Criticism of Irish National Accounts overdone.

The recent release of Ireland’s national accounts for 2017, showing a (preliminary) increase in real GDP of 7.8%,  precipitated another round of complaints about the relevance of such data, including  ESRI comments calling for a ‘parallel’ set of accounts to be published, stripping out the impact of   the ‘large transactions of a select number of firms’.

In fact the CSO already publish a number of adjustments, following  the clamour accompanying the release of the 2015 accounts, which were  the first compiled under the new EU standard, ESA 2010,  prompting some to talk of ‘leprechaun economics’.  A modifed capital formation figure is produced in the quarterly accounts which strips out two components- aircraft leasing expendidure is excluded from total spending on machinery and equipment and R&D spending on intellectual property service imports is excluded from total spending on Intangibles. The latter is GDP neutral anyway (investment  boosts GDP but if imported will have an offsetting negative impact)  but Intangibles has contributed to a huge increase in the investment share of GDP, as well as being extraordinarily volatile on a quarterly and indeed annual basis. This adds to the difficulty of forecasting Irish GDP but, nonetheless,  is the internationally accepted norm in that such intellectual property  used to be viewed as a cost of production but is now (rightly ) deemed to be an asset , be it dometically generated or transferred from abroad.

The CSO  has also introduced a  modified Gross National Income (GNI) figure , GNI*, albeit only published with the full annual accounts, and one wonders if this was embraced too readily. This concept is unique to Ireland and  makes a number of adjustments to the  headline GNI figure, largely reflecting the depreciation of intellectual property assets and aircraft  as well as excluding the profits of  firms re-domiciled in Ireland.Yet it is unclear what the final figure is supposed to mean and the adjustments are arbitrary, (why aircraft leasing, for eample, which has a long history in Ireland, and are firms domiciled here or not?) as well as confusing in that the term  ‘gross’ is still used, even though  some depreciation is  excluded.  Indeed, if depreciation is the issue why not simply use Net National Income (NNI), which adjusts for total depreciation across all sectors, and  has always been published on an annual basis. Moreover, the correlation between NNI and GNI* on the  annual data going back to 1995 is extremely high , at 0.99.

GDP is the internationally accepted norm, of course, and closer to home  most people would view the debate as arcane. Other readilly available indicators exist that are of  use in capturing real developments in the economy depending on the question asked. The surge in employment in recent years  and the plunge in unemployment is real enough for many households, as is the increase in household incomes. Similarly we can track consumer spending in the national accounts. Some argue that the GDP figure , when used as a denominator, gives a misleading indicator of Ireland’s debt burden, but again there are other metrics which one can use, including debt to tax revenue. Another perceived problem is in relation to forecasting for the Budget, but that is done on a bottom up basis anyway by the Department of Finance  i.e. income tax receipts reflect employment and pay assumptions and VAT  forecasts depend on consumer spending projections.

The change to a new methodology in collating the national accounts had a huge impact on Ireland’s recorded GDP, but this was a step adjustment and need not lead to  a host of ad-hoc exclusions, while any volatility going forward reflects the scale of multinationals relative to the indigenous economy and hence a fact of modern Irish life. Real growth in the latter part of the 1990’s averaged over 9% per annum, driven by multinationals, so the average over the last two years ( 6.5%) is not that unusual. It is also curious that the the Irish authorities spend an inordinate amount of time defending the multinational presence in Ireland as real,  yet also devote time and effort in producing arbitrarily  adjusted GDP figures to strip out part of that multinational impact.

7.8% Irish GDP growth in 2017 but consumer spending up only 1.9%.

The Irish economy grew by 7.8% last year in real terms according to the initial CSO estimate, bringing the cumulative increase over the past three years to 45%. Nominal GDP in 2017 grew by 7.5%, to €296bn, and is now over €100bn larger than it was in 2014. Those kinds of numbers are clearly extraordinary and indicate some serious distortions, as consumer spending is now less than a third of real spending in the economy ,against an EU norm of over 50%, while the surplus on the Balance of Payments in 2017 was recorded  at €37bn or 12.5% of GDP, and 19% of GDP in the final quarter alone.

Indeed, consumer spending was surprisingly weak in 2017 given what we know about household incomes; employment  rose by 61,000 or 2.9%, and average pay increased by 2%  yet personal consumption grew by  only 3.2% in nominal terms and  by 1.9% in real terms, implying a significant rise in the savings ratio. The latter is also out of kilter with surveys of consumer confidence, which have hovered around record highs.

Building and Construction is growing strongly, rising by  over 16% last year, spurred by a 33% increase in housebuilding. Spending on machinery and equipment fell however, by 11%, and by slightly more when account is taken of aircraft leasing, but overall capital formation was again dominated by multinational spending on Intangibles ( R&D, patents) which fell by 41%  following a 111% rise in 2016. As a result overall investment fell by 22% and final domestic demand declined by 8%.

The plunge in recorded R&D spending is broadly GDP neutral as service imports also fell , contributing to an  decline in  total imports of 6.2% in volume terms. On the export side contract manufacturing was again a major influence, with merchandise exports in the national accounts recorded at €194bn, as against €122bn actually manufactured in Ireland. Service exports rose by over 14% , and exports as a whole rose by 6.9% in volume terms.

So on the face of it the external secor made a positive contribution to 2017 GDP growth of some 15%, so dwarfing the big negative from domestic demand, with an additional 1% coming from a strong stock build.

On a quarterly basis, the seasonally adjusted data reveals a very strong second half to the year, with real GDP expanding by 3.2% in the final quarter following  4.8% in q3, although again personal consumption is seen as surprisingly soft, increasing by just 0.3% in q4. That skewed pattern also left the annual increase in GDP in the final quarter at 8.4%, which in a normal economy would indicate that growth in 2018 would likely be extremely strong given that base, but in Ireland’s case one can’t be as sure, such is the extreme volatility from quarter to quarter.