Irish Economy
Irish Economy 2015: ESRI expects GNP to grow 4.6% before adjustment
By Michael Hennigan, Finfacts founder and editor
Dec 17, 2014 - 4:14 AM

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Irish Economy 2015: The ESRI (Economic and Social Research Institute) in its latest economic commentary forecasts a GNP (gross national product) rise of 4.6% next year with unemployment set to fall to an annual average of 9.7%.

In the Quarterly Economic Commentary (QEC), Winter 2014, issued Wednesday, the institute says that because of distortions caused by the foreign-owned sector, it prefers to use GNP compared with GDP (gross domestic product - the main difference is that the latter includes the profits of the significant foreign-owned sector).

However, GNP is also distorted by mainly US firms becoming Irish for tax purposes - in 2010 alone annual GNP was boosted by 2.9% by these so-called tax inversions - see box below.

The economists say that the Irish economy is set to grow by almost 5% in 2014 with unemployment likely to fall below 11.5% - the strongest growth rates since  2005. They say that while external demand remains a key component of the recovery, domestic contributions, and investment in particular, have become increasingly important. The strong economic performance has been mirrored by robust government receipts with almost all headline items reporting returns ahead of target for the year to November. The general government deficit for 2014 is likely to be around 3.5%.

The overall employment rate among persons aged 15-64 now stands at 62.2% compared to 61.1% in Q3 2013. Employment increased in ten of the 14 economic sectors over the year with the largest rate of increase recorded in Construction which is up 6.7% annually and 3.8% quarterly.

Today's report says that the majority of new jobs created continue to be full-time positions, with an increase of 1.8% over the year following an annual increase of 2.4% in Q2 2014.

However it should be noted the broad rate of unemployment is 21% while there should be a distinction between full-time employees and full-time self employed one-person operations where income can be volatile.

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The economists say that taking account of the recently announced investment in social housing the ESRI forecast for house completions for 2015 is 16,000. "As we have previously discussed, this is below the forecast rate of new household formation and so points to a continuing gap between the demand for and supply of housing over the forecast period. Other building and construction output is also expected to increase, reflecting higher domestic activity levels and increased FDI flows. These factors, as well as the undertaking of previously deferred investment, will also underpin growth in machinery and equipment investment, both in 2014 and 2015. On the basis of this, we expect that overall investment will grow by 14.3% this year and by 12.8% in volume terms in 2015."

In a submission to the Central Bank (copy published with QEC) on proposed loan-to-value and loan-to-income mortgage restrictions, David Duffy and Kevin McQuinn wrote: "At this point in the Irish market based on these criteria, it is not clear that the envisaged measures are fully warranted. While house price growth has been significant over the past 18 months, in McQuinn (2014), for example, the results of four standard models of Irish house prices suggest that, as of Q4 2013, Irish house prices still appear to be undervalued. This is mainly due to the very sharp and persistent fall recorded in Irish house prices between 2007 and early 2013."

They suggested that the Central Bank should implement a rules-based system that would be used when warranted.

The QEC says Budget 2015 should have been more cautionary.

“This, we felt, struck the right balance between the need to maintain fiscal discipline and in particular meet the 3% deficit target in 2015 with the clear need to encourage and foster the recovery in the economy,” it said. “We advocated an increase in capital expenditure on social housing of approximately €500m, which we projected would be offset by the increase in water charges set to be imposed in 2015.”

It said the “expansionary” Budget 2015 was “less cautious than it would have preferred” and forecasts that the deficit in 2015 to be 2.4% up from 2.1% in the Autumn QEC.

If Eurostat, the EU statistics office, will rule in coming months that Irish Water should not be separated from the public finances, the deficit would be 2.8%.

Executive summary [pdf]

The ESRI said that "previous Commentaries have discussed at length various difficulties with interpreting Irish national accounts. Contract manufacturing has emerged as another such issue. Overall, because of this and other reasons, we continue to use GNP, rather than GDP, as our main economic indicator."

Booking overseas manufacturing in Ireland for tax avoidance purposes is not new - e.g. Dell moved its PC manufacturing from Limerick to Poland in 2009 but it books the output of its Polish plant in Ireland - however, there has been a spike in this activity this year and it maybe related to activity of some tax inversions, officially known as "redomiciled PLCs" where mainly US companies become Irish for tax purposes - with a brass plate or skeleton staff presences in Ireland -  but while a company is legally Irish, operational control remains in the US.

The ESRI says in the QEC that exports to the US, in particular, "have continued to strengthen which may be linked to the issue of contract manufacturing. Despite the fact that goods exports to the US are down almost 20% quarter-on-quarter, overall there has been growth in this market of over 4% for the period January to September 2014 compared with the same period in 2013."

Contract manufacturing occurs where an Irish resident firm (but not necessarily an Irish-owned one) contracts a manufacturer abroad to produce a good for supply to an end client abroad. The sale of the good is recorded as an Irish export of goods, while the contracted production is considered a service import.

Meanwhile, almost half of services exports or about €45bn, result from the Double Dutch Irish tax dodge scheme.

The ESRI says that a Balance of Payments current account surplus of 6.3% of GDP was recorded in Q2 2014. "In 2014 and 2015 we envisage a further improvement in the current account surplus at 5.4% of GNP in 2014 and 6.2% of GNP in 2015. When account is taken of the redomiciled PLCs the current account surplus is forecast to be 0.7% of GNP in 2014 and 1.7% in 2015."

In 2010, 2.9% was added to annual Irish GNP as a result of tax inversions (see links below) and in coming weeks two big US tax inversions: the Medtronic and Actavis deals worth $109bn and involving almost 80,000 employees will mess up GNP and Balance of Payments data.

In total, these faux-Irish firms will have staff of over 600,000 and their profits are technically paid to them in Ireland even though, under double taxation agreements, their tax liability arises in other jurisdictions.

On the import side, the data will be impacted by real activity.

In September 2014, Ryanair began importing 180 new planes which will, over time, add between €1 and €1.5bn to the national imports bill which is forecast to increase 4.5% in volume terms for 2014 and 2015.

Finally, while the distortions of the foreign-owned sector flatters Ireland's GDP and GNP per capita, the actual standard of living is below the EU28 average and close to Spain's - click last link below.

Irish Economy: Industrial production up 38.5% in 12 months - employment falls!!

The idiot/ eejit's guide to distorted Irish national economic data

43% of rise in H1 2014 GDP from manufacturing overseas - Irish Fiscal Council

US-Ireland Tax Inversions 600,000+ staff: Kenny, Noonan met with top US corporate lawyers

ESRI's FitzGerald says Irish GNP and Current Account surplus overstated

German per capita standard of living highest in Europe; Ireland below EU average

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