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Irish Economy and Public Finances

Macroeconomic outlook

  • Ireland’s strong economic growth continues even after accounting for distortions to Ireland’s GDP data (see below for discussion on distortions). The CSO have released a metric called GNI* (an augmented Gross National Income) which excludes the impact of multinational companies’ distortions. On a nominal basis, GNI* amounted to €189bn in 2016 compared with €276bn for Gross Domestic Product (GDP). GNI* grew 9.4% in nominal terms in 2016. No constant price figures for GNI* are provided yet but will be released in time.
  • Until then, modified final domestic demand can give us a more-timely gauge of the economy in the quarters ahead. Modified final domestic demand grew in real terms by 4.6% y-o-y in 2016 and 5.9% in Q3 2017 (4-quarter on 4-quarter).
  • Employment is also a good barometer of the economy’s health. Employment has increased by 12.6% from its low in 2012. In the year to Q2 2017, 11 of 14 sectors saw employment growth. Unemployment was 6.1% of the labour force in November 2017 – a fall of nine percentage points from its peak. Encouragingly, all regions have seen a fall in their unemployment rate in the last year. Despite this strength, unemployment is still above its natural rate.
  • The picture is not uniform across the economy: certain sectors are operating closer to full capacity whereas others are weaker. As a result, wage inflation is back in some sectors. Employees are also beginning to work longer hours. An encouraging sign is the recent movement of people from part-time employment to full time employment – the latter is now growing at 5% y-o-y despite overall employment increasing by 2.4% over the same period.
  • Most high frequency indicators point to continued growth for Ireland. Ireland’s average composite PMI reading for January 2017 – November 2017 was 57.8, comfortably above the expansionary threshold (50). The November PMI reading for services was 56.0; the lowest reading in a year but still expanding. For manufacturing, readings suffered post-Brexit but the indicator has recovered since to an all-time high in December (59.1). The construction PMI remains well into expansionary territory. November’s reading of 56.7 is the 51th consecutive reading above the 50 mark.
  • Turning to the outlook for Ireland, the Department of Finance forecasts that real GDP will continue to grow in the coming years. In its Budget 2018 forecasts, the Department of Finance expect real GDP growth of 4.3% for 2017 and 3.5% for 2018. It is likely Brexit will act as a headwind to Irish growth prospects in the short term. Despite Brexit, consumption growth is expected to continue and underlying fixed investment is forecast to expand quickly in 2017/18 rates, following years of under-investment to pay for the excesses of the 2002-2007 bubble.
  • Consumer spending is improving as confidence is close to record highs. One example of this is the strong growth in core retail sales (3.7% annual increase in value terms in October 2017). Disposable income has expanded in aggregate, thanks to more people at work. Other positives exist: rising house prices have led to higher net worth, low inflation underpins real income, interest expenditure is nudging down and other non-wage income inducing dividends and rents are rising.

Balance of payments and public finances

  • The current account of the Balance of International Payments recorded a surplus of 8.5% of GDP in Q3 2017 (four-quarter average). Much of the dramatic improvement comes from activities of redomiciled companies and imports of intellectual property however. A clear understanding of the current account is difficult in the face of these distortions. The CSO has released a modified current account measure which aims to be consistent with its GNI* calculation. Under this metric the current account was 7.1% of GNI* for 2016.
  • The end-2017 general government balance is forecasted at -0.3% of GDP (-0.5% of GNI*). Again, given the inflated GDP data, caution is warranted in using the usual deficit metrics. Excluding the distortions, Ireland’s fiscal picture is improving. Ireland is in primary surplus. Revenue data for 2017 was in line with expectations while government spending was restrained in the main.
  • Since 2016, Ireland has been in the preventive arm of the EU’s stability and growth pact. Ireland is now charged with bringing its structural balance (general government balance excluding cyclical factors and one-offs) to below -0.5% of potential output by 2019. The latest forecasts by the Department of Finance meet this target in 2018.
  • Gross Government debt peaked as a percentage of GDP in 2013 at 119.5%.  Following rapid GDP growth and the distortions mentioned above the debt ratio fell to c.70% at end-2017. The ratio is set to fall to 69% by end-2018.
  • The inflated GDP denominator means other metrics of debt serviceability are required. Debt-to-GG Revenue (269%, forecasts for 2017), interest as a percentage of revenue (7.8%) and the average interest rate on Ireland’s debt (2.9%) are more apt measures for comparison with other sovereigns regarding Ireland’s debt serviceability.
  • Debt-to-GNI* (106% for 2016) is also a useful metric for evaluating Ireland’s debt sustainability even if it understates the ability of Ireland to repay debt. GNI* excludes certain activities that the Irish State could possibly tax and hence excludes some part of its ability to repay. This means that the Debt-to-GNI* ratio is likely too high. With debt-to-GDP too low, it is fair to say the reality of Ireland’s “proper” debt ratio is somewhere in the middle.

National Account Distortions

  • From 2015 onwards, Ireland’s national accounts are distorted by the reclassification of multinational companies or their assets as being resident in Ireland. Given the presence of such large distortions, GDP and GNP have little information content in regards to Ireland’s economic activity
  • The reclassification of multinational companies’ activity as Ireland expanded the capital stock in 2015 by c. €300bn or c. 40%. In some cases, whole companies re-domiciled in Ireland while in others multinationals moved assets (mostly intangibles) to their Irish-based subsidiary. The goods produced by the additional capital were mainly exported. This resulted in a step change in net exports Q1 2015. Net exports grew by 102.4% in 2015. Complicating matters, the goods were produced through “contract manufacturing”. The result of contract manufacturing is a goods export is recorded in the Irish Balance of Payments even though it was never produced in Ireland. There is little or no employment effect in Ireland from this contract manufacturing.
  • Contract manufacturing (CM) has occurred in Ireland in the past but did not have a significant net impact on GDP since the company engaged in CM would send royalties back to its parent as a royalty import. However now that the parent/intangible asset is here, there is no royalty import and Ireland’s GDP is artificially inflated. This scale of contract manufacturing (c. €70bn) is unprecedented.
  • Further to these distortions, the import of intellectual property by firms in Ireland gives a misleading picture on the drivers within Irish growth. When a firm moves IP into Ireland it is recorded as an import and also as investment. These two net out so overall GDP is not affected however the net exports and investment figures are distorted. Adjusting for this provides a better picture of the drivers of Ireland growth.
  • In response to the distortions, the CSO convened the Economic Statistics Review Group (ESRG) to identify indicators that would provide a better understanding of Ireland’s highly globalised economy. In February, the ESRG released its recommendations. The CSO has agreed to implement these recommendations.
  • Among the main proposals were the publication of two new supplementary indicators, one closely related to Gross National Income (known as GNI*) and another is a modified version of domestic demand.
  • For GNI*, Gross National Income is stripped of the profits of redomiciled companies, depreciation on R&D/ IP assets and depreciation on aircraft leasing. On a nominal basis, GNI* amounted to €189bn in 2016 compared with €276bn for Gross Domestic Product (GDP). GNI* grew 9.4% in nominal terms in 2016. No constant price figures for GNI* are provided yet but will be released in time.
National Account – Current Prices
(€ Billions, y-o-y growth rates)
2015 2016
Gross Domestic Product (GDP) 262bn (34.7%) 275.6bn (5.2%)
minus Net Factor Income from rest of the world
= Gross National Product (GNP) 206bn (25.0%) 226.7bn (10.1%)
add EU subsidies minus EU taxes 1.2bn 1.0bn
= Gross National Income (GNI) 207.2bn (24.9%) 227.7bn (9.9%)
minus retained earnings of re-domiciled firms -4.6bn -5.8bn
minus depreciation on foreign owned IP assets -25.0bn -27.8bn
minus depreciation on aircraft leasing -4.6bn -5.0bn
= GNI* 172.9bn (11.9%) 189.2bn (9.4%)
  • Until then, modified final domestic demand can give us a more-timely gauge of the economy in the quarters ahead. Modified final domestic demand grew by 4.6% y-o-y in 2016 and 5.6% in Q2 2017 in real terms. This measure is domestically focussed and is constructed to be largely unaffected by the activities of multinational companies. The measure includes private consumption, government consumption and elements of investment.

January 2018