The fall in GNP

Over the past week or so there have been a number of references to the fall in GNP that occurred in late 2011 as reported in the most recent set of Quarterly National Accounts released by the CSO.

Vincent Browne in particular has focused on the 7.1% fall in GNP recorded in Q4 2011 when compared to Q4 2010 as if it is indicative of some of cataclysmic collapse in the economy.  The seasonally adjusted quarterly real change was a drop of 2.2% in Q4 but even that may not be reflective of changes in the economy.

GNP is often referred to as a better indicator of the domestic economy than GDP because it “excludes the impact of the multinationals”.  That is not necessarily true.  GDP includes the net exports of the MNC sector and it is worth noting that in 2009 the top 10 MNCs accounting for one-third of Irish exports and imports (see slide 14).

GNP does not remove the trading performance of the MNCs as a measure of national income; it adds in the effect of Net Factor Income from Abroad.  This will, of course, be heavily influenced by the performance of the MNCs and the profits earned from their exports will largely exit in this fashion.

The point is that GNP can move because of a change in the export performance of the MNCs or a change in the profit repatriation decisions of the MNCs.  The decisions of the MNCs have two avenues to impact our GNP figures.  The assumption may be that one will offset the other but that is not necessarily the case.

If we look at the real seasonally adjusted changes in the components of GNP.

Component Q4 2010 Q3 2011 Q4 2011 Annual Quarterly

Consumption

20,983

20,400

20,506

-2.3%

+0.5%

Investment

4,277

3,702

4,221

-1.3%

+14.0%

Government

6,866

6,611

6,389

-6.9%

-3.4%

(C + I + G)

32,126

30,713

31,116

-3.1%

+1.3%

Exports

38,929

40,752

40,287

+3.5%

-1.1%

Imports

(31,397)

(30,639)

(30,319)

-3.4%

-1.0%

(X – M)

7,532

10,113

9,968

+32.3%

-1.4%

GDP

39,721

40,180

40,100

+1.0%

-0.2%

Net Income

(5,427)

(7,969)

(8,711)

-60.5%

-9.3%

GNP

33,925

32,225

31,523

-7.1%

-2.2%

The annual figures are poor and there is a €2.4 billion drop in quarterly GNP over the year.  Although the seasonally adjusted figures are not additive it is instructive to do so to get an indicator of where the annual 7% drop came from.

All of consumption, investment and government have fallen but their sum contributes €1.0 billion of the drop.   Net exports (driven by the MNCs) rose by €2.4 billion over the year but this was more than offset by a €3.3 billion reduction in net factor income from abroad. 

A large proportion of the change in GNP is a result of changes in exports and net factor income.  About 90% of our exports are from MNCs and you can use the Balance of Payments to track income flows (noting though that the this does not include seasonally adjusted data).  It seems that the expected drop in the outflow of investment income in the final quarter of the year was not as large as anticipated, thus becoming a seasonally adjusted increase in the outflow of investment income as reflected in the table above.

If we look at the quarterly changes we see that both consumption and investment rose in Q4 2011 (although investment was at an extremely low level to begin with).  This is not suggestive of an economy in freefall in the latter quarters of 2011.

Ireland national income statistics are hugely influenced by the presence of MNCs.  Although GNP is a useful indicator it is important to realise that changes in GNP are not necessarily reflective of changes in the domestic economy.  The CSO do provide tables on ‘Domestic Demand’ which is the bulk of the “Irish” economy (as opposed to the economy in Ireland) but that excludes the performance of indigenous exporting firms.

20 thoughts on “The fall in GNP”

  1. Re “heavily influenced by the performance of the MNCs and the profits earned from their exports will largely exit in this fashion.

    The point is that GNP can move because of a change in the export performance of the MNCs or a change in the profit repatriation decisions of the MNCs”

    The point is we need more accurate and clear info to plot the movements of capital.

    Real figures that separate ‘real exports’ from ‘profit repatriation’ schenanigans as in transfer pricing, double dutch sandwich, or a mailbox only presence are currently bundled into ‘real exports’ of MNC’s ?

  2. Well we are witnessing a slow grinding down of the Air travel business.

    If I travel to Youghal rather then Scotland this summer I guess it would improve GNP a bit.
    But what of all those Yanks that will never come again ?
    The French & Germans do not spend much money when abroad.
    The air travel stats on the Transport omnibus (2005 -2010) was devastating to see all in one area rather then seeing bits and pieces of data.
    Like much of these data presentations 2005 does not go back far enough.

    I think Cork airport March figures are down 8% from last March….

    I also find the best real world indicator of a forthcoming demand shock to Europe is the decline of car sales as that is so credit dependent.

    Europes Industrial model is simply not working….. since 87 / 88 most of the fixed capital was bank credit created.
    Very little fiscal money has been spent on the commons….. the European economy is all extracted out I am afraid as our capital was exported to build 2 coal fired power stations a week in China.
    We are left with a Physical world of Houses , cars & roads but with no energy glue to bind them together.

  3. So we cant take one statistic and use it to make a point while totally ignoring context?

    Reminds me of a good quote I heard:

    “thinking is hard work which is why you dont see a lot of people doing it”

  4. @Seamus

    Thanks for pointing out these not so obvious things.

    I accept that GNP is heavily influenced by the MNCs, but so is GDP.

    Could you give us your opinion on which of two figures, GNP and GDP, best capture the wealth and economic growth of Irish households and business activity that genuinely takes places in this state? In addition, which figure is the gross government debt best compared to?

    My opinion was that GNP is the better measure, because it excludes profits repatriated from overseas and money that is simply routed though Ireland for tax purposes. Would you agree?

    While GNP and GDP are both influenced by MNCs, it would seem to me that GNP is a better measure of whether the economy is genuinely in recession or not and is a better figure to compare government debt to.

  5. Neither GDP nor GNP seem to be ag fas.

    What does that mean for the return to the sunny uplands by year 4 of the bailout programme ?
    The situation is similar across the water.

    http://www.guardian.co.uk/commentisfree/2012/apr/25/osborne-kamikaze-chancellor-double-dip#history-link-box

    The Office for Budget Responsibility’s forecast of a return to growth next year, driven by a surge in investment and exports, has looked absurd for months. The idea that business investment will jump 40% by 2015/16, the biggest since 1945, is risible.

  6. Seamus, some of the important issues you’re raising are properties that all national indicators have, in particular ones derived from aggregated national accounts. Copeland in 1949 makes this point pretty clearly (http://www.jstor.org/stable/2720888). The quarterly financial accounts, also developed by the CSO and Central Bank, can be really useful in pulling some of these issues apart I think.

  7. Unlike the past recessions our lives have become far too input senstive to deal with a fall in revenue.

    There is very few 40 acre Gabriel Byrne like characters whoring after the big shots daughter now…. the late 70s /early 80s bracken era might as well be a Victorian oddity to most.

    People in the past could scratch a living from something…. now they are isolated on suburban reservations.

    Check out the CSOs latest town & county publication today.
    Courtown harbours population grew by 101% since 2006 !!
    From 1,421 to 2,857 !!
    It has no railway station….. any development should have been concentrated in Gorey which is not too far way.
    The place is a disaster zone.

    The rise in the Luas Red line passenger numbers is perhaps partially the result of pop. growth in Saggart by 147 % (868 to 2,144)
    Ditto for the Midleton lines viability and the rise in population of Carrigtwohill from 2,782 to 4,551… at least thats half way logical.

    But Ballymahon Longford !! Sweet Jesus
    963 to 1,563 or 62%

  8. Seamus,

    Thanks for those slides. Pity someone close to them did not make a downloadable preso walkthrough elaborating on some of them.

    I was surprised by some of the figures:

    For MNCs in Ireland top 10 account for 34% of value of exports and
    33% of imports, ok as atated earlier we do need data on ‘real exports’ as opposed to Google’s financial reengineering of its foreign earnings through Ireland Inc, even from the point of view of exposing a weakness that could overnight be altered negatively.

    Slide 3 Imports of goods and services as a % of GDP

    80% Exports 70% Imports for Ireland. This shows how much of an open and vulnerable economy we are.

    Compared to next highest Germany

    45% exports Imports 40%

    That slide especially surprised me especially the huge 70% imports figure. Import substitution ought to be high on the agenda there.

    But if you take away imports from exports in Irelands case the contributory remainder to GDP is a mere 10% because of those high imports. Likewise, in Germany, rather surprising to see it down at only 5% as I would have thought it to be much higher.

  9. The reason why economists have always traditionally preferred our GNP to our GDP statistics has to do with the inaccuracies introduced by MNCs transfer pricing. It isn’t so much because we want to exclude MNCs from the calculation, as because of the fact that we can’t accurately measure what they do here. At least that is what we taught our students before this crisis began: it is an argument that goes back to the 1980s, at the very least.

  10. “Ireland’s 2011 budget deficit is estimated to be 9.4pc of GDP, within its 10.6pc target. However, Eurostat highlighted on Monday that this figure does not include the €5.8bn bailout Ireland gave to two of its banks. When you take this into account, Ireland’s budget deficit came in at 13.1pc last year.”

    No comment.

  11. @Ceterisparibus

    Ireland’s 2011 budget deficit is estimated to be 9.4pc of GDP, within its 10.6pc target…. When you take this into account, Ireland’s budget deficit came in at 13.1pc last year.

    And they would have gotten away with it too, if it weren’t for those pesky Eurostat kids!

  12. Eurostat has a metric, ‘Actual individual consumption’ (AIC) which appears to be a more reliable indicator for Ireland than GDP per capita or GNP per capita.

    It puts Ireland lower than the Eurozone average in 2009; grouped with Italy, Spain and Greece and quite a bit lower than Germany, France, Austria, and the Netherlands.

    AIC per inhabitant consists of goods and services actually consumed by individuals, irrespective of whether these goods and services are purchased and paid for by households, by government or non-profit institutions. In international volume comparisons, AIC is often seen as the preferable measure, since it is not influenced by the fact that the organisation of certain important services consumed by households, like health and education services, differs a lot across countries. For example if dental services are paid for by the government in one country, and by households in another.

    Even during the boom, we were never as rich as the headline data suggested.

    Table here:

    http://www.finfacts.ie/irishfinancenews/article_1021590.shtml

  13. Real GNP increased by 4.8% in the year to Q4’10, and then fell by 7.1% in the year to Q4’11. Go figure (with the help of Seamus Coffey)! In the year to Q4’11 employment in the Irish economy fell by c15k, or by 0.8% (and actually rose in Q4 from Q3), after a fall of c65k, or 3.4%, in the year to Q4’10. The moderation in the pace of employmemt decline last year would hardly have occurred if the economy had really ‘tanked’ by 7.1%.

  14. Hi Seamus
    “It seems that the expected drop in the outflow of investment income in the final quarter of the year was not as large as anticipated, thus becoming a seasonally adjusted increase in the outflow of investment income as reflected in the table above.”
    I think this is the main reason for the ‘alarming’ figure Vincent Browne mentioned.
    On closer inspection not as alarming but obviously the trends are not pretty and the government halving GDP growth forecasts are no barrel of laughs.

    Are you getting your own back cos he forgot your name last night? 🙂 only kiddin.

  15. Karl Whelan had a take on GNP and GNP and drew attention to the more accurate figure of GGD, General Government Deficit, suggesting the ‘real figures’ were for public consumption and were being dressed up, he made a good point here:

    “Some of these differences are accounted for by the exclusion of capital spending and on the tax side there’s differing treatment of PRSI contributions. I could go on listing other differences but, frankly, who cares? The GGB figures provided to Brussels are the most comprehensive indicators of our fiscal position and they are being closely watched by the EU and IMF.

    As I’ve written about before, these kinds of figures also mislead the public about key magnitudes, thus undermining public debate about fiscal options. For example, you will hear various expenditure items compared against a total tax revenue figure of €31.7 billion—those who’ve read the C&AG report will think total revenue was €35.6 billion. This usually ends up distorting the actual fraction of revenues devoted to these expenditures. ”

    Another wildcard not provided in the figures is the figures for the NAMA SPV

    The current status of the PN repayments and how they fit into reportage is not clear to me.

    http://www.irisheconomy.ie/index.php/tag/budget-deficit/

  16. In a period of low GDP growth in coming years, it will be safe to assume that positive data will reflect MNC transactions unrelated to real economic activity in Ireland.

    The phantom services exports do not generally impact the national accounts as transfer charges and royalties are used to cut taxes and raise imports.

    On the goods side, there is significant ‘wholesale trade’ with likely little processing but useful for profit-shifting. That of course impacts the national accounts.

    With over 3,000 commercial aircraft ‘owned’ in Ireland, sales of second-hand aircraft and purchases of new ones can have quite an impact. The value of the aircraft is equivalent to half GDP and about 1,000 work in aircraft leasing companies.

    As regards factor income inflows, a company such as CRH is now effectively only Irish in name.

    Michael Noonan told an Oireachtas Committee this week: “Last year, GDP grew by 0.7 per cent. This is the first increase in economic growth since 2007. Activity is being driven by exports (up 4.1 per cent). This owes much to the competitiveness improvements that have taken place in recent years, which, in turn, is testament to the flexibility of the Irish economy. Importantly, many “indigenous sectors” are performing relatively well, i.e. tourism and agri-food. ”

    Eamon Devoy of the Technical, Engineering and Electrical Union wrote in The Irish Times this week: “We are now in the highest quartile of OECD member states when it comes to advances in reducing real unit labour costs. Utilising the pension fund mechanism advocated by Siptu and endorsed by the Irish Congress of Trade Unions would maximise these gains.”

    Noonan’s point about ‘competitiveness improvements’ compared with other countries and Devoy’s point about falling unit labour costs, rely on tainted data.

    So the next time you hear or see claims on rising Irish productivity, reach for the salt cellar – – and you will have a right to question whether the individual is a dupe or a spoofer.

    http://www.finfacts.ie/irishfinancenews/article_1024185.shtml

  17. What do you might be the better measure of the Irish Economy: GDP or GNP ?

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