National Income: 1 – From Turnover to Production Value

In aggregate terms, Ireland’s national income in 2021 was around €230 billion (using modified Gross National Income, GNI*). This comes from an economy where the aggregate turnover is probably around €1 trillion. There is a lot of money flowing around but as is often quoted but rarely attributed: “turnover is vanity, profit is sanity and cash is reality.”

The table shows a progression from turnover to production value. All bar the top two rows are in line with the latest estimates for 2021 from the CSO. Aggregate figures for turnover and for the cost of goods and services purchased for resale in same condition as received are not provided by the CSO within Ireland’s national accounts but the figures shown are within the ballpark. Turnover is not significant within the national accounts framework where the emphasis is on production, value added and income. The sequence shown isn’t how the national accounts are compiled but can serve as a setting off for examining where our income comes from.

Goods and Services Purchases for Resale in Same Condition as Received

Of the roughly €1 trillion of turnover in the Irish economy in 2021, around €300 billion was due to the selling, both wholesaling and retailing, of goods and services that somebody else made. Those doing the selling are looking to gain a small margin. The wholesale sector in Ireland (G46) has a turnover of around €150 billion, some of which is linked to MNC-activities, while the more domestically-orientated retail sector (G47) has a turnover of around €50 billion. Both have operating margins in the low single digits. It will also be the case that the same goods will be included in the turnover of both. The turnover of wholesalers includes sales to retailers and the turnover of retailers is based on the sale of those same goods to customers. Subtracting the cost of goods and services sold in the same condition as purchased leaves around €700 billion of turnover from goods and services that are made – market output. This is the value of output that is produced for sale at market prices.

Non-Market Output

There will also be output that does not get picked up in turnover. There are two main types of non-market output. There is output that is produced by someone for own final use and output that is produced for sale at prices that are not economically significant.

There are lots of activities that could be included in production for own final use and around €35 billion of such activity was included in the national accounts for 2021. One of the main elements is the housing services that owner-occupier households provide to themselves. Owner-occupiers do not buy the housing services that they consume, but instead own the asset that produces them. An imputed value is included in the national accounts for the housing services produced, and consumed, by owner-occupier households. These are based on market rents and around €18.5 billion of such imputed rents were included in non-market output in 2021. Household cooking and cleaning undertaken by workers who are paid is also included in output but any cooking and cleaning done by households themselves is not.

Firms can also produce output for their own final use but as firms do not undertake final consumption their output for own final use only includes capital assets, as capital formation is a final use. Firm may have in-house production of capital assets such as machinery, software, and research and development. They do not sell the capital assets produced but use them in their own production. The 2021 figure is not yet available but in 2020, businesses in Ireland in the industry sector (NACE C) produced around €15 billion of capital assets for their own final use.

There is also non-market output which is provided at prices that are not economically significant (which includes having no price at all). The most important component of this other non-market output is the provision of health, education, and other services by the government sector. There will also be some non-market output from non-profit institutions serving households. In total, the value of such non-market output was estimated to be €50 billion in 2021. As there is no market price this value is based on the costs of production, of which labour costs will be the most significant in many instances.  While consistent and measurable, the sum-of-costs approach does mean that such non-market output can potentially be undervalued relative to output included using market prices.

Changes in Stocks

As we want to get the production value within a particular time period (such as a year) an adjustment is made for changes in stocks. It could be that some of this year’s turnover is derived from the sale of goods made last year (i.e., a decline in stocks) or there could be output made this year that is not sold (i.e., an increase in stocks). In 2021, it is estimated that more output was produced during the year than was sold during the year which resulted in a positive figure for the change in stocks, of around €5 billion.

Production Value

Adding these four items: market output (€700 billion), output for own final use (€35 billion), other non-market output (€50 billion), and changes in stocks (+€5 billion) gets us to the total value of goods and services produced in the economy and included in the national accounts. Thus, the value of production in the Irish economy was estimated to be €790 billion in 2021. In a future post, we will pick up the sequence and follow how this production value is transposed into GDP and subsequently to National Income.

2021 Economic Letters from the Central Bank

Volume 2021 of the Central Bank’s Economic Letters series has seen a set of interesting contributions across a range of topics so far this year. The Economic Letters published to date are:

The effects of the 1ST COVID 19 lockdown and re-opening on sales in Irish customer-facing businesses.

Guest post by Eoin O’Leary, Emeritus Professor of Economics, Cork University Business School, UCC.

Introduction

There has been vast media coverage on the effects of the COVID 19 pandemic on the Irish economy, most of which has been speculative as the struggles of workers, businesses and government has been ongoing. Yet the recent publication of the monthly Retail Sales Index (https://www.cso.ie/en/statistics/services/retailsalesindex/) and the Monthly Services Index (https://www.cso.ie/en/statistics/services/monthlyservicesindex/) for October provides a fascinating insight into how sales in customer-facing businesses in 21 retail and market services sectors have been affected by the pandemic since the beginning of 2020.

These sectors, which employed 1.1 million workers in the Republic of Ireland in 2019, have been directly affected by the sudden onset of the first lockdown of many shops and services enterprises in March, followed by graduated re-openings with social distancing measures and increasing reliance on remote access for customers.

The period January to October 2020 is ideal for investigating the 1st wave of the pandemic, as it covers the first lockdown in March and the subsequent re-opening during the summer before the 2nd lockdown on 19th October 2020. The sectors being investigated are major contributors to the Irish economy. Together they employed over 1.1 million workers in 2019, which represents 49% of total employment in the state.

The first key date in the timing of the response to the pandemic was the government-imposed lockdown starting on 27th March. Apart from retail enterprises involved in food, fuel and pharmacy (ie Food, Beverages and Tobacco in Supermarkets; Food, Beverages & Tobacco in Specialized Stores; Fuel and Pharmaceuticals, Medical & Cosmetic Articles) which remained open throughout 2020, all other retail sectors closed from this date with some providing remote access for customers. This was followed by a graduated re-opening (with social distancing measures continued) from June to mid-October. There was variation, with for example Bars (not selling food) being closed until September 21st, while mainstream non-food retailing (ie the remaining 8 retail sectors) re-opened from June 8th.

In market services, food and accommodation services (ie Accommodation and Food Services Activities) were closed from 27th March and re-opened on June 28th. There were differences within the remaining sectors. For Wholesale Trade those businesses involved in food, fuel and pharmaceutical distribution would not have been significantly affected during the 1st lockdown, while non-food retailers would have experienced a downturn. For Transport and Storage, passenger transport was severely curtailed while, anecdotally, there is evidence that courier services prospered. The other 4 sectors (ie Information and Communication; Professional Scientific and Technical Activities; Administrative and Support Services Activities and Other Business Services) were influenced by having to serve customers almost exclusively via remote access.

The Data and Method

Table 1 shows detailed descriptions of the sectors covered and their 2019 employment levels. For the Retail Sales Index, sales from a sample of 1,700 enterprises of varying sizes are collected each month across 13 sectors and indices generated. In addition to sales, in relevant sectors, data are collected on the % of sales from online sales of enterprises with a presence in Ireland. This source provides very detailed and comprehensive coverage of businesses of all sizes in retailing, accounting for 253 thousand persons engaged in 2019 (22% of the 1.1 million covered in the paper). One exclusion is that the index does not cover the retail trade of food and non-food via stalls and markets.

For the Monthly Services Index, sales from a sample of 2,250 enterprises with more than €20 million sales and more than 100 persons engaged is collected.  In addition to the index only covering these larger enterprises, the 8 sectors are more broadly defined than retail (see Table 1).  These sectors covered 876 thousand persons engaged or 78% of the total in 2019.  Notable exclusions from this series are financial and insurance activities; public administration; education; human health; creative arts, music and entertainment activities.  Together, both indices provide interesting insights into a substantial portion of the Irish economy that has been most affected by the pandemic.                      

In order to estimate the effect of the pandemic on each of these 21 sectors from January to October 2020, the actual monthly value index is compared to what the index would have been if no pandemic occurred.  The latter is estimated using a simple model which first estimates the trend of the value index for each sector, calculated over the previous 5 years, for the 9 months starting in February 2020.   This month is taken as the beginning of the pandemic because there is evidence, especially in food retailing, that customer behaviour shifted during that month when it became clear that a lockdown was imminent. 

The trend is computed using the average annual percentage change in the seasonally adjusted value index from January 2015 to January 2020 which is applied to the February to October 2020 indices.  It then adjusts the resultant series for each sector by monthly seasonal factors.  These are derived by dividing the seasonally adjusted index by the unadjusted value index for February 2015 to October 2019 and calculating the average seasonal factor for each of the 9 months over these 5 years (see https://www.cso.ie/en/statistics/services/).  The resultant seasonal factors are then applied to the estimated trend from February to October 2020. 

The effect of the pandemic is assumed to be the difference between the estimated trend with seasonal variation and the actual unadjusted value index for each of the 9 months being analysed.  It is assumed that the pandemic is the chief irregular component effecting the sales indices in these 21 sectors.  There can be little doubt that it was by far the most significant abnormality that prevailed during 2020.

The Findings

Overall, of the 21 sectors investigated, actual monthly sales are estimated to have been down in 16 sectors, with 5 either unchanged or doing better than they would have if there was no pandemic.

  • By far the most negatively affected were Accommodation Services, which relates to hotels and other kinds of accommodation, down a massive 72%, and Bars down 58%.
  • Other very large declines were in Transport and Storage (-37%); Books, Newspapers and Stationery (-32%); Clothing Footwear and Textiles (-30%); Fuel (-25%); Food Services, which includes restaurants and cafes (-24%) and Department Stores (-23%).
  • 7 sectors were down between 3 and 18%, namely: Furniture and Lighting (-18%); Motor Trades (-12%); Administrative and Support Services (-11%); Professional, Scientific and Technical Services (-10%); Wholesale Trade (-8%); Other Retail (-7%) and Electrical Goods (-3%).
  • 2 sectors were unaffected, namely Information and Communication and Pharmacies.
  • Notably, 3 sectors experienced higher sales than they would have experienced without the pandemic.  These were predictably Specialized Food Stores (+11%), and Supermarkets (+7%) and, perhaps less predictably, Hardware, Paints & Glass stores (+9%).

Figures 1–21 present detailed graphs of the actual value index for each sector from January to September 2020 and the estimated trend and seasonal variation, using the simple model described above.  The base is January 2020 = 100 to facilitate comparison between sectors. The average monthly difference in percentage terms between the estimated and the actual is presented under the heading of each graph, to signify the magnitude of the effect of the pandemic.  This magnitude is used to determine the order in which sectors are presented, beginning with those whose sales are down the most due to the pandemic and ending with 3 sectors whose sales improved in the pandemic.  The commentaries beside each Figure bring out the highlights with suggestions of possible explanations. Where available the trends in the % of sales from online sales are included in the commentaries for retail sectors.

Concluding Comments

These findings provide fascinating insights on the effect of the COVID 19 pandemic on the sales performance of Irish customer-facing businesses in 21 sectors during the 1st lockdown and subsequent re-opening in 2020.  Three points are worth making in conclusion: 

Contact email: eoin.oleary@ucc.ie.  The author would like to thank Eleanor Doyle and Owen O’Brien for discussions that inspired this work. 

Company births and insolvencies

A guest post by Niall McGeever (Central Bank of Ireland) on new company registrations and corporate insolvency in Ireland during the pandemic. [Disclaimer: This blog represents the author’s views and not those of the Central Bank of Ireland]

The severity of the COVID-19 shock and the modest liquid asset holdings of many Irish firms (Financial Stability Review 2020 I; McGeever et al., 2020) raises the question of how the pandemic is affecting business dynamism and failure rates. A marked reduction in new firm formation or a spike in insolvencies could lower the productive capacity of the economy and negatively affect output and employment.

Cecilia Sarchi, Maria Woods, and I look at recent trends in a new Economic Letter on Irish company births and insolvent liquidations during the COVID-19 shock.

There’s lots of economic research showing the importance of new firms for productivity and employment growth. Lawless (2013), for example, shows that young firms contribute disproportionately to employment growth in Ireland.

While a certain level of insolvency over time is inevitable and even desirable to ensure resource re-allocation to productive firms, the failure of otherwise viable firms due to the pandemic could reduce output and productivity growth. See Lambert et al. (2020) for more discussion on this point.

The chart below, Figure 2 from the Letter, shows the new company registration rate between January 2001 and September 2020. The rate averages around 9.5 per cent per annum and is broadly pro-cyclical.

The initial Covid-19 shock coincided with a sharp decline in new company registrations, with the rate falling to 5.3 per cent in April and 6.1 per cent in May. The Companies Registration Office tell us that over 90 per cent of applications to register a new company are made online, so the decline in April and May cannot be explained by procedural delay due to the pandemic. Instead, it likely reflects a temporary decline in both new enterprise formation and stalled investment decision-making by pre-existing corporate groups.

The largest declines during this period were, perhaps unsurprisingly, in Accommodation and Food and in Arts, Entertainment and Recreation. New registrations in these sectors were down 50 per cent on the same period in 2019.

Whilst the number of registrations in the first nine months of 2020 were down around 12 per cent on the same period of 2019, new company registrations rebounded quite strongly over the summer and had returned to roughly pre-pandemic levels by September. An emerging trend in the Wholesale and Retail trade category is the consistent increase in new registrations in “retail sales via mail order houses or via internet” and in “other retail sales not in stores, stalls or markets” between June and September relative to the same period in 2019. This trend is also reflected internationally. US Census Bureau data, for example, shows higher new business applications by non-store (e.g., internet sales) retailers during 2020.

We next look at insolvent liquidations. The next chart (Figure 4 in the Letter) shows the insolvent liquidation rate from January 2001 to September 2020. The rate generally tracks macroeconomic conditions very closely and it is worth noting that it rose notably rose with the unemployment rate in early 2008.

The immediate impact of Covid-19 shock was to sharply reduce insolvent liquidations. The annualised rate was exceptionally low at 0.07 per cent in April 2020 and only a touch higher at 0.10 per cent in May. This is due principally to the inability of company directors to safely convene creditors’ meetings. Prior to the pandemic, it was a requirement to hold a physical meeting with creditors to initiate a creditors’ voluntary liquidation. This became impractical during the acute phase of public health restrictions and so the main channel for insolvent liquidations was blocked. This procedural issue was quickly resolved and the Oireachtas passed a company law amendment to facilitate creditors’ meetings by electronic means.

The insolvent liquidation rate reverted to pre-pandemic levels in June and showed no signs of a marked increase up to September. At a sectoral level, Accommodation and Food and Wholesale and Retail Trade show signs of higher liquidations both during the pandemic and relative to 2019. These patterns are aligned with the negative labour market shocks in both sectors.. To a lesser extent, we also see the Arts and health sectors recording higher numbers.

Despite the clear evidence of financial distress facing many firms, there is no evidence yet of a marked increase in corporate insolvencies. The striking contrast between the insolvent liquidation rate and current labour market conditions is unusual and points to the significant role of government supports, loan payment breaks, and forbearance from other creditors in helping firms to stay cash-flow solvent.

Central Bank Quarterly Bulletin 4, 2020

A guest post by Enda Keenan from the Central Bank, highlighting some of the key messages from Bank’s latest Quarterly Bulletin.

Today the Bank published its fourth and final Quarterly Bulletin for 2020. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in July as well as our latest macroeconomic forecasts out to 2022.

The forecast for GDP growth has been revised upwards to -0.4 per cent in 2020 reflecting more positive developments in consumption, strong export performance and an enhanced level of fiscal support arising from the July stimulus package. Growth prospects for next year and 2022 are more subdued compared to the previous Bulletin due to the implications of a WTO Brexit. As outlined Box A, a disruptive transition to a WTO trading relationship would frontload associated output and employment losses. In this baseline scenario, the growth rate of the Irish economy is 2 percentage points lower in 2021 relative to a Free Trade Agreement due to the introduction of tariff and non-tariff barriers. The ILO unemployment rate is projected to average 5.3 per cent for this year, rising to 8 per cent in 2021 following the closure of income-support schemes at the end of the first quarter (Box D in the Bulletin discusses the challenges that arise for measuring unemployment in the time of COVID-19).

Since re-opening from a period of lockdown, the recovery of the Irish economy has been uneven as levels of domestically focussed economic activity remain well below pre-pandemic levels. In particular, consumer-facing services sectors, such as tourism, hospitality and retail services, which are also more labour-intensive, have been slower to recover contributing to a projected decline in underlying domestic demand of 7.1 per cent this year. The strong performance of exports, which are expected to decline by just 0.3 percent in 2020, is the main factor driving an upward revision in the baseline projection for GDP. Box C details the relative resilience of high-value exports such as computer services and pharmaceuticals during a period of declining trade-weighted world demand.

The Central Bank’s Business Cycle Indicator (BCI), a monthly summary indicator of overall economic conditions estimated from a larger dataset of high-frequency releases, fell sharply during the months of March and April reaching a historical low (Figure 1). The latest estimates show that economic conditions continued to improve into July and August, but the rate of recovery has slowed down. Despite the improvement over the four months to August, the overall level of the BCI remains substantially below that observed prior to the emergence of the COVID-19 crisis.

Figure 1: Business Cycle Indicator (BCI) for Ireland’s Economy

The outlook remains highly uncertain, depending not only on the economic consequences of COVID-19 and its containment, but also on the nature of the trading relationship between the EU and the UK. Recognising this uncertainty, Box E analyses the impact of a ‘severe’ COVID-19 scenario as an alternative to the baseline forecasts in which there is a strong resurgence of the pandemic, leading to the restoration of widespread and stringent containment measures for a more prolonged period. Underlying domestic demand is projected to fall by 8.5 per cent in 2020 in this case with a continued contraction of -1.3 per cent into 2021. While the economy does not begin to recover until 2022, underlying domestic demand remains 6 percentage points below 2019 levels. In the ‘severe’ scenario, the unemployment rate rises to 12.5 per cent in 2021 before moderating to 10.1 per cent the following year.

The bulletin also contains analysis on the latest income tax developments and measurement difficulties for the unemployment rate arising from COVID-19.