Superlative 2015 Irish growth data massively distorted by tax moves
Irish gross domestic product grew (GDP) by a stunning 9.2% year-on-year in the final quarter of last year, outranking India at 7.3% and China at 6.8%. GDP was 7.8% higher compared to 5.2% growth in 2014 while GNP (gross national product) was up 5.7%. The GDP performance was the best annual outturn since 2000. Last month we reported that unadjusted jobs data showed that zero jobs were added in the Irish economy in Q4 2015.
The 3.5% improvement in consumer spending, was boosted by a rise in employment by 43,000 in the year 2015. The public debt-GDP ratio was about 95% compared to a forecasted 97%.
The CSO said value added of industry rose by 13.7% in volume terms in 2015 compared to 2014, with manufacturing recording a 14.2% increase in real terms and building and construction recording an 8.8% rise — equivalent to the ratio in 1997. The distribution, transport, software and communications sector increased by 8.7% while the agriculture sector rose by 6.4%, and other services by 4.3%. Public administration and defence recorded an annual decline of 2.6%.
Exports rose 13.8% but imports added 16.4% mainly relating to the transfer of IP (intellectual property) assets to Irish onshore affiliates of US companies. While net trade was not significant, there were huge changes in headline data.
Goods exports were valued at €111bn in 2015, based on customs data but at €144bn in the Balance of Payments data — a jump of 28%. Apart from adjustments for double counting, the bulk of the latter relates to booking of foreign manufacturing, in Ireland for tax avoidance purposes — this activity is called contract manufacturing.
The Chemicals + Medical Devices sector, which accounted for 58% of the €111bn total, added about 2,000 jobs in 2005-2014 and in 2015, the indigenous-dominated Food and Beverages sector had a low single digit performance with a surplus rise of 4% — despite positive currency developments during much of the year — compared with the overall goods trade surplus rising from €43bn to €65bn — a jump of 51%.
In terms of employment, the indigenous sector is much more job-intensive than the foreign sector. Simply, the rise in the overall goods trade surplus provides leprechaun's gold for the typical Irish citizen which is reflected in an Irish standard of living per capita that is below Italy's.
Finfacts 2016: Exports not a significant jobs engine for Irish economy
Finfacts 2016: US FDI stock in Ireland doubled since 2007, Only 11,000 jobs added — how tax avoidance pollutes data.
Computer services exports were valued at €56bn or 49% of total services exports of €117bn. Together with Double Irish bookings in Business Services, we can say that at least half the value of total services exports are fake.
Investment was the most significant factor in the "rocket" growth that Michael Noonan, finance minister, dreamed about in March 2012.
Capital Formation surged by 28% in 2015 with the value of intangible investment rocketing to €10.3bn, or 103% year-on-year.
This is likely a reaction to the planned ending of the Double Irish tax dodge in 2021 and moves by the likes of Google and Microsoft transferring IP from Irish shell companies in Bermuda to the onshore Irish affiliates.
Aircraft purchases were down about €2.4bn while machinery and equipment would have risen +8.4% if aircraft had been unchanged, according to the CSO.
GDP vs. GNP
In recent times, GNP has been seen as a better measure than GDP of the value added accruing to residents of the country and it had been about a fifth lower than GDP because of income flows to non-residents, especially profits and dividends of foreign direct investment enterprises. In 1970, the reverse was the case with GNP which was higher than GNP because of income flows to Irish residents from emigrants abroad.
In 2015 the value of GNP was 85% of GDP.
The trend in recent years of mainly large American companies moving their headquarters and tax residency to Ireland is negating the reliability of GNP as a metric and the Balance of Payments data is also polluted.
In 2015, two big US so-called tax inversions — Medtronic and the takeover of Botox-maker Allergan by Actavis — boosted Irish GNP but the CSO does not disclose the total impact of these tax avoidance moves, on the national accounts.
This year will likely see Pfizer, the US drugs giant, becoming Irish for tax purposes and expect another boost in GNP.
It is not easy to separate fact from fantasy and William Fry, the Dublin law firm, on Friday issued a report in Dublin on "a vibrant mergers and acquisitions (M&A) scene in 2015, with a significant rise in deal values, from €45.3bn in 2014 to €189bn in 2015, although a drop in deal volume, from 120 in 2014 down to 104 in 2015."
€189bn in M&A deals involving Irish companies in 2015 compared with the value of Irish GDP at €204bn!
These figures include the ‘megadeal’ of the Pfizer acquisition of Allergan announced in November 2015, which was worth €172.6bn. Excluding these deals, Ireland’s M&A sector still recorded a significant increase, with value up 41% on 2014, from €11.4bn to €16.1bn, with the largest deal being Bohai Leasing’s purchase of Avolon Holdings, for €6.5bn and the second largest the purchase of King Digital Entertainment by Activision Blizzard, for €5.3bn.
Outbound deals account for 50% of transactions
The most notable trend in 2015 is that half of all transactions with an Irish element were outbound, the highest on record for Irish businesses making overseas acquisitions and higher than recorded in other countries such as France (31%); Germany (29%) and the UK (28%). Although outbound deals accounted for greater volume of transactions, inbound deals dominated by value, with nine out of 10 largest deals by value in 2015 involving foreign bidders — four from the US; three from Europe and two from Asia-Pacific.
King Digital Entertainment — the Swedish maker of the Candy Crush Saga smartphone game, managed from London — didn't even have any staff in Ireland and operated from William Fry's Dublin offices. When Actavis, an Irish redomiciled American firm acquired Allergan, the combined group was renamed Allergan and Pfizer's tax inversion involves the acquisition of the faux-Irish Allergan.
The Sunday Business Post reported last month on more data from 2015 that is a mix of fact and fantasy:
Venture capital funding of Irish SMEs rose by 30% to €522m last year and has risen by 90% since 2010, a new survey shows.
"Irish SMEs" include foreign-operated companies.
Fine Gael and Labour suffered a backlash from bragging about distorted headline employment and national accounts data as it exaggerated the real recovery.
It's unlikely that the outcome would have been different if Thursday's data releases came before the 26 February general election.
The recovery is real but it's time that the distorted data is subject to clear caveats when published. Otherwise, policy makers will continue to believe that fairytales are fact or at least try to fool the people that they are.
The more troubling feature of the Irish recovery is the inflated rise in exports. As Michael Hennigan of Finfacts has laboriously documented, take away the startling unreasonable jumps in some export categories and the rest of the export performance is mediocre, at best.
Former Central Bank governor Patrick Honohan has repeated Hennigan’s insistent calls in gentler words.