That 26% growth rate: two weeks on

The recent publication by the CSO of the 2015 National Income and Expenditure Accounts generated a lot of reaction.  There is no doubt that a 26.3 per cent real GDP growth is bizarre but it was not farcical, false or based on fairy tales.

Many commentators went out of their way to highlight that the figures did not characterise what was happening “on the ground” in the Irish economy.  But this seems like a bit of a strawman.  Instead of being told what the figures were we were been scolded over what they weren’t.  No one said the economy was growing at 26 per cent.  Arguments against using GDP in an Irish context have made for the past quarter of a century.  Even as recently as March, when the first growth estimates for 2015 were provided, there were plenty of people who pointed that the underlying growth rate of the economy was probably around half of the 7.8 per cent growth rate in real GDP shown at that time.

But a 26.3 per cent real GDP growth rate is very very unusual.  And one that deserves understanding rather than dismissal.  However, the discussion of the figures has generated more heat than light.  At the briefing it seems three items were identified as having oversized effects on the national accounts’ aggregates. These were:

  • aircraft leasing
  • inversions and corporate restructurings, and
  • asset transfers to Ireland

Continue reading “That 26% growth rate: two weeks on”

Preliminary Census Results

The CSO have published some preliminary findings from last April’s Census.

The population was measured to be 4.76 million up from 4.59 million in 2011 giving an increase of 170,000 (+3.7%).  The natural increase was just over 198,000 so the estimate of net migration over the five years since the last census is –28,500.  This is the second consecutive occasion where inter-censal population estimates were out by around 100,000.

The housing stock increased from 2,003,914 to 2,022,895, a rise of less than 20,000 over the five years.  On census night just over 1.7 million units were occupied with 45,000 units where the occupants were temporarily absent and there were 60,000 unoccupied holiday or second homes.  There were just under 200,000 “other vacant dwellings” a drop of 30,000 in this category since 2011.  There is a wide variation in vacancy rates by area.

There is plenty of interesting detail available by following the link.

Economy expands by 26.3%

Or at least that is what the national accounts tell us.  The CSO have published the National Income and Expenditure Accounts for 2015.  These show that real GDP expanded by 26.3 per cent in 2015 and real GNP grew by 18.7 per cent.  Do these numbers mean anything?  It is hard to know.

Looking at the expenditure approach the big real changes were in investment (+26.7%), exports (+34.4%) and imports (+21.7%).

In nominal terms, exports in 2015 were put at €317.2 billion, up from €219.8 billion in 2014. Exports minus imports was €81.2 billion compared to €34.6 billion in 2014.  We would usually expect most of this to feed through to the outflow of factor payments but net factor income from abroad only went from –€29.7 billion in 2014 to –€53.2 billion in 2015.  That means most of the improvement in net exports also contributed to GNP but the “gross” part of this seems to be important.

The reason is that there seems to be an awful lot happening on the asset side of the national accounts.  The nominal provision for depreciation rose from €30.9 billion in 2014 to €61.6 billion in 2015.  It looks like a large part of the increase in gross value added in 2015 of €60 billion went to cover the depreciation of assets.

The biggest source of the additional value added was in the Industry sector which rose 97.8 per cent in real terms over in the year (and in nominal terms rose €50 billion).  The CSO don’t provide a sectoral breakdown for this (they usually do) but it is probably a safe guess that a large part of it is related to the chemical and pharmaceutical sector.

One explanation is that a number of sectors saw MNCs move intangible assets onshore.  This increases gross value added in Ireland as there are no longer outbound royalty payments.  There is also a once-off increase in investment when the asset moves here (but the growth effect of this is offset by the import of the asset).

It is also worth noting that the increase in value added isn’t necessarily related to goods manufactured in Ireland.  The CSO’s External Trade data, which only include goods that physically leave Ireland, shows €111 billion of goods exports from Ireland in 2015.  Goods exports in the national accounts are done on a different basis (where ownership rather than location matters) and show exports of €195 billion.  A large part of the value added from these exports is accounted for in Ireland.

So we have a large increase in gross value added but this doesn’t fully feed through to increases in wages and/or profits.  Non-agricultural wages and salaries rose from €67.7 billion in 2014 to €71.5 billion in 2015.

The domestic trading profits of companies rose from €52.3 billion in 2014 to €74.4 billion in 2015.  This €22 billion increase roughly corresponds the increased outflow of net factor income.  Profits before depreciation would be up by even more but a lot of that went against the fall in the value of the assets.

But even then the value on onshored assets can’t account for all of this.  Most of the increase in investment can be attributed to research and development which in nominal terms rose from €9.6 billion in 2014 to €21.3 billion in 2015.  It is likely that most of this increase is due to once-off purchases of intangible assets rather than ongoing expenditure on R&D.

There may also be impacts from the aircraft leasing sector.  Although the investment figures show a small decrease in investment in transport equipment in 2015, a balance-sheet effect may have resulted in increased aircraft assets being accounted for in Ireland.  Gross value added in aircraft leasing may be high but depreciation of the asset would again consume a lot of this.

The CSO highlighted this and slide 6 of their presentation on the figures shows that Ireland’s gross capital stock rose by about €300 billion in 2015, from €750 billion to €1,050 billion.  Even with today’s inflated figures this corresponds to an increase in the gross capital stock equivalent to 120 per cent of GDP in just one year. Investment in 2015 was equivalent to just over 20 per cent of GDP so these balance-sheet effects impacted the capital stock to the tune of almost 100 per cent of GDP.

The best we can do to strip out all of this madness is probably to look at net national income which excludes the provision for depreciation from all assets and accounts for net factor income from abroad.

Net National Income at Market Prices grew by 6.5 per cent in 2015 which is probably somewhere around where “the Irish economy” grew at in 2015 rather than the 26.3 per cent that “the economy in Ireland” grew by.

Ireland exits the EDP

Unsurprisingly the European Commission have concluded that Ireland’s “excessive deficit” per the reference values in the TFEU has been corrected.  The Commission decision is here.

The Commission have also published their country-specific recommendations on Ireland based on this staff report.

There is lots in the staff report but on the fiscal side in introducing their CSRs the Commission note:

[Following the abrogation of the excessive deficit procedure, Ireland is in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule.] In its 2016 stability programme, which is based on a no-policy-change assumption, the government plans gradual improvements of the headline balance until reaching a surplus of 0.4% of GDP in 2018. The revised medium-term budgetary objective  a structural deficit of 0.5% of GDP – is expected to be reached in 2018. However, the annual change in the recalculated11 structural balance of 0.1% of GDP in 2016 does not ensure sufficient progress towards the medium-term budgetary objective. According to the stability programme, the government debt-toGDP ratio is expected to fall to 88.2% in 2016 and to continue declining to 85.5% in 2017. The macroeconomic scenario underpinning these budgetary projections is plausible. However, the measures needed to support the planned deficit targets from 2017 onwards have not been sufficiently specified. Based on the Commission 2016 spring forecast, there is a risk of some deviation from the recommended fiscal adjustment in 2016, while Ireland is projected to be compliant in 2017 under unchanged policies. Ireland is forecast to comply with the transitional debt rule in 2016 and 2017. Based on its assessment of the stability programme and taking into account the Commission 2016 spring forecast, the Council is of the opinion that Ireland is expected to broadly comply with the provisions of the Stability and Growth Pact. Nevertheless, further measures will be needed to ensure compliance in 2016.

The Commission press release detailing all of the decisions taken and documents published today is here.