The Economic and Social Research Institute forecast during the week that GDP would rise by 8.9 per cent this year, not far off double its previous prediction.
The CSO recently estimated growth was running at 9 per cent in the first half of the year.
This begs the question: is this real growth, or are we still in the era of Leprechaun economics, where our national data bears little relation to people’s lives and what is happening in the real economy?
The economy overall is growing strongly but the data for Ireland are still completely messed up by the activities of the big multinationals nased here.
Here is why.
Ireland is a relatively small economy with a few really big multinational companies having their European bases here.
The CSO estimated in 2016 that ten companies accounted for not far off half of all production in the economy.
The IMF has estimated one quarter of Irish GDP growth last year was related to the production of Apple’s iPhone, even though the phones are not made in Ireland and only a tiny proportion are sold here.
Unlinking real economic activity from the effects of multinationals’ accounting is very tricky. Ireland’s economy is growing rapidly because of real growth and rising employment.
But the figures are being boosted by accounting decisions made far away on the west coast of the US, with little relevance to our “real” economy.
Davy stockbrokers economist Conall Mac Coille says the level of underlying economic growth here is probably in the 5 to 6 per cent range, which is still very strong, especially in an EU context.
He bases this on a rise of about 4 per cent in full -time working hours, with 1 to 2 per cent added on for productivity growth.
But in recent years our annual GDP growth went as high as 26 per cent in 2015 – the year of Paul Krugman’s ‘Leprechaun economics’ comment.
Forecasting GDP growth in an Irish context has thus become something of a guessing game and, more seriously, we lack reliable data on which to base our economic policy.
Let’s look at two key ways in which multinational activity affects the figures.
Both of these relate to the relocation by big multinationals of more of their assets to Ireland in recent years – and particularly their intellectual property (IP) assets.
These are the copyrights, patents, trademarks and so on, reflecting the work that went into designing and developing their key products.
Moving these assets so they are held by their Irish subsidiaries is largely bookkeeping transactions, but it has significant implications for our national economic data and for parts of our real economy, for example corporate tax payments.
It changes the statistical measurement of much of the activity of these companies.
For example, because Apple locates its IP for markets outside the US in Ireland, it seems some of the giant global trade in manufacturing iPhones is counted in our export data, even though all the phones and their components are made in the Far East.
1. Contract manufacturing: This is one of the biggies. It occurs when a foreign-owned company resident in Ireland issues a contract to a firm based elsewhere to manufacture goods on its behalf.
These goods never enter the Irish economy, but their sales are recorded as Irish “ exports.”
Total exports from the economy were a whopping 58 per cent greater than exports which actually crossed Irish borders in the 2015 to 2018 period.
When you factor this out, the vast bulk of the actual export growth in the last few years came from the pharma sector.
The bottom line here is that our trade performance is nowhere near as strong as the top line figure suggest and real export growth has been narrowly-enough based.
Some of the distortions from multinational activity affect the detail of our national economic data – for example pushing up investment, or influencing exports and imports– but because of pluses and minuses do not affect the overall GDP growth figure too significantly.
However, in the case of contract manufacturing, the impact feedds through to our overall GDP growth data.
But contract manufacturing has little impact on the “ real” economy and does not create or sustain jobs in Ireland. The only “real” impact is that it may contribute to more corporate profits being booked here and thus more corporate tax revenue to our exchequer.
2. Intellectual property assets: Intellectual property or IP is a key issue for major tech companies. Apple's future, for example, is dependent on its ability to design and develop new iPhones and market them to the public.
But IP is also at the heart of international – legal – tax planning. Big companies set up a subsidiary which holds their IP and then charge royalties to other subsidiaries which sells the product on world markets – a kind of fee for use of the IP.
This often accounts for a significant portion of the sales revenues. These means where the IP is located is vital, as much of the company revenue will end up in the company which holds the IP.
It goes to the heart of the controversial international debate on profit shifting and transfer pricing .
For many years IP assets were typically located in tax havens such as Bermuda or the Cayman Islands. The old US tax system allowed companies to build up big cash piles in theses subsidiaries and avoid tax, unless the cash was returned to the US.
Their Irish subsidiaries were typically used to route cash out fro European markets to these tax havens – in other words the royalty payments moved through Ireland.
New US tax rules are changing the picture and mean the cash piles will be taxed. And the public criticism companies face for using tax havens – and new OECD rules making it more difficult to do so – has also led companies to change the location of their IP assets.
Many have moved them out of tax havens and Ireland has been one of the recipients, with Irish subsidiaries holding the assets.
This has caused massive distortions in our national economic data. For example,at the end of 2014, Ireland’s stock of productive assets was measured at €500 billion. By the end of 2016 this figure shot up to €800 billion.
This related to the move of IP assets by Apple and a few big other players to Ireland. And so these assets get counted alongside all the machinery and equipment and physical infrastructure we normally think of as productive assets.
Dealing with the depreciation of these assets is now a major issue for Ireland in terms of economic statistics.
The Irish subsidiaries typically borrowed money to fund the acquisition of the IP, setting off a chain of impacts on investment, imports and our capital position.
The IP transfers were one of the reasons for the famous Leprechaun economics distortions - as was contract manufacturing. And it is still affecting the figures.
The ESRI points out in its latest forecasts that one of the reasons why it has increased its GDP growth forecast for 2018 is because there are less imports than expected. This is because Irish companies were previously sending cash abroad as payment for the use of IP – this counted as a services import . But now that the IP is located here, the flow has reversed.
This improves Ireland’s trade balance and pushes up measured GDP growth. Again the “real” impact on our economy is debatable, though it does seem to be one reason why corporate taxes are rising.
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The bottom line is Ireland’s economic data is subject to huge distortions. The CSO is following the rules in terms of counting the data ,as it must do under various international guidelines and agreements.
New guidelines introduced internationally in 2016 were designed to deal with these issues .
But the unusual combination of huge firms in a small economy and the IP relocations mean GDP still gives a misleading picture for Ireland.
The economy is growing very strongly – underlying growth of, say, 5 per cent would still be two and a half times to EU average.But the multinationals are adding an unwarranted froth to our data.
This is important for two reasons. First, it makes it hard to assess parts of the economy, for example our trade position of exports and imports.
Second, our economic data is vulnerable to any difficulties faced by the big players in the years ahead, or any changes they make in their tax arrangements. And while much of the impact of multinational money-shuffling is illusory, these factors have had an impact on our corporate taxes. The companies involved are also major players here employing thousands of people and generating massive real economic activity.
The CSO is developing a new indicator called Gross National Income * (GNI*) to try to factor out some of the statistical distortions.
Initial estimates of this have already been made, bring us a “ Honey I shrunk the economy” moment, with the overall size of GNI* 30 per cent lower than GDP.
It is also presenting other statistics to try to present the domestic economy. Yet national debate if still dominated by the GDP data we have used for years. Some argue a more fundamental set of new indicators are needed to sit alongside the existing data.
Whatever the approach taken, the first step is to treat Irish economic data with extreme caution. The economy is growing strongly, but there is no reality to figures showing we are growing at 9 per cent. Any argument to the contrary is Leprechaun economics.
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