Over the weekend just gone a rather familiar issue has reared its head.
Gabriel Makhlouf, governor of the Central Bank of Ireland, has defended Ireland’s world-beating economic growth against accusations that it is an artificial product of big US companies taking advantage of Dublin’s low taxes.
Mr Makhlouf told The Financial Times that much of Ireland’s growth – forecast to be 12.2 per cent last year, more than treble growth in the overall EU – comes from “real factories with real people” even if a lot of activity stems from big technology and pharmaceutical groups. ( Financial Times)
As you can see there is a lot going on there as “world-beating” and “12.2%” pose their own questions before we even get to the issue of the fact that central bankers rarely tell the truth these days. The debate got triggered by this.
The debate about Ireland’s economic outperformance flared up recently after the country’s 3.5 per cent quarter-on-quarter growth in gross domestic product single-handedly prevented the eurozone economy from stagnating in the final three months of last year. ( FT)
As you can see 3.5% in one quarter is the claim and it kept the Euro area from reporting nil growth in the last quarter of 2022. That added to existing concerns where Irish economic numbers which are usually produced later that the rest of the Euro area are sometimes moving them around a lot. That has been particularly true of business investment. Often it has been a case of the Irish tail wagging the Euro area dog.
According to our central banker things are fine.
“Too many people think or jump to the conclusion that this is all about intellectual property that’s sort of moving around and it’s not real, and that’s wrong,” Makhlouf said.
“This stuff, especially in pharma, it’s made in Ireland. There are people in Ireland. There’s a remarkable proportion of the top ten medicines in the world [that] are made in Ireland,” he said. “One of the oldest multinationals in Ireland is Intel and they also make stuff.”
Actually back in 2015 it was intellectual property.
Critics say Ireland’s GDP is distorted by the accounting manoeuvres of large US multinational groups capitalising on low Irish tax rates. When Apple moved intellectual property assets to its Irish base in 2015, it helped to send Ireland’s GDP up 25 per cent, which Nobel-prize winning economist Paul Krugman called(opens a new window) “leprechaun economics”. ( FT)
If we now switch to his example if the pharmaceutical industry there is a clear problem. Whilst there is genuine economic activity it is much less than the claimed total because the profits go elsewhere ( mostly to the US).
Irish Consumption
One problem is that the Irish do not spend the money the GDP accounts suggest they have. Here are the latest detailed accounts.
Personal Consumption Expenditure grew by 0.3% in Q3 2022 compared to Q2 2022,
That is a long way short of the GDP growth rate of 2.3% for the quarter. The difference is another move in investment of the sort I referred to earlier.
Capital Investment increased by €24.4 billion in Q3 compared with the previous quarter and accounted for 57.1% of total domestic demand in Q3 2022.
That may slide past the unwary but 24 billion or so is a lot for an economy the size of Ireland and investment being 57% of domestic demand? We get more insight as we note that at just under 49 billion Euros in total it was up 91.8% on the quarter.
If we now switch to the annual numbers we see that GDP was also on something of a tear.
Preliminary estimates for the third quarter of 2022 indicate that there was an increase of 10.9% in GDP in real terms in Q3 2022 compared with Q3 2021.
But Irish consumers spent very little of it.
Personal Consumption showed an increase of 2.2%
This is a familiar pattern
But the massive GDP spike has not translated into higher living standards: Irish consumer spending in 2022Q3 was 2% lower than in 2019Q4 after accounting for inflation. The disconnect between Irish GDP and Irish living standards is not new, but it has widened considerably over the past few years. ( MC Klein )
Curious when the economy has apparently been so strong.
Even before last year’s growth, Irish GDP had more than doubled since 2014, according to Eurostat, the EU’s statistics office. That dwarfs the overall EU economy’s 23 per cent growth in the same period. ( Financial Times)
The Central Bank of Ireland does not agree
We then get something of a change of tack from Governor Maklouf
The Irish central bank uses alternative growth measures to strip out the impact of multinational companies and get a better picture of domestic demand. One is a version of gross national income, known as GNI star, which the central bank expects to show much slower growth of 5.9 per cent in 2022.
So that is half the growth gone. He than makes the case for GDP being unreliable.
Makhlouf said exports by multinational companies in Ireland “have gone up and they’ve been a big driver” of the country’s growth. “They do distort our stats, which is why . . . because a lot of the profits go back to the parent — they don’t sit in Ireland — we don’t use GDP.”
If we switch to industrial production we see that it fell by 15.2% in October 2022, then rose by 7.8% in November 2022 before falling by 8.5% in December. So we have yet another very distorted number.
Comment
As I have pointed out before the picture for Ireland is much more nuanced than the headlines say. There has been a boom for some as Duncan O’Leary of Goodbody points out.
But he added: “The activities of the multinationals are real and have had a visible impact on the prosperity of the Irish economy over recent years.” Employment from foreign direct investment rose 8 per cent on average in the past five years in Ireland, he said. “These are high-paying jobs,” which he said had “contributed to an extraordinary rebound in tax revenues on top of the boom in corporation tax receipts”.
If we look at the latest wages numbers we see some evidence of that.
The sector showing the largest annual percentage increase in average weekly earnings in Q3 2022 was the Information & Communication sector (10.8%) where average weekly earnings rose from €1,335.88 to €1,480.25 in the year to Q3 2022.
But if we allow for that growth elsewhere is very different.
Average weekly earnings were €864.32 in Q3 2022, an increase of 3.2% compared with €837.61 from one year earlier according to preliminary estimates of the Earnings and Labour Costs quarterly release.
So they were quite a bit behind inflation.
The Consumer Price Index (CPI) rose by 9.2% between October 2021 and October 2022, up from an annual increase of 8.2% in the 12 months to September 2022.
This is the thirteenth straight month where the annual increase for the CPI has been at least 5.0%.
If the economy was as strong as we have been told surely it would be the one places with real wage growth? Whereas in fact the fall is quite heavy.
Looking ahead there are issues for Ireland.
A further blow could come from a wave of job cuts announced recently by several big tech groups that is expected to hit their Irish units. ( FT)