The Central Bank’s June quarterly bulletin has downgraded Ireland’s growth prospects, mostly as a result of the negative impact of Brexit.

Frustrated by the grotesque distortions introduced into the national accounts by what it calls ‘onshoring’, the bank concludes that there is a need to develop a more meaningful, commonly agreed measure of the actual level of Irish economic activity that accurately mirrors developments within the economy, and states that the distortions have made it very difficult to distinguish real, underlying economic trends.

Underlying domestic demand, comprised of the sum of personal expenditure on goods and services, net government expenditure on goods and services and investment excluding in aircraft and intangible assets, grew by close to 5% in 2015, the bulletin says.

Together with employment growth of 2.5% and growth in compensation per employee of 2.7%, this points to growth in domestic activity broadly in the region of 5%.

In the light of the national accounts problem and Brexit, the bank has reduced its growth forecasts by 0.2 percentage points for 2016 and 0.6 points for 2017, so its projections are now 4.9% for this year and 3.6% for 2017.

In Association with

“Assessing the outlook for the economy is further complicated by the outcome of the Brexit referendum in the UK. The close relationship between the Irish and UK economies creates a particular exposure for the Irish economy from Brexit.

“Both in the short-term and in the longer-term, the economic impact of Brexit on Ireland is set to be negative and material. Quantifying the impact with much precision, however, is difficult. In the transition period to establishing new arrangements between the UK and the EU, there is the potential for a protracted period of heightened uncertainty and risk aversion.

“The nature and scale of the eventual macroeconomic impact of Brexit for the Irish economy will reflect the extent to which the exit arrangements bring about any change to the free movement of goods, services, capital and labour, currently facilitated through the operation of the EU Single Market.”

The quarterly bulletin goes on: “Taking account of these considerations, relative to a no-Brexit baseline, projected Irish GDP growth has been revised down by 0.2 and 0.6% in 2016 and 2017, respectively. On this basis, and subject to the caveats expressed earlier about conventional National Accounts measures, GDP is projected to grow by 4.9% this year and by 3.6% in 2017. Supported by continued solid gains in employment, underlying domestic demand is projected to grow by close to 4% this year, slowing to 3% in 2017. This slowdown reflects a projected negative impact from Brexit-related factors.”

The Central Bank concludes that, once other risks are factored in “and given the potential for Brexit to have a negative and material impact”, policies should remain focussed on underpinning stability and reducing uncertainty.

Leprechaun Economics Explained

The recent upgrading of nominal GDP growth in 2015 to 26% excited some comment from the bulletin’s authors, and given the astonishingly grotesque effect of transfer pricing and accounting practices by multinationals, it’s worth quoting the bank on this.

“Assessing both the performance and prospects for the Irish economy has been made more problematic, respectively, by the scale of revisions to the 2015 National Accounts data and the outcome of the UK referendum on membership of the European Union. In terms of economic performance, while compiled on the basis of international standards, the 2015 National Income and Expenditure accounts are not reflective of actual economic activity taking place in Ireland.

“Instead, these developments reflect the statistical ‘on-shoring’ of economic activity associated with a level shift in the size of the Irish capital stock arising from corporate restructuring and balancing sheet reclassification in the multinational sector and also growth in aircraft leasing activity. As a result, national accounts data now include a very significant amount of activity carried out elsewhere, but formally recorded as part of Irish GDP and GNP.

“In addition to distorting the reality of what is happening in the economy, metrics derived from these measures, such as the various fiscal ratios-to-GDP, measures of potential output, the output gap, the structural deficit and the expenditure benchmark, have become much less meaningful.

“In terms of one of the most commonly used gauges of the fiscal stance, the general government deficit-to-GDP ratio, the volatility of GDP now argues for focusing in the near-term on the actual deficit in nominal terms rather than relying solely on the ratio itself or a structural deficit target, while working to develop a meaningful cyclically-adjusted measure of fiscal sustainability appropriate to Ireland’s circumstances.

“In the absence of the latter, the government’s stated goal of achieving structural balance by 2018 should be interpreted as a goal of achieving actual budget balance by 2018.

“National accounts developments also highlight the potential fragility of some rapidly growing sources of recent Exchequer revenues, such as corporation tax receipts, which grew by almost 50% in year-on-year terms in 2015. Past experience highlights the danger of relying on volatile and potentially transitory revenue sources, which can quickly melt away, to fund increased levels of public spending or reductions in tax rates, which can prove hard to reverse.”