Friday, 2 July 2010

Recession? What recession?

Ireland's recession is over!!! Hurrah!!!!

After removing regular season influences, GDP increased by 2.7% in the three months to March, compared with the three months to December 2009. That must mean the recession is over, right? Growth has resumed right?


The Irish economy is a curiosity in that its underlying structure is badly distorted by government industry policy (read meddling) and the statistics we might use to measure it are tainted by accounting fiddles to the point they are almost as useful as measures of Bernie Madoff's investment performance.

Because the crux of the matter is that the amount of value added created in Ireland by Irish entities has continued to fall. While GDP increased, GNP fell by 0.7% in the quarter. As a nation we have continued to suffer a fall in our income and that is the only thing that matters.

Let's explore this in a little more detail. There is some useful background reading in this topic here and here.

The difference between GDP and GNP will be net foreign income. If you deduct that component of GDP (net output) that represent is effectively owned by foreigners and add net output created created overseas and owned by Irish residents you get GNP. Examples of the former would be profits generated (more accurately reported) by Microsoft or Dell operations in Ireland. The latter would be profits of CRH in the US.

Add to that the accounting shenanigans practiced by companies resident in Ireland and you have a recipe for a complete distortion of the true state of health of the Irish economy as you do here.

Exports may have increased and pushed up Irish output (GDP), but there is no way to know if that simply isn't the result of an accountant's pen. What we do witness is that the supposed rise in output in the economy, had absolutely no apparent positive affect on the income of Irish residents (GNP).

This tells us nothing new. As I noted in the blogs I link above, Ireland is not a "small open economy". Exports provide relatively little feedback into the economy. If Dell exports more (or records in its accounts that it exports more), that simply means that they are importing more parts from abroad to then crudely bang together and sell on, or they are just writing up their profits by claiming more revenues from abroad.

What appears to be happening here? I reckon it is most likely the latter, for two reasons. The import response to the rise in exports was muted (for any merchandised exports like pharmaceuticals, chemicals, IT equipment etc. companies need to import more to export more). Secondly, with some modest improvement in foreign European markets, there is increased incentive to record revenues in Ireland - over 2008 and 2009 Google or Microsoft for example would have recorded less in profit or even loss in higher tax jurisdiction. Once demand stabilises to the point that they are no longer loss making, they start to transfer more in way of revenue to Ireland in order to bring any profits within their low tax jurisdiction.

It all amounts to smoke and mirrors basically. Keep watching the GNP figures before GDP. The state of the labour market gives the best cues - unemployment is still on the rise the latest figures show.


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