Ireland’s outsized economic growth skewed by multinationals - Financial Times

15/12/2017

Ireland’s outsized economic growth skewed by multinationals

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Arthur Beesley

Another set of stellar growth figures for Ireland highlights the acute volatility in Dublin’s economic data that results from the heavy presence of big global companies in the country.

Data released on Friday suggest Irish gross domestic product (GDP) accelerated at a rate of 10.5 per cent in the 12 months to September, far surpassing even the most ambitious projections and prompting economists to rewrite their forecasts for the year.

But Paschal Donohoe, finance minister, was quick to say a large part of the surge arose from Irish-resident multinationals increasing the amount of contract manufacturing they carry on outside Ireland. Under statistical rules such manufacturing is marked down as a boost to Ireland’s exports. This is then reflected in the country’s national accounts, even though the actual economic activity takes place elsewhere.

The minister’s 2018 budget was predicated on the achievement of 4.3 per cent GDP growth this year. “On the basis of today’s data, the outturn for this year is likely to be above … projections,” he said.

“Having said that, it must be acknowledged that a key factor behind the stronger-than-expected growth was exports associated with contract manufacturing which has little, if any, impact on domestic activity.”

Data from Ireland’s central statistics office show that GDP in volume terms rose 4.2 per cent in the third quarter of 2017 while gross national product rose 11.9 per cent.

With private consumption rising 2.7 per cent on an annual basis and building and construction investment up more than 7 per cent, Mr Donohoe said the domestic economy also made a strong positive contribution. “These figures are mirrored in strong employment growth as well as tax receipts to end-November which increased by 6 per cent over the same period last year,” he said.

But he warned of economic overheating, saying the domestic recovery presents its own challenges. “In particular, if the economy continues to grow in excess of its potential, capacity constraints will begin to emerge. In these circumstances, it is essential that budgetary policy does not contribute to overheating.”

Austin Hughes, chief economist at KBC Bank Ireland, said high growth rate suggested by the data was not related to the economic economic circumstances faced by most Irish businesses and households. “The scale of the multinational sector and the size of the swings in that sector’s activities tend to throw up numbers that aren’t representative of general conditions in the Irish economy,” Mr Hughes said.

“When you look at the underlying picture you’re looking at a growth rate that is region of 4 per cent probably for this year rather than the 6-7 per cent rate that these numbers imply. We’re seeing a solid improvement in household spending and domestic investment but we’re not back at the boom of 10 years ago which might be suggested by these numbers.”

Wide variations in Ireland’s GDP data are nothing new. A 26 per cent annual increase in 2015 was attributed to internal restructuring by Irish-based multinationals, generating headlines around the world. This was dismissed as “leprechaun economics” by Paul Krugman, the Nobel-winning US economist.

The affair led policy-makers in Dublin to develop a new measure of economic activity to strip out the impact of globalisation on the Irish economy. Data on Ireland’s “modified gross national income” is published annually alongside traditional quarterly data. By this measure, Ireland’s economy is about one-third smaller than its GDP figures suggest.