2014. All in, IBRC liquidation shaved off 6 percentage points off our 2014 debt to GDP ratio. In between, change in the EU accounting rules raised our 2013 GDP by 6.5 percent. Stronger economic conditions and smooth exit from the Troika Programme have meant that the Irish Government was free to spend some of the borrowed cash reserves on buying out IBRC-linked bonds held in the Central Bank. This drawdown of previously borrowed cash contributed to some 4 percentage points drop in Irish debt to GDP ratio. For all the Government’s bravado, last year’s economic recovery contributed only 1.75 percentage points to the debt decline or roughly one sixth of the overall improvement.

Still, barring adverse shocks, we remain, for now, on course to drive debt to GDP ratio below 100 percent of GDP before the end of 2019.

As IMF notes, however, a temporary drop of 2 percentage points in 2015-2016 forecast nominal GDP growth rates would push our debt to GDP ratio to 117 percent in 2016. And on the balance side, a one percent rise in primary spending by the Government can push public deficit to 3.6 percent of GDP in 2015 and 3.0 percent in 2016 instead of Government projected 2.7 percent and 1.8 percent, respectively.

The IMF is concerned that the Irish Government is suffering from the ‘adjustment fatigue’, especially once the upcoming political pressures of the general election start looming on the horizon. The danger is that “…medium-term fiscal consolidation is at risk from spending pressures, requiring the adoption of a clear strategy to enable the restraint envisaged to be realized. … As the public investment budget is already low, current expenditures will have to bear the brunt of spending restraint, while ensuring the capacity to meet demands for health and education services from rising child and elderly populations. Nominal public sector wages and social benefits must be held flat for as long as feasible and the authorities will need to continue to seek savings across the budget.”

Somewhat predictably, the Irish authorities offered no strategy for fiscal management beyond 2015 and no expenditure policy solutions that can address such risks. Instead of sticking to promised costs moderation, the authorities told the IMF that increased current spending, including on higher public sector wages, can be offset by “discretionary revenue measures”. In other words, should the Government want to fund pre-election giveaways to its preferred social partners (aka public sector wage earners) it can simply hike taxes on less favoured groups. A slip of the veil revealing the ugly nature of our politics-captured economic strategy.

Politics is now firmly displacing economics in both, the way we set our forecasts, as well as interpret the existent data.

Take, for example our reported nearly 5 percent growth over 2014. Various recent ministerial statements extoled the virtues of the Government that made Ireland “the envy of Germany” as the best performing economy in Europe. Largely ignored in the official rhetoric was that much of this growth came from the “contract manufacturing outside Ireland that is dominated by a few companies”. The problem is that none of it has any real connection to Ireland and, as IMF notes, much of it “could quickly turn”.

Private domestic demand, excluding aircraft leasing and investment in tech services-linked intangibles rose by closer to 3 percent. Again, according to the IMF this figure may be a more realistic estimate of the real recovery. In other words, somewhere between 30 and 40 percent of the recorded growth in 2014 was down to just one an accounting trick. And multinationals had plenty other accounting tricks up their sleeves that no one is bothering to count.

Even the 3 percent domestic growth estimate stands inconsistent with the data on household finances. Stripping out gains in household net worth attributable to the property markets, households’ financial positions hardly improved in 2014. Mortgages in arrears accounted for 23.7 percent of all house loans outstanding, when measured by the balance of loans, down from 25.6 percent a year ago. Based on the Central Bank data, at the end of Q3 2014, some 244,816 mortgages accounts (amounting to EUR46.1 billion) were either in arrears, in repossession, or at risk of arrears – a number that is roughly 4,500 higher than a year ago. Based on the Department of Finance data, 85 percent of all accounts in arrears ‘permanently restructured’ at the end of November 2014 involved arrears solutions that result in higher debt over the life time of mortgage than prior to restructuring.

Based on the Central Bank data, Q3 2014 household deposits in the Irish banking system stood at EUR85.9 billion, slightly down on EUR86.0 billion a year ago.

In part, the above figures translate into the improvement in banking sector performance at the expense of households. In the first half of 2014, Irish banks recorded their first positive return on assets since the beginning of the crisis, and the net interest margin (the difference between the bank lending rate and the cost of funding) rose to a crisis-period high of 1.5 percent. But credit growth remained negative, contracting at a rate higher than in 2011. Put this in simple terms, the banks continued to bleed their clients dry at a faster rate than the recovery was making them stronger, and there was preciously little observable improvement in households’ financial positions compared to 2013. Certainly not enough to claim the picture to be consistent with rapid economic growth.

The IMF isn’t undiplomatic enough to say that, but the Fund is clearly concerned more than the Irish authorities at this state of imbalances. As they should be: the Central Bank internal stress-testing for new mortgages being issued by the banks today is for the interest rates rising to over 6-6.5 percent over the life time of the loan.

Of course, the Central Bank is a myopic institution when it comes to telling us what effects such rates would have on existent corporate and household loans. But give it a thought. Currently, average existent mortgage on the market is priced at interest rates below 2 percent per annum. And with that, 17.3 percent of all mortgages accounts are officially in arrears, and 34.3 percent of all balances relating to mortgages loans are either in arrears, in repossessions or restructured.

Should the interest rates double, let alone triple, what mortgages default rates on currently performing mortgages can we expect? What amount of economic growth do we need to shore up our household finances sufficiently enough to escape the interest rate squeeze that even the Central Bank admits might arrive in the foreseeable future? Can the current trends in the recovery – the ones that are leaving households out in the cold, while superficially inflating official GDP figures – deliver any sense of sustainability of our economic performance across the financial, fiscal and economic areas in this country should even mild shocks take place?

One can only wonder as to the answers to these questions, as well as to the silence of our authorities on these topics.