Economic hopium for the masses

The Interloper:

Ireland’s national accounts extraordinarily manipulated. By Constantin Gurdgiev.


Since the publication of the second quarter 2014 (Q2 2014) National Accounts on September 18th, Irish media have virtually abandoned any critical assessment of the economy in a fog of fawning, culminating in some wayward demi-jubilation over the Budget. The ‘crisis easing’ narrative of the past has now turned into an unrelenting celebration of the ‘Celtic Phoenix’. Evidence of mortgage and utilities-payment arrears, and the rising numbers of those who find it difficult to meet their monthly groceries bills has been swept away by cheering for the official statistical releases.


Recent commentary by Central Bank Governor Patrick Honohan is revelatory. Data published by the Central Bank show that over 40 percent of ‘permanently restructured’ mortgages remain in arrears after restructuring. Despite this, the Governor claimed that some 80 percent of all restructurings were a resounding success.


The nation has been well prepped for this confidence turnaround. Years of unrelenting bad news, rising tax burdens and cuts in public services have tolled. Like a drunk told by his doctor that he has cirrhosis, Ireland needed a bottle of ‘good news’ to drown its sorrows.


The intoxicating power of rising home prices and torrents of feel-good press-releases from Government Departments and the commentariat have done the trick: the nation has pushed aside its indebted and insolvent, its poor and homeless, its tax-hit middle classes struggling to pay their bills and the unemployed. A new story – a tale of our mythical revival – fuels our imagination. Much of this is hopium – a PR ‘drug’ for confidence.


Consider our national accounts. Ireland was one of the first countries in the EU to switch from the the ESA 95 to the ESA 2010 accounting framework back in Q1 2014. This means that we started including estimated illegal economic activities (sales of drugs, stolen goods, prostitution etc) as a part of our official GDP, GNP, Gross National Income and domestic demand. We also reclassified R&D spending by companies, including Multinationals (MNCs), and state enterprises, as investment. Under previous standards, R&D spending was treated as a business cost, not adding to the economic activity until it generated actual returns. Now, R&D is labelled as investment and thus counts fully for national income irrespective of whether it produces anything meaningful in the end or is simply written off as a loss.


According to the EU Commission, just three companies account for almost 70% of all R&D ‘investment’ in Ireland: Accenture (31%), Covidien (24%) and Seagate Technology (15%). So R&D inclusion simply introduced more MNC-driven statistical noise into our aggregate figures. The effect of these accounting changes was not immaterial. Overnight, 2013’s GDP was boosted by €10.6 billion or a whopping 6.5 percent. With it, the entire informational content of the national accounts has become unprecedentedly muddied. As actual Government debt continued to climb, the debt-to-GDP ratio fell from 123.7 percent to 116.1 percent. The Government deficit shrank from 7.2 percent to 6.7 percent. Thanks to statistical gimmickry, we were made richer than before without adding a single cent to our actual purses.


Then the preliminary Q2 2014 estimates rolled in with even more aggrandised revisions and upgrades to national income. In nominal terms, in H1 2014, personal expenditure on consumer goods and services was up 2.9 percent on the same period in 2014. Still, even with the illicit activities factored in, our nominal consumption over 3 years went up less than 1.5 percent. Not exactly booming.


Government spending went up 0.2 percent year-on-year yet is down 0.8 percent on H1 2011. In other words, post-austerity spending is basically flat. Out-performing its own Budget 2014 targets, the Government is now presenting a rising tax take capable of funding interest costs on our debt as a sign of economic strength.


Gross Fixed Capital Formation is also booming, officially. Much of this is, once again, thanks to reclassifications and tax-optimisation by MNCs and the notorious rise in corporate inversions. In H1 2014 €98 billion worth of mergers and acquisitions deals were announced involving ‘Irish’ companies. Virtually all related to ‘inverted’ US MNCs superficially registered in Ireland.


Vulture funds and other institutional investors continued to sieve the rubble of the Celtic Tiger, buying up property in the hope of flipping it in 1-2 years time. This too counts as investment, even though it sustains nothing more than a handful of legal jobs and NAMA employment rolls. All in, gross investment officially recorded in the national accounts saw a rise of 13.3 percent year-on-year in H1 2014 and is now running 7.2 percent ahead of H1 2011.


With the help the above factors, year-on-year, Irish GDP rose a jaw-dropping 5.7 percent in H1 2014 in nominal terms or €4.86 billion. Three quarters of this is due to tax- and property-linked ‘investments’, higher stocks of goods held by companies and net-exports expansion. One quarter is attributable to the real domestic economy, including illegal-activity adjustments.


To paraphrase Dirty Harry: “Are you feeling rich, punk?”. The Irish Government has been quick to claim wild numbers in new jobs creation: from 60,000 in Q1 to 71,000 in Q2.


But things are not as they seem. In Q2 2014, year-on-year, non-agricultural private-sector employment in Ireland rose by 21,400. Not bad, but far from what is emitted as political sound bites. Worse, since the current Government came into office, total non-agricultural employment has risen by only 24,700.

Seasonally adjusted rates of growth (% changes on previous quarter)


Of course, a job added is better than none. And the number of officially unemployed is down 66,000 on Q2 2011. But the number of retirees is up 52,200. Everyone knows there have been plentiful early retirement schemes across the economy but it is important to note that retired workers are not being replaced one-for-one with new ones. This explains why in Q2 2014 the Irish labour-force participation rate was running at 60.0 percent, which is lower than 60.5 percent three years ago.


The above numbers do not account for all those ‘placed’ into state training programmes. When this Government came to power, in Q2 2011, Irish state training programmes involved 54,287 individuals. This year, in Q2 2014, state training programme involved 65,709. So of those 24,700 net new jobs created, roughly half can potentially be explained by the efforts of the training wizards formerly known as Fás. And the above figures do not allow for continued rampant emigration and drop-outs from the labour force. In the last 5 years, total net emigration from Ireland outstripped the previous 5-year record set back at the end of the 1980s. Hopium can mask these realities, but it can’t undo them.


Services account for roughly 70 percent of our economic output and 76 percent of employment. According to popular mythology, Irish consumers are now possessed by the shopping craze. The latest figures for retail sales are showing a yearly rise of 2.2 percent in core sales (excluding motors) in value and 3.7 percent in volume up to August 2014. But, discretionary non-food sales, excluding motors, fuel and bars are up only 1.4 percent in volume. So we buy more necessary goods and services and slightly more discretionary ones. Discretionary retail sales by volume are now barely back to the levels of H1 2010. Some good news is that sales of household goods are up in volume terms to pre-crisis levels. Shopping craze this is not, but some recovery is afoot.


Crucially, we remain only around the level of real household wellbeing of other ‘peripheral’ states. In 2013 Irish GDP per capita was 126 percent of the EU28 average, ranking us as the fifth ‘richest’ country in Europe. But our actual individual consumption was just 97 percent of the EU28 average (12th place in the EU28). Given that in 2013 we invested and saved a smaller share of our income than most of our EU counterparts, this discrepancy between GDP per capita and consumption shows definitively just how vastly over-inflated our national accounts are. Incidentally, the same prestidigitation is now also working through the other line of national accounts: exports. For example, in H1 2014 the value of Irish goods traded – as recorded in the National Accounts – is €7 billion higher than the same exports recorded in the External Trade statistics!


Meanwhile, what is beyond any doubt is the shift in Irish economy’s productive capacity away from producing goods and services that have tangible, meaningful connection to the economy here, towards services produced and sold elsewhere.


How do we know this? Indirectly, of course, for official statistics do not tell us how much of our GDP and GNP comes from sales closed by MNCs in Dublin on services supplied outside Ireland. Remember the claims by the Irish Government that ICT services MNCs (the famous Barrow Street Hub) are here to engage in innovation and real R&D? Latest statistics from the CSO show that Professional, Scientific and Technical Activities are nearly collapsing across our economy.


The index for this services sub-sector, having shrunk year-on-year in 17 months out of the last 18 is now down 32.4 percent on 2009 levels. Meanwhile, Information and Communication Services activities are up 37.8 percent on 2009 levels.


Despite the PR hoopla in foreign and domestic media about the Celtic Phoenix rising, things remain tough on the ground for most of us. The Celtic Phoenix may be flapping its wings, but the chains of personal and corporate debt crises, state grab of households’ resources and real unemployment are holding it firmly to the ground.


One day it might fly… •