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Ireland's political and cultural magazine
28 April 2015
I
N recent weeks publication of three related sets
of data have confirmed the extraordinary
nature of the ongoing changes in the economy
and the broader social fabric of modern
Ireland. Taken together, the latest Quarterly
National Accounts, retail-sales and consumer-prices
data; and the 2015 Edelman Trust Barometer paint a
picture of a wide and growing disconnection between
the real economy in Ireland and the official exports-
led recovery propelled primarily by the
tax-optimising multinational enterprises.
The same data also unmask the image of the torn
social fabric within a polarised society.
National accounts: different Irelands
Fourth-quarter (Q4) 2014 national accounts set off
statistical fireworks and brought back memories of
vintage champagne and the Fianna Fáil tent of yore.
In 2014, the Irish economy officially clocked a
massive 4.78 percent growth in real (inflation-
adjusted) GDP, and 5.18 percent growth in GNP.
Our Final Domestic Demand (the sum of Personal
Expenditure, Net Current Expenditure by the
Government and Gross Domestic Fixed Capital
Formation) rose for the first time since 2007 – up
2.94 percent or €3.947bn in real terms, year-on-
year. The domestic economy, having shrunk for six
GNP (and GDP)
growth figures
need to be
reduced to
allow for vulture
property funds
and contract
pricing; and to
reflect the weird
lack of growth on
the streets
Constantin Gurdgiev
OPINION
INTERLOPER
1% not 5% growth
in 2014
the Phoenix
is not aloft
April 2015 29
years in a row seemed to have turned around in 2014.
The problem with the narrative of the resurgent
Ireland is in the fine print of the numbers.
The good news from 2014 was that our personal
expenditure did rise 1.14 percent, breaking three
years of uninterrupted contraction. In 2014, Irish
households raised their consumption by €936m to
€82.733bn, matching 2006 levels of expenditure
although still below 2011 levels and some €5.7bn
short of the 2008 peak.
Government current spending also rose in real
terms, by €36m (or 0.14 percent) marking the second
consecutive year of increases.
But the bulk of our domestic growth came from the
investment side of the National Accounts. In 2014,
our Gross Domestic Fixed Capital Formation rose
11.3 percent year-on-year, adding €2.98bn to the
GDP and GNP aggregates and to Final Domestic
Demand. The trouble is, based on commercial-real-
estate transactions data for 2014, over €2bn of this
increase came from the foreign investments in
distressed Irish property, including NAMA sales.
This ‘investment’ added no value to the economy, as
vulture funds and distressed-asset investors tend to
do no real work on the assets they buy, holding them
to flip them back into the market as prices inflate.
Controlling for this ‘small statistical wrinkle’ puts
Irish Domestic Demand growth at around 1.22
percent year-on-year. Not far off the EU average
economic expansion recorded in 2014 and not much
to be jubilant about.
So the National Accounts data reveal two Irelands:
one of the booming vulture funds and some domestic
investment vehicles, and another of relatively less
dynamic domestic consumers and suppliers.
The Third Ireland: Exports
Beyond domestic economic distortions, 2014
marked a very substantial dichotomy in our net
exports accounts.
We record two trade statistics for goods in services:
one via the National Accounts, and another via
customs records. On average, over the 1998-2013
period, the two accounts differed for net exports/
imports of goods by roughly €158m annually, with
National Accounts marginally understating customs
data. Over the years, this error ranged between an
overstatement of €2.89bn (in 2007, on foot of
booming imports of goods, in part driven by Celtic
Tiger peak consumption) and an understatement of
€4.39bn (in 2001, on foot of dramatic changes in the
exporting economy driven by a shift from
manufacturing to pharma-driven growth). In 2014,
Chart 2: Irish exports of goods and services (1millions)
Chart 1: National Accounts Data: GDP v Domestic Demand
(1millions at constant prices)
Source: Author’s own calculation based on data from CSO
190,000
180,000
170,000
160,000
150,000
140,000
130,000
120,000
110,000
100,000
90,000
80,000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-15.8%
on peak
-2.2%
on peak
GDP at constant prices
2014
Final Domestic Demand at constant prices
Source: Author’s own calculation based on data from CSO
210,000
190,000
170,000
150,000
130,000
110,000
90,000
70,000
50,000
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
National Accounts Data
Customs Data
30 April 2015
National Accounts-based net exports/imports of
goods exceeded customs-recorded net exports by an
unprecedented €10.28bn.
Factor payments abroad, representing returns
earned by Multinational Companies on their
activities booked in Ireland actually shrank in 2014
compared to 2013. The trade balance in services,
containing the royalty payments to MNCs outside of
Ireland that in part relate to trade in goods by the
same MNCs here, has deteriorated by €6bn. Because
of the aforementioned discrepancy we are left with at
least €4.27bn of unexplained ‘net export’ increases.
This discrepancy counts in our GDP and GNP
figures. The IMF, the CSO and the ESRI attribute this
effect to ‘Contract Manufacturing’ schemes - a new
tax optimisation fad that hit the Irish economy in
2014. Under this scheme, a multinational enterprise
uses contractual arrangements with an Irish-
domiciled company to manufacture goods (under the
MNC licence) outside the country, but to bill value
added from this manufacturing in Ireland. Goods,
effectively made elsewhere, become ‘Irish-produced’
for accounting purposes, boosting the National
Accounts statistics. But most of these goods do not
even cross our border. So they go unregistered in the
official trade statistics.
Net effect: hold that champagne
Put together the two factors driving growth
mentioned above (distressed ‘value-added’ property
investments and MNCs ‘Contract Manufacturing’),
and take them out of the 2014 GDP and GNP
aggregates. Adjusting for inflation, outflows of factor
payments abroad and potential royalty payments on
licences, the result is to shrink our 2014 economic
growth from 4.78 percent to close to 1.26 percent for
GDP and from 5.18 percent to 1 percent for GNP.
Of course, the adjusted figures are rough estimates,
but they do more accurately reflect the domestic
demand growth (controlling for property
investments). Allowing for both discrepancies results
in GDP and GNP growth that is within 25 basis points
of domestic demand growth. In contrast, official
statistics show the discrepancy in growth rates
between GDP and GNP and domestic demand of up to
224 basis points.
Not much growth on the streets yet
Let’s look at data from the ground: retail sales,
consumer confidence and consumer prices. In
December 2014, the Irish Harmonised Index of
Consumer Prices (HICP) fell 0.3 percent year on year.
This was followed by a decline of 0.4 percent in
January and February 2015. You might think that our
deflation is being driven by something exogenous,
such as, for example, the deflating cost of energy.
Indeed, the cost of transport services fell seven
percent year-on-year in February. According to the
CSO, in February, the most notable changes in prices
included decreases in “…Clothing & Footwear (-3.0
percent), Food & Non-Alcoholic Beverages (-2.9
percent) and Furnishings, Household Equipment &
Routine Household Maintenance (-2.7 percent)”. In
the last three months, energy-related costs fell 8
percent. However, Utilities and Local Charges rose
10.7 percent.
So, removing state-controlled sectors, prices
remained effectively unchanged over the 3 months up
We rank between second
and third worst in the
euro area in terms of
current income compared
to the pre-crisis
income peak
“
OPINION Constantin Gurdgiev
Careful: one hand not ve
April 2015 31
to February 2015.
In other words, prices are not exactly screaming
rising consumer demand.
And these data are fully corroborated by the retail
sales statistics, also available up to February 2015.
Over the last 12 months, the increase in volume for
core retail sales was 4.5 percent and in value terms it
was only 0.2 percent. Volume of retail sales increases
were the highest in those sub-categories of sales that
suffered the largest decreases in prices.
Meanwhile, consumer confidence indicator
compiled by the ESRI keeps trending above pre-crisis
averages, indicating strong willingness by
consumers to spend, even though that willingness
was much more subdued when it came to paying at
the stores.
In simple terms, Ireland’s consumer boom is not
driven by organic, real economic growth translating
into higher disposable incomes, but by falling or
static prices. After all the talk about increased wages,
average weekly earnings in Q4 2014 were up just 2.3
percent year-on-year. Even this rise is questionable,
as it reflects preliminary data – final data for the Q3
2014 average weekly earnings showed an annual
decline of 1 percent in contrast to the preliminary
estimate of a 0.8 percent drop.
Thus, deflation – the force that is, according to the
logic of the Central Bank and mainstream
economists, supposed to stall our demand for goods
and services – is in fact helping to sustain consumer
demand.
The glass is half…
The above numbers, as well as other statistics from
the economy, have led to a bizarre scenario.
As mentioned above, the Consumer Confidence
indicator is currently registering at almost double
the average level for the boom-time period,
ascending above the pre-crisis peak in both January
and February this year. Marketing gurus and the
media are proclaiming not only the end of the crisis,
but ‘historic’ heights of growth.
For example, analysts from Amárach have
declared that their “Economic Recovery Index has
reached its highest level ever in …the March 2015
report”. Never mind that the index only started
reporting data from April 2009. The fine print
relating to this headline says that at “… the end of Q1
2015 our Economic Recovery Index shows a modest
recovery in momentum after reaching a plateau in
Q4 2014”. In other words, the “highest ever” index
performance represents a ‘modest recovery’.
And the recovery is so modest, that only 17
percent of those surveyed agree that “the economic
situation is getting better and showing clear signs of
improvement” while 46% of respondents view this
economy as being consistent with either getting
worse or being bad but stable.
Meanwhile, the Edelman Trust Barometer 2015,
published in late February, puts Ireland second
lowest in the sample of 27 countries in terms of
overall public trust in social and political elites.
In 2014, our Index reading was 39th and in 2015
it fell to 37th, signalling not only that things are bad,
but they are getting worse.
Take a look at the evolution of various institutional
trust sub-indices over 2014-2015 in Ireland (Table
1) and you will get the picture: we rank at the bottom
of the overall trust distribution.
For a nation allegedly experiencing an economic
renaissance, these are dire indicators.
Some certainty
The truth is that, courtesy of the structure of our
economy – its high dependence on multinational
corporations and relatively inefficient domestic
sectors (both private and public) – we simply can get
no idea of what is really going on from the headline
growth figures. Meanwhile, data relating to domestic
activity show some tangible recovery that is hardly
worth the fables being written up about the Celtic
Tiger resurgence.
The key, however, is not that the real growth
remains relatively subdued, but that it is lack-lustre
in year eight after the onset of the crisis.
Even helped by the emigration over the last six
years, Irish real income per capita is still languishing
at levels so low that we rank between second and
third worst in the euro area in terms of current
income compared to the pre-crisis income peak.
And we rank at the top of the euro area in terms of
total debt carried by this economy – private and
public, combined – and in the rate at which this debt
increased over the course of the crisis.
Given the depth of our collapse, normal economic
theory and rational policy makers’ expectations
would be for a bounce in domestic demand, incomes
and real investment at least in low double digits.
That ‘normal’ is not happening so far, the fifth year
into the officially-declared recovery, and 15 months
into the reported ight of the Celtic Phoenix. •
Removing state-
controlled sectors,
prices remained
effectively unchanged
over the three months up
to February 2015
“
OPINION Constantin Gurdgiev
Trust Trust Trust Trust
in Media in Govt. in Business in NGOs
Table 1: Trust in core social and political institutions, 2014-2015
Ireland (% of respondents expressing trust)
2014 37 21 41 58
2015 34 26 38 48
Global (% of respondents expressing trust)
2014 53 45 59 66
2015 51 48 57 63
Ireland rank (out of 27: 1 = highest trust)
2014 24 24 25 23
2015 25 24 26 24
Ranking Poor and Poor and Poor and Poor and
Performance deteriorating unchanged deteriorating deteriorating
Source: Edelman Trust Barometer 2015
