Forget leprechauns, foreign firms are up to some funny business
Published 15/09/2016 | 02:30
Leprechaun economics was a term coined by an American economist two months ago. He did so after it emerged that the Irish State's statisticians revised their 2015 figures on the size of the economy. According to the number crunchers, the Irish economy grew by 26pc in a single year. Last week, the Kremlin's international TV station discussed Ireland. The set was bedecked with leprechaun stuffed toys.
The aforementioned American chap was not alone in his wonderment back in July.
The eyes of dismal scientists everywhere popped out on stalks when they saw the figures. Ireland's world-beating economic growth made news across the globe. But it did so because it was far too good to be true. Economies just don't grow that fast.
The staggering figure was down to the huge, and usually hugely positive role multinational companies play in the Irish economy.
But it also underscored how their activities can distort traditional ways of measuring economies (GDP), something hammered home across the world again earlier this month when the European Commission slapped a €13bn back-tax bill on Apple.
It was probably with some relief that the statisticians - not the kind of people who are prone to seeking out international limelight - had nothing earth-shaking to report yesterday when they published their first batch of GDP numbers since the 'Leprechaun economics' episode.
But if their July effort massively overstated underlying growth in 2016, their latest stab at measuring economic activity looks to have understated it in the first half of 2016.
They reckon the economy was smaller in the first six months of 2016 than in the last six months of 2015. That doesn't feel right. And it doesn't look right given all the other indicators are pointing to medium to strong growth in 2016.
But, it must be said - mainly for the legions of conspiracy theorists out there - that the civil servants at the Central Statistics Office are not up to any Greek-style shenanigans. They are merely doing their sums as set down in the enormous international manuals on how GDP should be totted up.
What's messing up the measurements is the multinational sector. Foreign companies may have made Ireland rich, but some are involved in funny business cooked up by creative minds in the bean-counting industry.
Yesterday's figures suggest that more such activity may have taken place in the spring and early summer. But as that can be tricky to explain, let's leave it until last and focus first, and very briefly, on other things, including how GDP is calculated.
Traditionally, it is measured in two ways. One way is to add up the value of everything that is produced in every industry sector, from farming to pharma.
The second is to add up everything that is spent in the economy. That, in turn, is broken into four components: households, the state, companies, and foreigners who hand over cash for exports.
When it comes to the contribution to GDP of households and government spending, the stats have been reliable and nobody believes they are being messed up to any degree by the multinational effect. Before yesterday's figures for the second quarter of the year were published, household spending was expected to grow solidly because most indicators of activity have been showing an economy whirring away. Most importantly, the quarterly jobs report for the same three months, which was published two weeks ago, showed booming employment growth - recall that the numbers at work in the economy surpassed the two million threshold. With more people earning, there are more pay packets coming into more homes. That should mean more consumer spending.
Surprisingly, yesterday's figures showed the opposite. In the second quarter of this year, the amount spent by consumers fell back on the first months of the year.
If that is very likely to be a blip, the bigger picture is that households are collectively spending almost as much as at peak level just before the economy crashed. But if anyone thinks that this means we have finally left the slump behind, they would be wrong. That is because there are almost 300,000 more people in the country today compared with 2008.
When we consider how much the average person spends on goods and services in a three-month period (currently under €5,000), it is less than half-way between the 2008 peak and the 2013 trough.
Another usually reliable component of the overall GDP figures is spending by the State on goods and services. Austerity after the crash was reflected in a big decline in that chunk of national spending, amounting to almost one-fifth from peak to trough.
But since the public purse strings started to be loosened three years ago, public spending has rebounded. It is now running at levels last seen at the end of 2006.
Now back to the multinational issue. Here, we are interested in the spending component of GDP that involves companies.
Traditionally, that was simple and straightforward. For example, companies bought new machines for their assembly lines and the money spent was added to GDP.
In today's hi-tech, globalised world things are rather more complex. Productive capacity isn't just about factories, plant and machinery. Today, "intangible assets", such as software and patents, make up a big chunk of corporate spending.
In the second quarter of this year, companies based in Ireland spent a staggering €8.8bn on such assets. That was double the spend in the previous quarter. It was, by a country mile, the highest on record.
One suspects that there will be quite some interest in the figure in a certain Belgian city.