The idiot/ eejit's guide to distorted Irish national economic data By Michael Hennigan, Finfacts founder and editor Sep 5, 2014 - 6:16 AM

John Herlihy, Google Ireland chief (left), apparently instructing Richard Bruton, enterprise minister, on pressing green lights, Dublin, September 2012.

"What the experience of the last two years shows is that the standard EU harmonised national accounts are not a satisfactory framework for understanding what is happening in the Irish economy," Prof John Fitzgerald of the Economic and Social Research Institute (ESRI) wrote last April. Our idiot/ eejit's guide covers such technical issues but also the collateral damage in a system addicted to spin and an economic crash that followed a period when delusions of Irish policy makers were sustained by foolish international observers who lauded Ireland for its miracle economy.

Foreign-owned firms, mainly American, are responsible for about 90% of Ireland's headline tradeable exports while Ireland's national accounts for 2014 will incorporate the financials of mainly American brass-plate companies that have become "Irish" for tax purposes in a process known as a "tax inversion" - - their payrolls exceed 600,000, almost quadruple direct employment in exporting FDI (foreign direct investment) firms - - US-Ireland Tax Inversions 600,000+ staff: Kenny, Noonan met with top US corporate lawyers

The distortions caused by the foreign-owned exporting sector (FDI - foreign direct investment) including massive tax avoidance, are not only used for political effect when it suits at home but also data that are provided to international bodies such as the European Commission, Organisation for Economic Co-operation and Development and the International Monetary Fund, or misunderstood by them, are in turn used at home with the apparent international validation.

Update Nov 25, 2014: 43% of rise in H1 2014 GDP from contract manufacturing overseas - Irish Fiscal Council - - just another example of corporate tax avoidance distorting Ireland's data.

Update Oct 08, 2014: Irish Economy: ESRI notes GNP and trade data uncertainties / distortions in national accounts

This week a newspaper reader would have encountered reports that 1) Irish manufacturing is back to the period of surging growth in 1999; 2) services activity is back to February 2007, the month when Irish bank shares hit all-time record highs;

Update Oct 07, 2014: Irish industrial production + services fell in August; Recall the excitable PMIs? - - Finfacts was right to be sceptical.

3) Google Ireland was declared 'Exporter of the Year' by the Irish Exporters Association which said: "Google’s export turnover increased by 36.5%, from €12.5bn in 2013 to €17bn in 2014" (should be 2012 to 2013).

Google Ireland's revenues amounted to 39% of global revenues and payroll numbers in Ireland and UK were respectively at 2,368 up from 2,200 in 2012 and 1,835 in 2013 up from 1,613 in 2012 - - Google Inc. had a global payroll of 43,862 (ex-Motorola) at end 2013.

This is fairytale economics: Most of Google's Irish exports result from accounting transactions at its headquarters in Mountain View, California.

The following are some of the durable economic fairytales:

1) GDP per capita: The Irish are among the wealthiest in the EU 28 (European Union) with the fifth highest per capita gross domestic product - - the data are true but in the real world, we are among the poorest with the Italians and Spanish in the 18-member country Eurozone;

2) PMI surveys: The purchasing managers index (PMI) anecdotal surveys get media attention as they are available in advance of official data, which has been more muted compared with the PMI headlines. We cover the issue in more depth below but the surveys relate to one month's level of sentiment, orders and assumed employment changes, not on the actual level of activity over time.

Is manufacturing back to the 1999 level?

According to the CSO (Central Statistics Office) employment in industry was at 310,000 in late 1999; 320,000 in 2000, 285,000 in 2007 and 236,000 in Q2 2014 - - and down 2,000 in 12 months.

The orders of the biggest services companies e.g. Google, are booked in Ireland for tax purposes. So when they report a 36% rise in business in a year, it messes up the data.

This also distorts official data which show Information and Communication (+16.4%) in 12 months to July. CSO's services index is up 10.5% since 2009.

On Friday the CSO reported that 'Chemicals and pharmaceuticals' production jumped 38.4% in July following a dip of 35.6% in June - - this volatility in an industry employing 25,000 people looks ridiculous but work-in-progress is not being captured in monthly data while some products may involve little processing and are being routed through Ireland for tax purposes. Jobs in the chemical/pharmaceutical sector were at 27,000 in 2004 and 26,000 in 2013 while total jobs in the chemical/pharmaceutical sector/medical devices sectors rose from 48,000 to 52,000 in the 10 years. Chemical/pharmaceutical sector/medical devices exports rose from €37bn in 2004; €43bn in 2007; €55bn in 2012 and €50bn in 2013. The ratio of total merchandise exports for 2004, 2007, 2012 and 2013 was 44%, 49%, 60% and 57% - - nevertheless, changes in the chemical sector in particular are not material for the economy. A November 2012 Davy report 'Ireland and the Pharma Patent Cliff - Importance of pharma sector overstated' [pdf], produced by Conall Mac Coille, chief economist, and Jack O'Gorman, pharma industry analyst, said that only around one-third of pharmaceutical export revenues count towards GDP because of the high import intensity including royalty payments. "The value added of the pharmaceutical sector was €13.8bn in 2011 or just 8.7 % of GDP."

Links to 2 Irish Times articles and one in the Irish Independent on

Irish manufacturing hits 15-year high in boost to recovery - - "A surge in new orders in August offered further evidence the economy is recovering [ ] One of the key highlights of the Manufacturing PMI for some time has been the Employment index, which now shows that the Irish manufacturing sector has increased headcounts in each of the past 15 months."

Why Irish manufacturing is bucking euro zone trend? - - "While factory activity in Europe and Asia cooled in August, as new orders dwindled in the face of escalating tensions in Ukraine and a patchy recovery in China, Irish manufacturing expanded at the fastest rate since 1999. [ ] Mr McQuaid also pointed to recent data from the European Commission, which shows Ireland has had a competitiveness boost through a reduction in unit labour costs, with a 20% relative improvement forecast against the euro zone average."

Services sector now expanding at best rate since 2007 - - "Philip O'Sullivan, economist with specialist bank Investec, said the service sector had experienced 25 successive months of expansion in business activity [ ] The rate of growth in new export business picked up, however, with the US and UK highlighted as key sources of new work from abroad."

3) Productivity/Unit labour costs: In April 2013 in a speech in Amsterdam, Mario Draghi, ECB president, said on the reduction in unit labour costs: "Ireland has seen an 18 percentage point improvement relative to the euro area average."

The Department of Finance's claim here [pdf; page 11] that a "continued competitiveness boost through reduction in unit labour costs with a 21% relative improvement forecast against the Eurozone average," is hugely misleading - - the average hourly labour cost covering all sectors of the economy other than 'Agriculture, forestry and fishing' was €25.03 in the first quarter (Q1) of 2008 and €24.89 in Q2 2014 [pdf].

A decline in relatively high-paying construction coupled with tax-related fake output reduces unit labour costs and 700 workers at Microsoft can produce 25% of its global revenues while the other almost 100,000 workers produce 75%.

In 2010, Patrick Honohan, Central Bank governor and a former professor of economics, warned about the use of Irish unit labour costs by "superficial analysts":

There are knock-on effects of the distinctive globalized structure of the Irish economy on other accounting measures of performance. With the structural shift towards high-productivity sectors during the 1990s and again since 2007, unit labour costs tend to fall even if wage costs for any individual firm or industry are increasing. Because of this shifting composition effect, as has been well-known for decades, but is routinely forgotten by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland."

Update Sept 12: The European Commission provided ministers with the latest opportunity to present propaganda as fact when falling unit labour costs in the US dominant drugs sector put Irish manufacturing among the best for competitiveness in 2007-2012. Ireland: Highest manufacturing productivity per person in EU thanks to US drugs firms - - the European Commission report includes a comparative table on services but as we outline below, the Irish data isn't reliable because of massive tax avoidance. Richard Bruton, enterprise minister, linked the news to his Action Plan for Jobs and Dara Murphy, minister for European affairs said: "this report serves to highlight that the strategies we have been implementing are achieving results" - - both claims are laughable but it's reported unfiltered in the media. What we repeatedly observe is that where there should be caveats to avoid misleading the public, there are none while the distorted data is used for political propaganda. The Journal: Ireland among Europe’s elite when it comes to competitiveness The Irish Times: Ireland ranked as one of the best for industrial competitiveness Irish Examiner: Ireland in top four most competitive countries in the EU

4) Exports: Ministers commonly conflate exports by foreign firms into global supply chains with indigenous exports to customers that have to be won, to gloss up the narrative but this posturing from Dublin makes the hard slog of developing export markets seem relatively easy.

We estimate that almost half the €92bn in 2013 services exports were tax-related or fake. However, the official position is that rising computer services exports reflect improved "competitiveness."

Irish Economy: Ireland's ephemeral services export boom (the CSO made some slight adjustments to the 2013 data in late June)

Forty American firms account for two-thirds of Irish exports

Last February the Government issued a report [pdf] on trade. However, it was more a work of fiction than real world facts:

The report says "Ireland is a strong performer in services exports, which grew by 11% in 2012 and account for 50% of total Irish exports. This reflects the growth in ICT and e-business sectors with a number of Irish services companies and large foreign-owned multinationals operating and exporting from Ireland. Ireland is also home to the service operations of many manufacturing firms as well as financial services, leasing and computer services firms. Some important services sectors within the Irish economy include:

Computer Services: accounting for 40% of total services exports in 2012, realising a 49% growth over a five year period."

Maybe some of the civil servants accept government propaganda as fact?

5) Innovation: The European Commission said in 2013: "Sweden, Germany, Ireland and Luxembourg are the EU Member States getting the most out of innovation, according to a new indicator."

So Ireland is one of the leading innovation economies in Europe but with a low patenting record and less than 30% of FDI firms spending even minimal amounts on R&D.

Irish resident patenting not suggestive of 'world class knowledge economy'

The tax avoidance related computer services exports and the number of science and technology personnel were the key factors.

However Gartner, the US IT research firm has estimated that almost half the 80,000+ employees in the Irish ICT sector, work in administration and they are hired in Europe for their foreign language skills.

The European Commission said in 2013 in respect of its 2012 Industrial R&D Investment Scorecard: "Three companies based in Ireland contributed 68% of that country's R&D investment: Seagate Technology (15.0%), Covidien (23.9%) and Accenture (31.2%)."

Most of this R&D is not done in Ireland - 2 companies result from US tax inversions and Accenture was spun-out from Andersen, the US accounting firm, in 2001 and after a period as a Bermudan company, it became "Irish" in 2009.

Update Dec 04, 2014: EU Industrial R&D Scoreboard: Tax-inverted brass-plate companies dominate in Ireland

6) Employment: Jobs announcements usually related to foreign firms are a key part of the government's propaganda machine.

The public can easily get the impression that there are huge numbers involved as announcements are spaced out for maximum impact.

However, in 2013 FDI firm jobs remained below the level in 2000 despite a 22% rise in the workforce.

IDA Ireland: Jobs in Irish FDI exporting sector remain below 2000 level

Since March 2011 when the current coalition took power, 60,000 jobs have been added:



24,000 are in 1-person self employment (some are not real jobs); 15,000 are in public schemes and 21,000 are as employees (both full-time and part-time).



The Government’s July 2014 target for FDI jobs is a net 7,000 per year, with retail, distribution, tourism and construction providing the most of the rest.

Ibec, the business lobby group, which a decade ago believed that the free lunch had been invented , says:

One of the major positive indicators of a consumer recovery in the past year has been the spectacular rise in employment, with 65,000 more people employed than two years ago."

The 1-person operations employ themselves and the public scheme members are employed who are unemployed!

There remains a steep hill to climb; employment is down 245,000 since Q2 2008 and in Q2 2014, 130,000 people working part-time wanted full-time work.



The Government’s July 2014 target for FDI jobs is a net 7,000 per year, with retail, distribution, tourism and construction providing most of the rest.



There is no sector today that could realistically be called a jobs engine.

More on jobs data here.

7) Inward FDI: Reuters reported in 2013 that at a conference in Dublin the head of Ireland's largest bank gave small business leaders the "15-second elevator pitch" that he gave to US executives when he was in New York or Boston.



"I've mentioned to US investors that US companies have more capital invested in Ireland than they do in Brazil, Russia, India and China put together," said Richie Boucher, chief executive of Bank of Ireland.

This misleading data came from an American Chamber of Commerce in Ireland annual report, where rising retained earnings of Irish affiliates of US companies related to 'trapped overseas cash' arising from tax avoidance, are counted as an FDI inflow.

The Organisation for Economic Co-operation and Development (OECD) said last April [pdf; page 5]:

Beginning in late 2014, a new methodology for collecting and reporting FDI statistics will come into effect. This is the OECD’s revised Benchmark Definition for FDI (4th edition), also known as BMD4. This new methodology will provide better measures of where international investment comes from, where it is going, and, most importantly, where it is creating jobs and value-added. It does so by distinguishing between ‘real FDI’ as opposed to various financial flows that are currently counted as FDI but which don’t add to the ‘real economy.’"

The pattern of FDI investments can also impact the national accounts in particular in aviation leasing where less than one thousand people are employed but the investment in over 3,000 commercial aircraft is valued at about half of annual gross domestic product.

In 2013 China alone received more FDI inflows than all EU countries together

Irish Budget 2015: Ibec back in boomtime mode; McKinsey warns of FDI challenges

Ireland's confusing FDI data in age of spin

Update: William Fry, a law firm, on Irish merger & acquisition activity highlighting the March 2014 listing on the New York Stock Exchange of a brass-plate company that uses the law firm's Dublin office as its address:

Irish companies are finding that the capital markets are becoming more receptive to listings. Irish gaming company King Digital Entertainment, the company behind the successful mobile game app ‘Candy Crush Saga’, had a $500m listing in March."

King was founded in Sweden and mainly operates from London -- calling this firm an "Irish gaming company" is another example of make-believe.

More detail here on FDI sector and tax avoidance:

Update, Sept 17: OECD & Tax: Everything grand in Ireland's Republic of Spin? - - from taboo to lots of new "opportunities."

Irish corporate tax policy like property bubble driven by short-term interests

Submission to Department of Finance consultation on corporation tax reform- - 17 page pdf document including the challenge of replacing a failed enterprise policy

8) Outward FDI: Brookings Institution, the Washington DC think-tank, gives Dublin an 8th ranking in the top global cities "sending" FDI (foreign direct investment ) to the US, which accounts for 141,600 American jobs -- the Reality Check is that this claim is mainly a fiction.

President Obama said last March at the St. Patrick's Day meeting with Enda Kenny, taoiseach: "there is tremendous investment by US companies in Ireland. There’s tremendous investment here in the United States by Irish companies."

Outward Irish FDI exceeds inward investment but this again is a fantasy.

The majority of the claimed Irish jobs in the US are at American companies like the tax-inverted Seagate.

CRH, the building materials giant, has 39,000 of its 76,000 payroll in the Americas and less than 2,000 in Ireland.

With about 90% of its shares held by non-Irish residents, it's arguable as to whether it is now an Irish company.

9) Government's accounting systems: The IMF in a report in July 2013 said that the government "prepares two sets of annual accounts which are audited and published within nine months of year-end, but neither provides a comprehensive overview of the central government finances or follows international accounting standards though they do conform with domestic legal requirements."

Monthly Exchequer returns only include part of revenues and spending; the charts of accounts for central government departments, extra-budgetary funds and other non-market agencies, local governments, and public corporations are not able to automatically generate summary fiscal data in line with international reporting standards; there is no permanent official or unit in the Irish administration responsible for setting and enforcing financial reporting standards across the public sector. As a result, there is no uniform set of accounting rule and procedures applying to government departments, extra-budgetary funds, semi-state bodies, local governments, and public corporations. "This makes consolidating government-wide financial information and promoting system-wide improvements in financial reporting practices very costly and time consuming."

Cross-departmental data with the exception of pay and pensions are not published.

How can public spending be properly monitored with this half-arsed system?

For example if the taoiseach wished to know what the public sector (including local government) spends on information technology hardware, software and maintenance contracts, it would likely take weeks to pull the information together.

At the MacGill Summer School in July 2009, Enda Kenny, then leader of the Opposition, asked why do we have a budgetary system in place that is unfit to run a corner-shop, let alone a nation of 4m people?

Kenny has been in a position to do something about it since March 2011 and the population is now 4.6m.

10) Gross Capital Formation: In 2007 business investment and construction accounted for 30% of GNP and it's back to about 18% comparable with levels of 18% of GDP in Sweden and 17% in Denmark.

The Irish construction sector will need to grow further from its low base during the bust to meet housing needs in particular while prime office rents in Dublin are heading back to boomtime levels.

The foreign multinational sector again can have a big impact.

Aviation leasing in Ireland employs less than 1,000 people but the companies own over 3,000 commercial aircraft that were valued by the Department of Transport in 2011 at €83bn - - almost half the value of annual GDP.

In addition Ryanair is Europe's biggest low cost airline has a fleet of over 300 aircraft.

So purchases and sales of aircraft can result in a lot of volatility in the data.

This is an extract of a commentary on the Australian Macro Business website (behind a paywall). It seems like someplace we may know! Look at the Reserve Bank of Australia, the Treasury, the Government and the press, on most issues they are caught in some weird echo chamber where bogus ideas and frames of reference bounce up and down in a vacuum of ersatz gravity. A few examples make the case. For the past decade, China was thought by 'the group' to be going to grow at astonishing rates forever. Warnings to the contrary by people such as Michael Pettis and Jim Chanos were actively attacked and discarded. When the restructuring of the economy that was embraced by 'the group' proved based on a false assumption, no accountability transpired, a new set of unchangeable truths emerged in the promotion of a great housing inflation. Now, as that bubble matures, only a hand full of marginalised economists and analysts keep the light of reason burning as the same members of 'groupthink' promote a new disaster to cover the tracks of the old. I could go on but there is no need. The groupthink loop between the RBA, Treasury, Government and media is obvious. What’s more interesting is to discuss why this sociological phenomenon has come to pass. Australia is always prone to groupthink. We exist in a sub-altern national psychology that is most comfortable in a state of colonisation. That’s the simple fruits of history. We are colonial people, born of underclasses, and driven by an inheritance of material philosophy hostile to that which cannot be seen touched, kicked or punched in the face. It has an upside in its defence of equality but is an identity innately suspicious of ideas and oriented towards simplicity. It is very fertile ground for populism."

GDP and GNP

The CSO says that Gross Domestic Product (GDP) and Gross National Product (GNP) are closely related measures. GDP measures the total output of the economy in a period i.e. the value of work done by employees, companies and self-employed persons. This work generates incomes but not all of the incomes earned in the economy remain the property of residents (and residents may earn some income abroad). The total income remaining with Irish residents is the GNP and it differs from GDP by the net amount of incomes sent to or received from abroad



In Ireland's case, for many years past, the amount belonging to persons abroad has exceeded the amount received from abroad, due mainly to the profits of foreign-owned companies, and our GNP is, therefore, less than our GDP.

In 1970, the reverse was the case with GNP higher, because of income flows to Irish residents from emigrant relatives abroad.

In recent years GNP, excluding the profits of the foreign-owned sector has been typically about 20% smaller than GDP.

In 2013 the difference was 15% because of the decline in profits related to the drugs patent cliff.

While GNP has been seen as a better indicator than GDP of Ireland's living standard and output, it has become distorted in recent years by the rise in tax inversions/ redomiciling.

Prof John FitzGerald of the ESRI in a 2013 paper [pdf] estimated that global profits re-domiciled in Ireland added almost €7.5bn to recorded GNP in 2012, making it appear 5% larger while the balance of payments surplus officially 6.1% of GNP was in reality 0.6%.



Medtronic, the US medical device maker, will likely complete its planned tax inversion by the year end.

So GNP will have an artificial boost from the new faux-Irish group that will have a payroll of about 50,000.

PMI

The published monthly PMI (purchasing managers index), for example on manufacturing, according to Markit, the London based financial index firm, is "an indicator designed to provide a single-figure measure of the health of the manufacturing industry [ ] which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago."

Comparing a current index result to a historical one, does not imply a comparative level of activity - which journalists commonly suggest.

Philip Vermeulen, an economist at the ECB in a 2012 paper [pdf] wrote that for the construction of PMI indices a representative sample of firms are asked each month whether output went ’up’, ’down’, or remained ’unchanged’. The indices that are released are diffusion indices, namely simple weighted averages of the aggregate ’up’ and ”unchanged” response shares in the population, i.e. with weights 1 and 0.5 respectively.

"Say if 50% of the managers answer that output has increased and 10% that it has remained unchanged the index would be 55."

For the output index, termed officially as ’ISM production index’ in the US and ’Markit Eurozone manufacturing PMI output index’ in the euro area, a representative sample of industrial firms in both economies is asked whether output (at the firm level) went up, down or remained unchanged relative to the previous month. In principle therefore the output index data should reveal information about the direction and strength of monthly industrial production growth.

Vermeulen says that a high PMI reading simply means that more executives are reporting improving business conditions than are reporting deteriorating business conditions. There is no attempt to capture differences across firms or over time in the intensity with which conditions are changing. Nor are the responses of different firms weighted by firm size. It follows that the PMI may miss a shift in the direction of the overall economy if that shift happens to be concentrated in a relatively small number of large firms.

Markit, the financial index firm, says there are two parts to the monthly PMI releases: the headline PMI number, designed to provide a snapshot of the health of the economy, and the sub-indices, or component level data. "These sub-indices provide unrivalled insight into key economic drivers, such as inflation, exports, employment and inventories.

Each country PMI survey for the manufacturing or service sector is based on questionnaire responses from panels of senior purchasing executives (or similar) at over 400 companies. The survey panels are carefully recruited to accurately represent the true structure of that sector.

Questionnaires are completed in the second half of each month and the survey results are then processed by Markit’s economists. Respondents are asked to state whether business conditions for a number of variables have improved, deteriorated or stayed the same, compared with the previous month. Reasons for any changes are also requested from respondents.

Diffusion indexes are calculated for each variable. These indexes vary between 0 and 100 with levels of 50.0 signalling no change on the previous month. Readings above 50.0 signal an improvement or increase on the previous month. Readings below 50.0 signal a deterioration or decrease on the previous month. The greater the divergence from 50.0 the greater the rate of change signalled."

Markit doesn't publish its panel response rate, which would be lower than normal in an August month.

Media headlines suggesting that Irish manufacturing activity was back to the 1999 level are clearly misleading.

Pharmaceutical and medical devices account for almost 60% of Irish merchandise exports but the monthly patent cliff volatility of the past two years hasn't been reflected in the PMI results while in respect of services, the main component does not reflect activity in Ireland.

Update: Sept 19:

Irish Economy 2014: GDP up 1.5% in Q2; GNP up 0.6% - personal spending weak

Surging Irish growth a lesson for European Union policy makers?