25/10/15: Grifols and the Ghosts of OECD

An interesting set of contrasts: one company, one move, two reports.

Last week, Irish and Spanish press reported on the Spanish Multinational pharma Grifols moving most of its operations from Spain to Ireland. Here are two examples of reports:
- One from Spain (http://economia.elpais.com/economia/2015/10/24/actualidad/1445711002_780890.html?id_externo_rsoc=TW_CM) focusing on tax optimisation reasons behind the Grifols' move; and
- One from Ireland (http://www.irishtimes.com/business/health-pharma/spanish-healthcare-firm-grifols-to-create-140-jobs-1.2401541) without a single mentioning of tax issues. You can also see this one from the Irish Examiner (http://www.irishexaminer.com/business/grifols-creates-140-jobs-in-dublin-360972.html) which also fails to mention tax issues.

Spanish report quotes Grifols CFO on the issue of tax optimisation. Irish reports say absolutely nada about the topic.

Spanish report references the statement that Grifols will channel all of its non-Spanish and non-US revenues via Ireland (a practice used for tax optimisation by many MNCs based here). But both Irish reports linked above fail to mention this quite material fact.

Remember OECD BEPS ‘reforms’? When someone doesn’t want to know the obvious, one doesn’t have to worry about the obvious…

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

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

On a quarterly basis:

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

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

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

Next, using both GDP and GNP figures:

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

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

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

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

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

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

First - y/y growth  rates:

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

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

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

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

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

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

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

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

Stay tuned for quarterly growth analysis.