The massive distortions to the national accounts which are caused by the multinational sector were thrown into sharp relief by the staggering figures published by the Central Statistics Office today, showing that GDP rose by 26.3% in real terms in 2015, with GNP growing by a supposed 18.7%.

These massive increases compare to preliminary estimates last March of 7.8% for GDP and 5.7% for GNP increases in 2015.

The CSO revised its estimates for all the expenditure side of the accounts, but it is the revisions to exports (now estimated to have grown by 34.4% in 2015, versus +13.8% previously), imports (now estimated to have grown by 21.7% y/y, versus +16.4% previously) and gross investment (now estimated to have grown by 32.7% versus +28.2%) that have had the greatest impact.

The inflation of the figures from the earlier estimates primarily reflects purely statistical reclassifications relating to the treatment of inversion deals involving US multinationals, purchases by aircraft leasing firms and companies relocating assets to Ireland.

Investec economist Philip O'Sullivan commented that “even the most seasoned observer of CSO releases will have been taken aback by the latest data”, as the new headline growth figures for Ireland bear scant relationship to developments on the ground.

In Association with

“Other data show that in 2015 total employment rose 2.6% (a tenth of the rate of growth in GDP), retail sales volumes were up 8.2% and tax receipts rose 10.5%. So while we believe that the Irish economy has been turning in strong growth, the latest CSO estimates overstate the underlying performance here.”

Exaggeration

The massive scale of the exaggeration of underlying trends is shown also by the CSO’s national accounts data for the first quarter of 2016, with GDP down by 2.1% in the quarter. This would yield an annual basis increase of just 2.3% for 2016, or a sudden slump in growth by over 90% from the 26.3% for 2015.

O'Sullivan added: “Continuing this theme, the latest balance of payments release serves as a vivid illustration of the distortions caused by the multinational sector. The preliminary estimate for the FY15 current account surplus released in March was €9.6 billion. Now the CSO estimates that it was nearly three times as large (a record €26.2  billion, or 10.2% of GDP as a €110 billion merchandise surplus offset a €84 billion invisibles deficit.

“For Q1 2016 the current account surplus is estimated at €9.0 billion (14.3% of quarterly GDP), while on a rolling four quarter basis the surplus (€30.6 billion) suggests that 2016 is on track to be another record-breaking year.”

Bewildering Distortion

Whatever about the bewildering degree of distortion, there is a definite upside for the state, as nominal GDP is the denominator for deficit and debt calculations. So the general government gross debt/GDP and general government deficit/GDP ratios for FY 2015 now move to 78.7% and -1.9% respectively, from the previous estimates of 93.8% and -2.3%, after a 19% upward revision to nominal GDP.

“Thanks to the statisticians’ pens, any diminution of the fiscal space available to the minister for finance post-Brexit has likely been reversed. For the record, Ireland’s new debt/GDP ratio is lower than that of Belgium, France and Austria – countries whose bond yields are lower than Ireland’s,” O'Sullivan added.

Meaningless

Austin Hughes, economist at KBC Bank, observed: "The scale of revisions means technical considerations such as Ireland’s potential growth rate, the associated output gap and, more importantly from a practical and political perspective, measures such as the structural budget balance and fiscal space are rendered virtually meaningless (even if there were always major problems with the mechanical nature of such calculations for an economy of the structure of Ireland).

"On one interpretation, much stronger economic growth implies a weaker 'structural' deficit in the public finances and a corresponding need to tighten fiscal policy. However, stronger trend growth in recent years also raises the possibility of a faster permitted increase in public spending. As a result, these numbers imply considerable uncertainty about how formal constraints on upcoming budgets should or might operate. A major re-think is required to formulate fiscal rules that are likely to lead to sustainable and healthy trends in Irish public finances."

Despite these concerns, finance minister Michael Noonan (pictured) purred: “I think the figures released by the CSO show that Ireland’s economy continues to grow. Peoples’ lives are improving with more at work than at any time since the onset of the downturn. We no longer need to impose swingeing cuts to public services rather we have room to invest in services and infrastructure. Ireland is now in a position where we borrow relatively small amounts at very low rates which ensure that investment is made in delivering more than the bare minimum of services to our citizens. These are all evidence of a country growing in real terms.”