Ivan Fox InvoiceFair Chairman shares his unique insight on the Irish economic landscape for 2018 and beyond
As the old proverb states “people who live in glass houses shouldn’t throw stones”. However, if you get into a stone throwing fight with a neighbour who lives in a brick house, you will definitely come off a lot worse.
Interestingly, from an economic accounting perspective, this is a positive development. Assume you make amends with your neighbour, as a result the whole round trip is a positive to Gross Domestic Product (GDP). You will pay for the repairs to your glass house which is a direct boost to GDP. Irrespective of whether you made a claim on your insurance it is still a positive increment to GDP. There will probably be a deductible and you will suffer increased premiums going forward, again a positive towards GDP. Marry your housekeeper and GDP goes down. The list goes on…
Therefore, when you hear cries of leprechaun economics – however don’t be worried.
In 2016 the Irish economy grew, in GDP terms, by 26.3 %. This was a staggering number for a developed economy by any measure. The eminent economist Paul Krugman called it leprechaun economics. The estimate proceeding the release of this figure was for 7.8% growth. Ireland is at the absolute vanguard of the limitations of GDP as a measure of economic growth and activity.
The problem of GDP as a measure in Ireland is well covered in commentary and analysis. It essentially hinges on the relative large size of the foreign owned multinational sector to the domestic economy. The CSO estimated in 2016 that ten companies accounted for not far off half of all production in the economy. Personally, when I was first studying economics many years ago, I always found it counter-intuitive that GDP includes foreign owned sectors, while Gross National Product excludes them. However, this can be added to a long list of things that confused me at the time.
The ESRI recently doubled its prediction for growth in the economy to 8.9%. Are the little green fellows back? The IMF has estimated one quarter of Irish GDP growth last year was related to the production of Apple’s iPhone, even though the phones are not made in Ireland and just a tiny proportion are sold here. Are our economic statistics so volatile as to be meaningless?
In its latest accounts, the CSO has suggested that GDP could be overstated by as much as 40%. As a result, the CSO has developed a more accurate measure – the Gross National Income (GNI) which seeks to filter out the considerable statistical distortions within the Irish Economy.
It is very instructive to observe the graphical progression of GDP vs GNI below:
This diffuses a lot of the hyperbole and hysteria and shows solid and steady growth.
Although the global economy continues to demonstrate strong positive growth in 2018, a number of worrying trends have emerged. Aggressive protectionist policy measures and increasingly difficult conditions among emerging markets both threaten the global outlook. Furthermore, increased US interest rates have led to an exodus of capital from emerging markets. While growth in the US economy remains quite strong, Europe looks set to experience more moderate growth, particularly as the ECB unwinds its accommodative monetary policy. While the IMF still expects global GDP to grow by 3.9 per cent in 2018 and 2019, their most recent report highlights the accumulation of downside risks.
However, all this been said, the Irish economy is in a good place – both in relative and absolute terms. Even if we cleanse our economic statistics for the above mentioned distortions we are still the fastest growing economy in the EU. There are seriously exciting things happening across a wide range of sectors in the economy that are very much real and don’t involve leprechauns. This is the economy that you and I live in. The trucks and traffic are real and yes there is no table available sir…
A key comparative advantage for Ireland is our demographic set up. The power of our demographics is substantial. A third of our population is under the age of 25 and half are under the age of 34. Coupled with education this is a powerful economic driver.
The future is bright. The future is green.