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Ireland's political and cultural magazine
40 December-January 2014
D
ECEMBER data on the Irish economy paint
a picture of a major slowdown in growth
momentum and once more highlight the
troubling nature of our national accounts statistics.
With that in mind, and given the spectacular tremors
rocking the global economy outside the well-insulated
doors of our Department of Finance, the Irish economy
is set for an eventful 2015.
Let’s take stock of the prospects awaiting our small
haven for tax-optimising MNCs and regulations-
minimising foreign investors, in the New Year.
Domestic bliss
On the domestic front, three drivers of economic
recovery will be lighting some fireworks over the
next 12 months. Here they are, in order of their
importance.
The ongoing shift in MNC activities here from profit-
booking to cost-based transfer pricing, colloquially
known as ‘contract manufacturing’. In simple terms,
this means unprofitable low-margin activities are
outsourced by MNCs to their subdivisions and other
MNCs located abroad, and the resulting revenues are
booked, often into Ireland. Official GDP rises here, while
our domestic economy stands still.
In H1 2014 this game of accounting shells has
accounted for 2.5 percent of the 5.8 percent recorded
growth in Irish GDP. In other words, some 43 percent
of the growth ‘miracle’ that is Ireland Unchained was
bogus. We don’t have detailed analysis of the Q3 2014
data to determine the broader impact of ‘contract
manufacturing’ yet, but the National Accounts data
are not encouraging. The gap between the National
Accounts-reported exports of goods and the same
exports reported in our Trade Statistics is growing
once again. Over Q2 and Q3 2014, this stood at a
whopping €7bn more than what the historical average
would imply. That is, roughly, 7.65 percent of our entire
GDP over the same period. If we correct the National
Accounts data for this discrepancy, cumulative Q2-Q3
2014 GDP in Ireland would have posted a 0.4 percent
decline year-on-year, not the rise of 5.4 percent
recorded in the official statistics.
As the trend accelerates in 2015, the Irish economy
is likely to post greater paper gains and lower real
economic activity and the utility of our economic data
will diminish further.
The second driver of boosterism is also MNC-focused.
Budget 2015 introduced massive incentives for MNCs
to book intellectual property into Ireland. Instead of
the notorious ‘Double Irish’ we now have an even more
generous ‘Knowledge Development Box’. This reinforces
the already absurd change to the National Accounts
that re-labels R&D spending as R&D investment. The
combined effect of both factors is likely to be more
R&D ‘imports’ into Ireland. The latest data show that
overseas-originating patents filed in Ireland rose 22.4
percent year on year in Q3 2014. And that is before the
‘Knowledge Development Box’ opened its all-welcoming
lid. As 2015 rolls on, expect more GDP supports from
the new ‘investment’ products to hit the market here.
Just don’t count on new jobs and higher domestic
incomes to materialise out of this ‘smart economy’
any time soon.
The third force likely to propel Irish growth to new
highs is the ongoing squeeze on the construction sector
imposed by a combination
of the credit crunch, Nama’s
assets-disposal strategy and
the woefully poor regulatory
reforms that have cut down the
supply of development sites and
the funding for development,
and so have blocked up the
planning applications pipeline.
The result is rising rents
(GDP-additive) and prices (the
so-called ‘investment’ side of
the national accounts) amid the
very real deepening misery of
rising business costs and an
escalating cost of living. Added
up, the Irish property sector
‘ r e v i v a l ’ i s n o w y et a n o t h e r f o r c e
that simultaneously transfers
money from households and
firms into the pockets of rent-
seekers and the Government,
and galvanises the national
accounts with fools’ gold.
Foreign squeeze
The domestic bliss of the GDP growth described above
will be severely challenged in 2015 by the continued
deterioration in global economic conditions. Here we
have some serious flash points of risk, trailing back
from 2013-2014, and some circling new ones that are
likely to emerge in 2015 in their own right.
Back at the beginning of 2014, expectations for
a global growth recovery in 2015 were driven by
rosy forecasts for North America and the Emerging
Markets.
The Euro area was expected to post a rather sluggish,
but nonetheless above one percent, recovery in 2014
and rise to close to two percent annual growth in 2015.
Fast forward to today. Latest forecasts suggest near-
zero growth in 2014, followed by one percent growth in
2015. So Europe’s prospects are bleak. That’s roughly
Some 43 percent
of the growth
‘miracle’ that
is Ireland
Unchained was
bogus, caused by
accounting shells
Constantin Gurdgiev
OPINION
INTERLOPER
More.
Austerity. For 2015
Latest
forecasts for
the Euro area
suggest near-
zero growth in
2014, followed
by one percent
growth in
2015. So
Europe’s
prospects are
bleak
“
December-January 2014 41
42 December-January 2014
35 percent of our indigenous exports trade
in the bin. But at least low growth is likely
to delay the inevitable rise in interest rates,
giving our heavily indebted households
another stay on execution.
The US miracle of economic recovery is
heavily dependent on interest rates policy
not reverting back to elevated rates and, in
all likelihood, the US Fed might just oblige.
Should the Fed change its mind, all bets
are off: we might see a slowdown in the
US recovery and with it a fall-off in the US
demand for Irish exports, both indigenous
ones and MNCs’.
The UK is a great example of the fragility
also present in the US economy. Like the US,
the UK is heavily dependent on supportive
monetary policy. And, ahead of the US, its
economy is starting to hit serious bumps.
Latest data show continued declines in
house prices, while demand is stagnating
and inflation is slipping to long-term lows.
The last time we saw UK inflation at current
levels was in 2002 – amid the dot.com-
bubble-induced recession.
Taking both the U.S. and UK markets
together we see over 50 percent of demand
for Irish indigenous exports put under rising
risk.
Which leaves us with the rest of the world.
Here, the Emerging Markets are tanking,
fast. Brazil is in an outright recession.
Russia is slipping into one at the speed of a
rock falling through the foggy ravine. China
is on the brink of a major de-acceleration
in growth; and that is under rather rosy
predictions. India is enjoying some warm
afterglow following applied expansionary
monetary policies, but the question is for
how long. South Africa is moving sideways:
a quarter of contraction is followed by a
quarter of anaemic growth.
The Irish Government’s Budget 2015
projections were based on the following
assumptions:
• Irish GDP growth of 3.9 percent or 0.85
percentage points above the IMF forecast
from October, and 0.6 percentage points
below the November forecasts from the
OECD.
• Euro area growth of 1.1 percent – mirrored
by IMF and OECD forecasts, as well as that
of the EU Commission, but the risks are still
to the downside in all of these forecasts.
• US growth of 3.1 percent - virtually
identical to the IMF forecast and the
current consensus amongst t economists,
but some business surveys suggest growth
closer to 2.4-2.5 percent.
• UK growth of 2.8 percent - or 0.1
percentage points above the IMF forecast
from October and OECD forecast from
November. More recent forecasts published in early December
suggest the UK economy might expand by 2.4-2.6 percent in
2015.
Global winds are not favourable to Ireland, although we do have
some aces up our sleeve. They are: aggressive tax optimisation and
the fact that domestic demand can only rise - two drivers that might,
just might, return that 3.9 percent expansion in 2015.
Still, for now, the forecasts suggest that the Government really
did miss a major opportunity in Budget 2015. As the Irish Fiscal
Advisory Council estimates show, Irish growth at 3.5 percent in
2015 will mean the Government missing the illusive three percent
deficit target. As the above forecasts slip back over time, the 3.9
percent growth assumption is likely to be revised closer and closer
to that critical point at which the Government risks losing face
before the International Markets. And that won’t play too well in
ego-driven Government buildings.
Add to the above some other silly assumptions made in the Budget,
such as static current expenditure for 2015-2018 and zero policy
change, and you get the idea. Over recent months, the Government
has revised its spending plans for Irish Water by some €300m. And
over the next twelve months it will have to revise its agreements with
the Trade Unions on public-sector costs moderation. Then there
is the political cycle that simply commands that the Government
despatch a torrent of budgetary giveaways over electoral itching, to
flush the FG/Labour coalition into the recycling bin of history.
All told, the real economy is likely to continue underperforming
into 2015, just as it did in 2014. In the first three quarters of
this year total domestic demand (the sum of private and public
consumption and investment, plus changes in the stocks of goods
and services in the economy) was up just 2.18 percent year on year
in real terms. Over the last three years, coincident with the term of
the current Government and its policies, total domestic economic
activity has expanded by a miserly 0.29 percent in real terms. That
is less than half the rate of growth in GDP over the same period.
And the latest quarter has been even less impressive, with domestic
demand falling 0.3 percent year on year, the same as in Q3 2013.
So tighten those belts for one more year of pain: the slimming
down of the Irish economy is not over yet. Happy Christmas. •
QNA: Domestic Demand – y/y % change
OPINION GURDGIEV
Correcting the gap
between the National
Accounts-reported
exports of goods and the
same exports reported
in our Trade Statistics
suggests a 0.4 percent
decline year-on-year, not
the rise of 5.4 percent
recorded in the official
statistics
“
