Monday 24 October 2016

GDP figures increasingly obscure rather than illuminate

Published 13/12/2015 | 02:30

Home-grown Irish companies dominate the aircraft leasing industry globally, which is splendid for all concerned and for the Irish economy
Home-grown Irish companies dominate the aircraft leasing industry globally, which is splendid for all concerned and for the Irish economy

The economy is growing at 7pc. Apparently.

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That is what last Thursday's latest GDP data said.

According to the official numbers, during the third quarter of this year, the Irish economy was producing 7pc more than in the same period in 2014.

This astonishing surge in output is among the strongest not only in Europe, but among the world's 200-odd economies.

The figure is a nonsense.

That is not to say the reliable parts of the economic growth figures are not good, but the manner in which they exaggerate the performance of the economy is getting worse almost by the quarter.

Before looking at the meaningful and important elements of the numbers, it is worth explaining why they are going wonky.

First off, it is not because the statisticians are doing anything wrong. On the contrary, they are compiling the data exactly as European and international accounting standards demand.

One reason the figures are exaggerating the economy's real performance is because some recent changes in those very standards have meant adding things to national output - which, in the Irish case, have an impact overseas, not here.

That, in turn, is because there are so many internationalised companies of different types in Ireland.

Again, there is no suggestion that any of these businesses are breaking any laws or even doing anything wrong - but the changing nature of international business means that both the exports and investment components of GDP have become hugely inflated in recent times (the first chart shows how both have been headed towards the stratosphere since 2013). Examples include "contract manufacturing", which inflate exports, and aircraft purchases which can puff up both.

Consider contract manufacturing first.

This happens when a company based in Ireland contracts a company in, say, China to make goods for the Australian market. These widgets never even make their way to Ireland - but because the contract originated here, the value added ends up being recorded in Ireland's national accounts.

Now consider what is the greatest indigenous success story in the history of Irish business - the aircraft leasing sector.

Home-grown Irish companies dominate this industry globally, which is splendid for all concerned and for the Irish economy.

But from a national accounting perspective, it causes a headache. That is because when an Irish business buys a plane that it aims to lease in the Latin American market, the investment ends up in the Irish numbers - even if the aircraft never touches down in Ireland over the course of its life.

But if this is just an accounting issue, readers might well ask, does it matter at all? While there are upsides to having a very high headline rate of growth (it can only burnish Ireland's international reputation as an astonishing recovery story), there are downsides too. The most obvious being the manner in which they flatter public debt and deficits figures.

Both are most commonly measured (and analysed) as a percentage GDP - for instance, many of the rules governing the public finances in eurozone countries are benchmarked in this way.

As GDP inflates, the Government's deficit and debt figures by this measure fall. This is contributing to the false sense of security about the budgetary position. Given the political class's long-term record of fiscal ineptitude, and this Government's pre-budget sleight of hand to allow it splash more cash, this can only be of concern.

So, all that having been said, let's have a look at what can be reliably taken from the latest numbers.

By far the most important component of the GDP figures on an expenditure basis is private consumption - the spending of individual and households (but not companies) on goods and services. It is, by some distance, the largest chunk of the domestic economy and it is not distorted by any of the factors discussed above.

As the first chart shows, it continued falling after all other components had troughed and was the last to turnaround. Since that happened (at the beginning of 2013) it has registered growth in every quarter bar one.

Thursday's figures showed that in the July-September period of this year it was 3.6pc up on the same quarter last year. That, as it happens, is very similar to growth in employment - at 3pc - over the same period.

Both of those numbers, which are in line with many other indicators, much better reflect the real pace of expansion in the economy. If the reliable parts of the GDP numbers deserved a broad welcome, so did Thursday's publication of the (entirely separate) quarterly balance of payments figures.

The headline was that Ireland Inc continued to earn considerably more from abroad than it paid out.

Such a surplus is necessary given the economy's very large stock of foreign debt - only if an aggregate foreign payments surplus is run can the aggregate foreign debt be reduced.

One of the most important aspects of this set of numbers is what they say about the services that are exported from Ireland.

This is important because the Irish economy is one of only a handful in the world whose total exports exceeds its GDP - and, even more unusually, half of those exports are now in the form of services.

The second chart shows most categories of services exports. Not included in the graphic is the biggest single services export by far - those related to computers. That category is not included because it is about as big as all the others combined and would distort the chart.

While there is probably some inflation in the computer services export figures too - the big tech companies use Ireland as a base to book lots of international revenues and profits - the headline figure, at around €4bn a month, is enormous, equivalent to around 25pc of GDP (a figure which exceeds many countries' total exports relative to their GDP).

The blistering pace of growth in computer related exports, which has been recorded over many years, shows no sign of ending.

In the third quarter, the year-on-year increase in export receipts from computer services exceeded 20pc. Even if some of that represents smoke and mirrors, most of it doesn't and the sheer scale of the foreign sales are truly remarkable.

Also good news, as the chart shows, is that all categories of services exports are trending upwards, with the exception of "other business services", which has been treading water for the past two years. That trend augurs well for 2016 and over the longer term.

Sunday Indo Business

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