Irish GDP data shock, highlighting virtual economy.

Anyone familiar with the Irish economy will be aware that the multinational sector has a huge impact on the export and investment data, contributing to the volatility of recorded GDP. Surprises in the latter are therefore not uncommon, but the latest example is without doubt the most jaw-dropping to date. The CSO had estimated that Irish real GDP rose by 7.8% in 2015, an unexpected figure in itself, but have now revised that growth rate to an astonishing 26.3%. Yes, 26.3%. Moreover, nominal GDP in 2015, which was put at around €215bn, is now over €41bn higher at €255.8bn, having risen by over 32% from the previous year on the new data. For those who prefer GNP as a more appropriate measure for Ireland ( it adjusts for multinational profit and other income flows ) real growth in 2015 was still stratospheric, at 18.7%, with the nominal increase at 24%.

What’s going on?. There were a number of factors at work, relating to changes made to the GDP methodology. The first is that business spending on R&D and patents is now captured as investment and classified as intangibles. The latter  rose by over €11bn in 2015, a 100% rise and contributing most of the overall 32.7% increase in capital formation; building and construction rose by over 13% but spending on machinery and equipment expanded by only 3%.

The external sector saw massive value and volume changes, reflecting the inclusion of offshore manufacturing activities and the fact that aircraft for leasing  are now counted  as exports and imports  as opposed to the  previous net impact . Exports  are now deemed to have risen by just shy of €100bn in 2015, and by over 34% in volume terms, with the volume rise in imports put at 22%, with the result that the external sector contributed 18 percentage points to overall GDP growth. That export surge also resulted in a huge balance of payments surplus for Ireland, amounting to over €26bn or 10.2% of GDP.

Extraordinary figures. Spending by the government and households paint a  more realistic picture of economic life on the ground in Ireland last year. Personal consumption did pick up, reflecting rising employment and strong growth in real incomes, expanding by 4.5% in real terms, the best performance since 2007. Government spending on goods and services also rose , albeit by a modest 1.2%.

For many, these GDP figures are not ‘real’ but they are used as the denominator in calculating Ireland’s fiscal and debt ratios. Consequently, the latter  now ended 2015  at 78.7%, well below the euro average, instead of the previously published 93.8%.

If that step jump in GDP last year was indeed a one-off data-related adjustment the risk now is that 2016 will see a dramatic ‘slowdown’ or even contraction. Indeed, real GDP actually did contract in the first quarter, by a seasonally adjusted 2.1%. Consumer spending continued to show good momentum, up over 2% in the quarter, but investment fell sharply , reflecting double digit percentage falls in machinery and equipment and intangibles, while exports  fell by 5% and imports by 10%. On an annual basis GDP is still growing, by 2.3%. and all forecasters, the government included, will now have to make a stab at what all this means for recorded growth in 2016 and beyond. The range of estimates is likely to be wide and handsome.