More. Austerity. For 2015 - Village Magazine

40 December-January 2014

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

“