The Irish Economy

The new ESRI QEC is out – executive summary here.

John Fitzgerald has a note on the impact of re-domiciled firms on Irish national accounts data here. This relates to the phenomenon of international firms locating the headquarters office here for legal/tax reasons, even if all of its activities are elsewhere. A feature of balance of payments accounting is that the retained earnings of these firms are counted as part of Ireland’s gross national income (GNI) [GNI used to be termed GNP until it was accepted that income was a better term than product, since the concept does not relate to domestic production].

John’s article shows that these retained earnings have been very large in recent years, so that the level of GNI has been boosted (with a large impact on the current account). This is why it it is important to also keep an eye on the international investment position (IIP), since the liabilities to the foreign investors that own these redomiciled firms rise in line with retained earnings and this will be reflected in the IIP.

If the pool of retained earnings is depleted by the payment of dividends to the shareholders, then GNI will decline – so the initial boost to GNI is eventually reversed.

Also, some of these redomiciled firms are now shifting HQ back to the UK, which will also undo the effect.

So, the Irish national accounts now features two unusual elements:

(a) the large-scale operations of the affiliates of foreign multinationals mean that there is a large gap between GDP and GNI due to the high recorded profits of these firms. Moreover, the high import content of the exports of these firms means that there are analytical issues in understanding the dynamics of valued added in Ireland. To the extent that transfer pricing means that true imports are understated as a means to boost recorded profits, it also means that the trade surplus is overstated (but one-for-one net factor income is understated, so the current account is unchanged)

(b) the more recent feature is the impact of redomiciled firms which are counted as Irish firms, since the headquarters are here and even though these have virtually zero domestic activities and the ownership is entirely foreign. As shown in John’s note, this sharply alters the interpretation of the GNI data – but has no impact on the GDP data (which relates to domestic production). It also sharply alters the interpretation of the current account data, which is a key variable in the European Commission’s “macroeconomic imbalances” scorecard.

So – both GDP and GNI data need to be handled with care. In particular, the traditional short cut of interpreting GNI as a better measure of true domestic activity is not wise – it is an income measure, not an activity measure.

It is important to emphasise that these are interpretation issues rather than measurement issues (the CSO implements the globally-agreed rules).