Gross Domestic Product – or GDP as it is better known – is the internationally recognized measure of a country’s economic activity.
When it comes to Ireland’s GDP it can be a bit of a fantasy that puts us at the top of the euro zone rankings and rivaling the likes of Singapore and Switzerland in terms of wealth per capita.
It was once spoken of in the realm of the “goblins” – the number is greeted with so much incredulity abroad.
However, it is an official measure which we totally reject at our own risk.
While we may overlook it in times of seemingly great generosity, it would be short-sighted of us not to examine it more closely when it shows signs of weakness.
Why is our GDP so out of whack?
In short, due to the activities of a number of large multinational companies here.
The transfer and amortization of intellectual property and the domicile of a number of aircraft leasing companies had an outsized impact on the data.
Measures such as Gross National Income (GNI) or even the National Statistics Office’s own bespoke version of GNI* (pronounced GNI star) are often used as alternative snapshots of economic performance.
However, the transfer of multinational assets here in a global crackdown on tax avoidance has made the former an unreliable indicator of economic activity.
And even the latter may not completely eliminate the impact of multinational corporations, as Professor Patrick Honohan, a former central bank governor, suggested in a paper published in 2021.
“Ireland is a prosperous country, but not as prosperous as is often assumed because of misleading, albeit conventional, statistics,” he commented at the time.
Why is GDP in the spotlight now?
This was followed by the release of ESRI’s latest Quarterly Economic Commentary last week.
While emphasizing that the domestic economy remains very dynamic and that the unemployment rate is at an all-time low, good wage growth and strong consumption, they lowered the prospects for economic growth in terms of GDP by around 5 percentage points to just 0.1% for 2023
The assessment was made on the basis of an expected decline in exports, particularly in the pharmaceutical sector, with a simultaneous increase in imports.
It might just be a one-time adjustment. Because if a few outsized transactions can boost our GDP, it could also shrink sharply due to some moves by a multinational.
But it is also not implausible that in the current environment – with rising interest rates and still high inflation in most economies – a cool wind could blow through the international trade sector.
Additionally, the pharmaceutical sector has seen strong growth during the pandemic years.
A reversal could be partly responsible for the sharp drop in activity.
Blip or something worse?
This is something that ESRI and others will be keeping a close eye on over the coming months and quarters.
International project management contractor PM Group, which released its annual report on the day the ESRI outlook was released, said it was surprised by signs of a slowdown in the pharmaceutical sector, where it does a lot of work.
“I think any decline would be temporary,” PM Group CEO Dave Murphy told Morning Ireland.
“We are seeing huge investments and capital investments in the pharmaceutical sector. People like Lily in Limerick and Pfizer in Grange Castle – which we both work on – and Merck Sharp and Dohme are expanding in all their locations. We expect this growth to continue,” he said.
Stockbroker Davy also takes the view that GDP weakness is an “outlier”.
Chief economist Conall MacCoille released his latest outlook in recent days, which also forecast a slowdown in GDP (but not nearly as sharply as ESRI), citing the outsized 4.6% contraction in Ireland’s GDP in the first quarter of this year.
“We’ve seen double-digit growth over the last few years. That was artificially strong. We think the first quarter numbers were artificially weak,” he said.
“Monthly industrial production numbers fell 45% in March alone, then rebounded 70% in April. These are extraordinary numbers. They are volatile,” he explained.
Gerard Brady, chief economist at Ibec, points out that volatility is often due to individual decisions made by one or more large multinational companies.
He referred to the impact patent protection for medicines had on our GDP a few years ago.
“Sometimes it reflects the noise in the companies and not the trend for the economy as a whole,” he explained.
“I wouldn’t interpret the noise too much,” he added.
Is it time to stop measuring Ireland’s GDP?
It is still the international benchmark and shows the whole history of the economy, even if it has little to do with most people’s everyday experience.
While it doesn’t give an accurate picture of what’s happening in the domestic economy, there are a number of other indicators of this performance.
Gerard Brady points out that most economies are struggling with their GDP.
“We’ve seen UK GDP figures fluctuate due to gold movements in and out of the City of London, for example. It happens even in big economies, but it’s a complicated story,” he explained.
“Every country has a certain level. We’re likely to be ahead if we’re able to dig deep into our numbers and understand the biases and challenges that might be there,” he added.
In the case of Ireland, the economy is particularly globalised, which can have an outsized impact on our totals.
We were able to overcome this to a certain extent by developing other metrics – none of which will ever be perfect.
But other countries are already following our example.
It seems we have the “goblin economy” to thank for that.
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