Tuesday, March 27, 2018

What is going on with GNP?

The issues with Ireland’s national accounts have gotten a good airing over the past two years or so.  Since the publication of the 26 per cent growth rate in July 2016 one that has been surprising is where some of the well-known (and not so well-known) distortions show up. 

A lot of attention has focused on GDP but apart from an extraordinary quarterly growth rate in Q1 2015 the following chart isn’t that noteworthy.  There has been a bit of volatility since late 2016 but it doesn’t seem that much different to what is showing for 1998/99.

QNA GDP Quarterly Growth Rate 1997-2017

The Q1 2015 spike clearly points to concerns about the level but that one quarterly growth rate apart most of the other outturns are within the realm of plausibility.  But what about the quarterly growth rates of GNP? GNP is what is supposed to be left after the profits of MNCs have been counted as an outflow.

QNA GNP Quarterly Growth Rate 1997-2017

This obviously shows a good deal of volatility but up the middle of 2016 it is not that outlandish.  Since then though the quarterly growth rates of GNP have been all over the place.  The last five observations are:

  • Q4 2016: +10.3%
  • Q1 2017: –6.4%
  • Q2 2017: –3.7%
  • Q3 2017: +12.3%
  • Q4 2017: +6.3%

As we commented here we have had the highest and lowest quarterly GNP growth rates in quick succession.

We might expect the relative volatility in growth rates to be the other way around: that if MNCs are causing GDP to jump around these would wash out through net factor payments and that GNP would be the relatively stable one.  The fact that MNC profits generated in Ireland are counted as a factor outflow in the period in which they are earned.  So an MNC-driven spike in GDP should be matched by an offsetting increase in factor outflows.

This is what we get if we look at the quarterly change in nominal GDP from the national accounts and the quarterly change in direct investment income on equity from the balance of payments.

Changes in GDP versus Profit Outflows

The surprising thing is how string the relationship is in 2015 and how weak it is recently.  The spike in GDP in Q1 2015 was accompanied by a spike in profit outflows. This is a bit surprising given the expected relationship between the 2015 GDP increase and depreciation.  The changes in GDP are “gross”,  i.e. before depreciation, whereas the profit outflows are “net”, i.e. after depreciation (and tax of course!).  Anyway, as GDP oscillated through 2015 the change in profit outflows tracked the changed in nominal GDP.  This continued through to the middle of 2016.

Since the middle of 2016 the changes to profit outflows have been relatively modest. The quarterly outflow was €13.1 billion in Q3 2016 and had reason fairly steadily and was put at €16.2 billion in Q4 2017. 

Over the same period GDP has been much more volatile, either rising by more (as was the case for most quarters) or falling by more (as was the case for Q1 2017).  It is the gaps between the lines in the chart above (and the changes in their signs) that have contributed to the recent volatility of GNP.

Value added has bounced around a bit over the past year and a half.  The relative stability of profit outflows means these changes in value added are being reflected in Ireland’s national income (or least are not been attributed to non-residents).

But why is this? What factors are there that can cause value added to bounce around yet not have this reflected in net profit outflows?  It could be that depreciation (of aircraft or intangibles) is playing a role but depreciation itself should be relatively stable (unless assets enter or leave the capital stock). 

If we had quarterly GNI* data we might be able to throw some light on this as,among other things, that measure is adjusted for the depreciation of aircraft and intangibles.  But until we get that we are left with the question, “what is going on with GNP?”, and even then we mightn’t be able to answer it.

Finally, just to show that outflows of direct investment income on equity in the balance of payments are the key constituent of net factor outflows in the national accounts this shows the two of them since the start of 2012:

Net Factor Income Outflows

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