Two Speeds Ahead (Well, One Anyway). The Recession Diaries – June 30th

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The CSO has just published the first quarter National Accounts.  If you want to avoid the spin go straight to Michael Burke’s cogent analysis on Progressive-Economy.  Here I just want to look at one long-term development – a very concerning trend relating to the very structure of the Irish economy; namely, the growing gap between GDP and GNP.

As everyone knows by now, GDP includes multi-national activity which acts like an economic souffle.  Put a fork in it, take out profit repatriation, and we end up with the GNP which is usually proclaimed to be the true economic measurement for Ireland (I believe this to be a bit simplistic but let’s take it as read – it’s closer to the truth than the GDP figure).

The problem we are facing into is that the gap between GDP and GNP is growing.  The headline figures are becoming more detached from the concrete economy.  This is not just an academic juggling of numbers.  For instance, our deficit, for the purposes of the Maastricht criteria, is measured against GDP.  Using the Government’s own projections, in 2009 the deficit was projected to be -11.7 percent of GDP (ex-Anglo subsidy); however, when we use the more relevant GNP, the deficit jumps to 14.5 percent.  In other words, the deficit is more of a burden on the economy than the headline numbers suggest.

Or take income per head:  if we use GDP per capita we’re still a rich nation, even in 2010.  We rank 3rd, behind Luxembourg and Denmark.  However, if we use GNP per capita we slide all the way down to 10th.  And if you really want to get depressed, if we use PPS measurements (to even out living standards), we are hardly wealthier per head than Greece, Spain and Italy.  No wonder that Davy Stockbrokers mocked the idea that we could call ourselves a wealthy society.

All analysis, all prescriptions, all policy must be grounded in reality.  So the gap between GDP and GNP should be of concern.  So how’s that gap going?  In 1995, the gap was 11.6 percent.  By 2005 that gap had grown to 15.4 percent.  It’s been growing ever since.

GDP GNP

Since we entered the recession, the gap has been growing in leaps and bounds.  This suggests that whatever about the activities of the multi-national sector – and much of it is tax-accountancy motivated – the GNP continues to fall behind.

Even the Government admits this, projecting the gap between GDP and GNP will grow to 21.5 percent.  On current trends, however, this could be highly optimistic.  Even so, the Government projects that GDP will grow by over €40 billion between 2009 and 2014; GNP is projected to grow by €29 billion.  That’s a considerable difference in terms of growth, tax revenue and unemployment costs.

The whole point of this post is that, in the future, we must pay closer attention to GNP and the economic components that monitor developments in the domestic economy.  In this respect, we find the current CSO National Accounts reporting:

  • Consumer Spending fell by -0.2 percent over the previous quarter last year
  • Government consumption fell by 0-9 percent
  • And investment fell by an unnerving 13.8 percent

Not much good news here.

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3 Responses

  1. Pope Epopt

    June 30, 2010 9:56 pm

    I suspect you might be missing a graph of GDP/GNP in the middle there, Michael.

    At the same time, because of deflation the effective debt burden round our necks has increased significantly.

    How much of the exports are manufactured here, I wonder, rather than be packaged here, to avail of low corporation tax? I know of at least one transnational that turns powdered drugs into packaged pills here in a plant with a vast output employing about 50 people.

    They used to talk of Ireland being Europe’s largest software exporter, but this was only because Microsoft chose to package it’s software for the EU market here, for obvious reasons.

  2. Pope Epopt

    June 30, 2010 9:57 pm

    The graph is present and correct now – perhaps I was an early reader!

  3. Michael Taft

    July 1, 2010 8:21 am

    Pope Epopt – to enter into the world of trying to figure out what MNCs do is to enter a murky world, indeed. There is little hard data in this area (indeed, Forfas gave up trying to measure productivity in the MNC sector since the accounting activities so distorted sector stats – such as gross output, value added, etc. – they just used US productivity as a proxy). There are legitimate MNCs that engage in real economic activity here (factories, offices, etc.). There are profits that are produced elsewhere, imported here for tax purposes, and then exported – through any number of complex transfer pricing vehicles. Then there are a range of activities in between these two. Of course, the Government has a vested interest in not investigating this area – to admit widescale tax laundering would bring other governments down on them a like a ton of tax returns.

    Needless to say, all this must of its very nature impact on our GDP figures. To what extent, we don’t know. So, did the GDP grow in 2010 Q1, or did the accounting activities of MNCs grow, or what was the balance? Hard, hard to tell.