Explaining (part of) the Irish growth anomaly (2 graphs)
Update. On second thought I’m probably too skeptical. Scientists should be skeptical but they also have to expect the unexpected. The extreme levels of investment in intellectual property rights in Q3 (and probably Q4) won’t be sustainable but a permanently higher level might be the ‘new normal to come’. Even then, the growth impetus will diminish and probably become negative in 2016.
Somewhat shady acquisitions and production of ‘property rights’ might explain an important part of the extra ordinary high growth of Irish Gross Domestic Product (GDP) in 2015. Irish 2015 ‘real’ growth is, at 7,8% YoY, extremely high in a European as well a historical context. When we look at growth from the demand side the surprise is even greater, as two of the main sources of demand (net exports and government expenditure) both declined. This does not mean that international trade was not dynamic: ‘Import growth during the year of 16.4 per cent outpaced that of exports at 13.8 per cent’. But it did not contribute to a net increase of domestic demand, even though tourism (which is counted as an export) increased at a double digit rate. Also, government employment (education + public administration) increased with about 3%, despite the decrease of real government expenditure.
When government expenditure and net exports decrease, growth must have been caused by increases in household consumption and investment. Irish households (and companies) are still deleveraging: a sizeable part of income is used to pay down debt and does therewith not contribute to demand for goods and services. Despite this household domestic consumption increased with a sturdy 3,5% which can be explained, more or less, by 2,3% employment growth in combination with an increase of hours per job, though de 0,5% decrease (!) of average wages in the fourth quarter was, of course, a negative for consumption. It all adds to the confusion: 7,8% growth but declining average wages, sizeable deleveraging but high growth of household consumption. Anyway – the increase of employment and household spending is way too low to explain the extra ordinary. Which leaves ‘investment’ as the main demand side engine of growth. And investment indeed increased with leaps and bounds, i.e. with 21% YoY. Aside: the high increase of production also means that productivity must have increased at an awesome rate. Aside: the high increase of production also means that productivity must have increased at an awesome rate.
How to make accounting sense of this? Let’s take a glance at the production side.
We do see a sturdy growth in employment in construction (+10.000 jobs or +8%), which is no doubt connected to the 15% increase in residential construction. But even this is not enough by a long shot to explain the magnitude investment increase. And though other sectors also do show sturdy employment growth, only ‘tourism (accommodation and food services) has a rate (+5%) which comes somewhat close to the employment growth rate of construction – but tourism produces memories, which are not yet counted as investment goods.
The answer to the riddle is provided by graph 1, which shows a specified kind of investment as a % of GDP (data: Eurostat). The new national accounts consider expenditure on Research and Development as well as the acquisition of intellectual property rights as ‘investment’, which means that money spent on these activities is added to the rate of investment as well as to GDP. Graph 1 shows that this kind of investment has increased to, in a historical perspective, an extra ordinary high rate while graph 2 shows that in a comparative perspective the Irish rate is also: extra ordinary. A high rate is characteristic for rich, productive economies but the even then Irish rate is slightly anomalous. Surely when we consider that according to the Irish statistical office investments continued to increase at break neck speed in the fourth quarter of 2015, which is not yet included in the Eurostat data shown in the graphs. I’m still at odds how this investment spree is financed (profits as estimated in the national accounts are surging, but a large part of these were transferred abroad, leading to a national product (total income of Irish nationals and companies) that increased much less than domestic product (total production of people and companies in Ireland)) . The data are however consistent with an administrative transfer of patents to Irish subsidiaries of for instance pharmaceutical or software companies, which considering the new national accounting rules shows up as ‘growth’ and an increase of productivity (in a meta sense, this should not be considered part of the market exchange or the tax economy, but as a kind of ‘gift exchange’ economy). Part of Irish growth surely was ‘genuine’ (more products and services), part might have been a kind of accounting mirage, not because R&D does not lead to valuable results but because property rights were possibly not so much produced (which must have been visible, quod non, as a large increase of people working in modern sectors) as transferred from on country to another. It’s a bit as if a company like Ryan Air buys planes (produced in for instance France but showing up as investments in Ireland) which fly all over the world but not necessarily to or from Ireland with this difference that the planes are not produced by a subsidiary of Ryan Air while these patents are produced by a subsidiary. I however lack the data to investigate this. The anomaly is as far as I’m concerned explained from the expenditure and production side, but not from the financing side. When such transfers decline, this will by the way show up as a decline of investment and a crimping economy.