Some thoughts on the QNA release

With all that was going on in Brussels, the fourth-quarter QNA release got less attention than might have been expected.  As usual, the numbers don’t all point in one direction.  And also as usual, the quarterly numbers must be treated with caution given their volatility and propensity for revision. 

The annual declines in real GDP (1 percent) and real GNP (2.1 percent) received the most coverage.   But the annual numbers can give a misleading picture when the economy is at a turning point.   A better measure is the percentage change over the same quarter of the previous year.   I linked to these graphs on the thread following the release.   The noticeable turnaround in real GNP is encouraging (up 2.7 percent on quarter four of 2009); less encouraging is the 0.6 percent decline in real GDP, with the overall performance dragged down by a poor final quarter.    

The final graph in the set shows again the “two economies” reality of recent Irish growth performance.   The only thing that I would add is that the underlying potential growth of the economy is a critical factor for our capacity to pull out of the debt crisis without default.   Recognising the likely impact of the austerity measures on domestic demand, I think the picture is consistent with the (ESRI) view of solid underlying export-driven growth potential.

The main bad news in the release relates to the performance of nominal GDP.    The Budget 2011 forecast for nominal GDP in 2010 was €157.3 billion.   The actual nominal GDP turned out to be €153.9 billion – a 2.1 percent shortfall over the budget day forecast.   Readers might recall that the €157.3 billion was itself the result of an earlier downward revision (see Philip Lane’s explanation here).  

If that nominal shortfall carried over to 2014, the deficit would have to be reduced by an additional €94.1 million to meet the 2.8 percent of GDP deficit target for that year.   This back-of-the-envelope calculation ignores the impact of any additional deficit reduction on GDP.   Of course, there are even more severe implications if we are required to hit the higher intermediate targets along the way (for these targets see Table 6, p. D19 here; see p. D9 for the Budget 2011 nominal GDP projections).   For example, an extra €316 million would have to be taken off the deficit to meet the 9.4 percent deficit target for 2011.  It should be noted, however, that the poor performance for nominal GDP mainly reflects an eyebrow-raising quarter-on-quarter drop in the final quarter (down 6.6 percent, seasonally adjusted), and could be even more than usually subject to revision. 

Why bother investing in Ireland?

I have been disappointed but not surprised by the lack of comment on Edgar Morgenroth’s  blog about the threat to introduce a low rate of corporation tax in Northern Ireland.

We are all well used to IDA shibboleths about the Republic of Ireland’s advantages other than the low Corporate Tax rate.  We are told about the modern infrastructure, the well educated labour force (sic), EU membership and the fact that the Republic of Ireland is English- speaking.  Northern Ireland has all of these as well as a dramatically lower cost base: we’ve even stopped killing each other in large numbers. 

The UK already has generous R&D incentives and intellectual property incentives are already trumped by other European countries such as the Netherlands. The Republic’s only remaining advantages may be its sovereign ability to skate close to the wind of tax haven status: relaxed rules on transfer pricing, absence of controlled foreign company laws, limited rules on thin capitalisation and its skill at negotiating double tax treaties.

Is that all the Republic has?  Surely, I’ve missed something!

Upcoming Investment Opportunity

I had missed this yesterday but it’s worth flagging for our readers in search of an investment bargain.

PENSION funds will be able to buy 30-year bonds at an interest rate of around 5pc, in a move that could ease funding difficulties for schemes. To be known as sovereign annuities, the new bonds may also lessen the liabilities in pension funds … Buying the likes of “safe” German 10-year bonds yields only 3pc, which does little to ease the funding difficulties in pensions … Director of funding at the National Treasury Management Agency Oliver Whelan told a conference yesterday there will also be an inflation-linked version of these bonds … Mr Whelan insisted that there was no default risk for pension funds buying Irish sovereign bonds, despite repeated questions from a number of trustees about such a risk … Mr Whelan insisted that no western country had defaulted since West Germany in 1948.

In a related development, Irish pension funds are soon to be offered shares in a well-known New York bridge. Apparently, it’s a tremendous investment opportunity.

NI Corporation Tax

The UK Budget was published yesterday. One of the noteworthy changes announced as part of this is a reduction in corporation tax:

“a reduction in the main rate of corporation tax by a further one per cent. From April 2011, the rate will be reduced to 26 per cent with further yearly reductions of one per cent until 2014 when it will reach 23 per cent”.

In addition the UK Treasury has published a consultation document entitled Rebalancing the Northern Ireland Economy, which specifically considers the potential for, and costs and benefits of devolving the power to vary the corporate tax rate in Northern Ireland, potentially reducing the rate in Northern Ireland to the 12.5% that applies in the republic of Ireland.

In the context of the pressure from France and Germany for the Republic of Ireland to raise its corporation tax rate, both the reduction in corporation tax rates in the UK and the potential harmonisation of the corporation tax rate to 12.5% on the island of Ireland are an interesting development.

Latest GDP/BOP data

The GDP release is here.

The BOP release is here.