7/5/15: The Surreal Industrial Production in Ireland: Q1 2015

Irish Industrial production figures for Q1 2015 are confirming what has become a serious joke for many analysts: Irish growth figures are now so distorted by various multinational tax optimisation tricks, there is little point looking at much of the GDP and GNP growth coming from the official accounts.

Take a look at comparatives for seasonally-adjusted indices of volume of production across 'Modern' and 'Traditional' sectors:

Year-on-year, Q1 2015 volumes of production rose 31.73% across all Industries. In the Traditional sectors, production increased 13.1%, while in Modern sector production rose 48.7%. Guess which sector is dominated by the MNCs?

Now, take a look relative to crisis period trough:

• Across industries, since the bottom was hit in the crisis period (in 1Q 2013), production rose 47.3% - implying quarterly rate of growth of 4.96%. 
• Across Traditional sectors, output rose 20.42%, implying quarterly growth rate of 1.56%; and
• Across Modern sectors output rose 78.613%, implying quarterly rate of growth of 7.52%.

Guess why is one sector growing at a rate that is almost 5 times the rate of growth in another sector? It can't be due to 'most productive labour force' we allegedly have, for both Traditional and Modern sectors have access to the same labour force. It can't be due to our 'pro-business institutions and culture', for both sectors have equal access to these, presumably. It can't be due to our 'Knowledge Economy', for - setting aside the questionable nature of its existence - both sectors can rely on knowledge in the economy equally. Wait… perhaps it is down to the difference between MNCs ability to access tax optimisation schemes which are down to international accounting methods, whilst traditional sectors firms have to pay the going headline rate of tax on their real activities? For that is, pretty much, the only fundamental long term difference between the two sectors.

But let's drill a little deeper. See the following chart:

What the above shows is the source of growth in the Modern Sectors - aka Chemicals and Pharmaceuticals - a sector that has managed to post growth of 109.2% on trough (from 1Q 2013). Yep, year on year the sector has expanded output by 60.76%. You'd have to wonder - what on earth can propel pharma to these rates of growth? The answer is the 'miracle' of contract manufacturing - a scheme whereby something not produced in Ireland, gets booked as if it was produced in Ireland.

This we call growth. To the amazement of the European politicians and the amusement of the more shrewd investment markets analysts who are starting to laugh at our PMIs, our GDP, our GNP... and so on...

Economics 11/01/2010: Manufacturing Activity Sliding

Once again, spot on with the general trend toward renewed deterioration in Q4, industrial production posted a 9.1% decline in November 2009. Per CSO: “The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period September to November 2009 was 3.1% lower than in the preceding three month period.” Monthly change was -9.1% as well in November, for Manufacturing Industries as contrasted with 1.6% decline in October. In all industries, November decline was 8%, compared with October monthly decline of 1.4%.

The sectors contributing most to the change in November were: Computer, electronic and optical products (-36.1%) and Food products (-12.5%). The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual decrease in production for November 2009 of 3.7% while a decrease of 17.7% was recorded in the “Traditional” Sector. In seasonally adjusted terms, the picture was slightly less poor: Modern Sectors declined 10.5% in monthly terms, marking second consecutive monthly decrease (the index fell 5.8% back in October 2009), while Traditional sectors fell 2.2% in November, after registering an increase of 5.5% in October. The series are obviously volatile – analysis of volatility is to follow later (grading times for both UCD & TCD) – but all signs point to a renewed deterioration taking hold.

Unemployment and more

As was widely predicted, December implied unemployment rate (based on Live Register figures) came in at 8.3%. According to CSO:
"The seasonally adjusted Live Register total increased from 277,200 in November to 293,500 in December, an increase of 16,300."

The unadjusted LR came in with a much higher increase of 22,777 - a number that might be actually closer to the reality on the ground, as seasonality adjustments are likely to underestimate the extent of actual jobs destruction in the recessionary economy.

For persons of 25 years of age and over (the prime earners' category), newly unemployed males outnumbered females almost 2:1 - a trend that underpins unemployment growth throughout the year.
Overall, there are now 293,500 seasonally adjusted individuals on the unemployment assistance in Ireland, implying the unemployment rate of 8.3%. However, this assumes static population figures. In reality, it is highly likely that net outward migration from Ireland has actually reduced the size of the available labour force in the country. If so, the actual unemployment rate should be higher than 8.3%.

Whether the actual unemployment rate is 8.3% or 8.5% is a moot point when one considers that we started 2008 with an implied unemployment rate of 4.9%. It is now clear that we are on-trend to reach 12% unemployment mark by the end of 2009 - so much for yet another childishly inaccurate DofFinance forecast of 7.3% unemployment for 2009!

On a bit more encouraging side

Yesterday's CSO data on industrial production has shown some positive signs of life in, it is worth saying, extremely volatile series. Here are some charts:
First chart above shows a robust pick up across the entire manufacturing sector in November. So much for 'uncompetitive' manufacturing story, but do not a massive overall increase in the range of volatility last year compared to 2007.
The second chart shows that most of the November increase can be accounted for by the 'Modern' sectors - aka US multinationals. This is quite interesting as December Exchequer returns have shown a massive (20%) drop in corporate tax receipts, suggesting that increased multinationals' activity was associated with increased transfer pricing. Exchange rate movements - stronger Euro - did not help either, exacerbating the impact of transfer pricing.
Really positive piece of news in on expectations front, with all but two sub-sectors (Basic Chemicals and Office Machinery & Computers) shown upward trending new orders for 2008.

These charts re-enforce the argument that I have been making for years now - Ireland Inc's productivity is wholly dependent on one source for growth: foreign firms. Forget the talk about somehow intrinsically better quality of our labour force and regulatory regimes. The formula for any real success in 1990-2007 in this country is: get them in with low taxes, for there is no other reason for them to be here.