Multinationals obscure Ireland’s economy

Posted on August 14, 2016

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From his light-filled fourth-floor office, Eamonn O’Reilly has a better view than most of what is happening in the Irish economy.

    On a single morning this week, the chief executive of Dublin Port could see a yard full of wind turbine components awaiting transportation, dozens of container trucks rolling off ferries from the UK and an oil tanker leaving its berth. Every day a train leaves for County Mayo in the west, hauling ingredients for a plant manufacturing Coca-Cola products.

    “It’s all the stuff we need,” he says. “All the stuff for the domestic economy is what moves through here.”

    Mr O’Reilly’s observation sheds light on the state of Ireland’s real economy — giving a far more accurate picture than the controversial set of growth data that recently sparked a raging debate at home and overseas.

    Last month, the official Central Statistics Office reported that Ireland’s gross domestic product expanded by 26.3 per cent in 2015. In nominal terms, the republic’s economic activity ballooned by €63bn, or 32 per cent, to just over €250bn — the highest it has ever been. Net exports more than doubled and Ireland’s capital stock — the value of the assets that make up its economy — grew by €300bn, or 40 per cent.

    As Donal O’Mahony, global strategist at Davy Stockbrokers, wrote last week, such a growth rate would be “the fastest ever recorded in the OECD area” and, he estimated, would add 0.4 per cent to eurozone GDP. Moreover, it cut the Irish debt-to-GDP ratio to less than 79 per cent, from 105 per cent in 2014.

    But this sudden increase in Ireland’s “wealth” was greeted with scepticism abroad and cynicism at home. The reaction was justified, economists say. This is not because the number is inaccurate — the CSO was following European statistical rules in calculating it — but because it is misleading in an economy like Ireland’s, which is dominated by a disproportionate number of big multinationals.

    Stephen Kinsella, who teaches economics at the University of Limerick, compares the task of measuring GDP to that of Carl Linnaeus, the 18th-century Swedish botanist. “He walked around counting stuff and classifying it, and the European system of national accounts is basically that,” he says.

    This works well for easily measurable activity such as household consumption. The problem, in the Irish case, is how to measure three other factors that economists and analysts conclude led to distortion in the official 2015 data.

    The three factors are the tax-driven corporate activities of US technology and pharmaceutical companies based in Ireland; the global aircraft leasing sector, much of which is based in Dublin but which employs relatively few people; and “contract manufacturing”, in which goods are made offshore and never touch Ireland but are registered as Irish manufacturing activity for accounting purposes. These activities rarely involve much on-the-ground economic activity in Ireland but are included in GDP since the companies are nominally Irish.

    Irish policymakers have such international activities in mind when they refer to Ireland as “a small, open economy”. However, Mr Kinsella notes that GDP as a measure of economic activity was designed for very large economies such as the UK — which can better absorb “outliers” in data — but “when it is applied faithfully to an economy like Ireland it throws up some nonsense results”.

    The Irish economy is, in fact, growing. Measured by underlying domestic demand, it expanded by 6 per cent last year, according to the National Treasury Management Agency, which manages Irish sovereign debt. More new cars were bought in Ireland in the first seven months of this year than in all of 2015, employment has grown strongly in recent years as foreign direct investment continues and corporate tax payments last year exceeded official expectations by €2.3bn.

    Yet those positive signs are not generating a feelgood factor among the public, which remains sceptical about the depth of the recovery. Economists are also increasingly wondering whether the turnround is sustainable.

    The distorted GDP figure, with its implication that nobody quite knows what is going on, is one of three developments casting a shadow over the Irish economy. The others are the UK’s vote to leave the EU and last month’s European bank stress tests, in which Irish banks fared unexpectedly badly. “All of those developments are very unhelpful,” says Conall MacCoille, chief economist at Davys.

    Mr O’Reilly sees the economy through a clearer lens. He dates the turnround in Ireland’s economic fortunes after the 2008 financial crash to April 2013, when business through Dublin Port began to rise again. Volumes have risen by 17 per cent over the past three years and by 8 per cent in the first half of this year.

    Activity in the port is a far cry from contract manufacturing and aircraft leasing, with traffic dominated by basic commodities such as petroleum and animal feeds. Mr O’Reilly estimates that every 1.4 per cent rise in port volumes translates into a 1 per cent rise in Irish GDP.

    “We’re growing at 8 per cent,” Mr O’Reilly says. “So the real economy is probably growing at about 6 per cent.”

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