Retail Sales Index for August

The CSO’s Retail Sales Index for August generated some modest positive reaction as both monthly and annual rises were recorded in the series to August.  The core retail sales index (excluding motor trades) has risen in value and volume terms for the past two months.  However, these rises have only seen seen sales clawback part of the drop registered in June: both the value and volume series remain below the levels recorded in May.



The annual change of both series nudged into positive numbers in August but there is little to suggest that this will be maintained.



The monthly changes continue to oscillate around zero.

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NERI Income Tax Proposal

The third Quarterly Economic Observer of the Nevin Economic Research Institute contains a specific income tax proposal for the upcoming budget.  The proposal is to raise the effective income tax rate of the top 20% of income tax cases by 1.5 percentage points.

We propose a modest increase in the effective income taxation rate faced by the top 20% of tax cases. Overall we suggest that the effective income tax paid by this group rises by 1.5% in 2013; meaning that on average the top 20% of tax cases would pay almost 23% of their income in income taxation in 2011.

The data used is from this Parliamentary Question tabled to the Minister for Finance in July.  Here I propose to use the data from another Parliamentary Question to assess the impact of this proposal on different income levels.  This provides us with the following table for 2011 incomes.

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GDP/GNP Revisions

As pointed out in the previous post Irish national income statistics are hugely influenced by the MNC presence here.  The figures themselves are also subject to frequent revision as new information becomes available and is incorporated into the statistics.  In the fourth paragraph of the recent National Income and Expenditure Accounts the CSO said the following:

The estimates for 2011 are based upon indicators for the different aggregates and must be regarded as tentative. The provisional nature of the estimates for 2009 and 2010 must also be borne in mind. In particular, the estimates for the year 2010 in the present report must be regarded as preliminary. Many of the inquiries upon which the basic compilations rest are incomplete and to the extent that figures given for 2008 and 2009 are still partly subject to revision, projections for the year 2010 are also affected. While no guarantee can be given that published figures will remain unaltered as inquiries proceed and as sources and methods are reviewed, it is expected that any changes made in future in relation to years earlier than 2007 will have a relatively insignificant effect on the year-to-year trend in these data.

The first estimate we will use is from the Q4 2011 QNAs released back in March and the second is from the Q2 2012 QNAs released yesterday.

The statistical revisions for GDP are shown below.

And is what has happen to the GNP estimates.

The upwards revisions make absolutely no difference to the economic reality faced by people but it does highlight the difficulties of measuring economic activity and further downplays the import that should be placed on the 4.3% rise in GNP reported yesterday.  As well as not reflecting the domestic economy it could be revised away in subsequent data releases.

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What’s the story with GNP?

Yesterday’s release of the Q2 2012 quarterly national accounts has led to some upright revisions of the meaning of the measures contained in the accounts.  It seems that there are figures which are bad when they go down but not good when they go up.  The release shows that real GDP was unchanged in the quarter while GNP jumped by an impressive sounding 4.3%.

For the past two years Irish GNP has been underperforming GDP and during this time there have been innumerable instances where GNP has been cited as the better measure of Irish economic performance.  These include:

Data published by the CSO in the last few days presents a very grim picture of the state of the country.  It shows that GNP (the relevant measurement of the state of the economy in Ireland) declined in 2011 by 2.5% – Government ministers had been claiming over the last several months that the economy had returned to growth.

Vincent Browne, politico.ie, 28th March

Far from the modest growth predicted in 2009, domestic Irish economic growth or GNP (the best measure of real activity in Ireland) has fallen sharply, with demand fundamentally depressed.

Daniel McConnell, Sunday Independent, 1st April

Our true economic activity, measured by GNP is now in decline three quarters in a row in inflation-adjusted terms.

Constantin, Gurdgiev, Sunday Times, 15th July

Last year, once the multinationals' contributions were stripped out, GNP figures showed that Ireland suffered a €3bn contraction in the activity generated by Irish nationals. GNP figures for the first quarter of 2012 were down by 1.3 per cent.

Nick Webb & Susan Hayes,Sunday Independent, 16th September

With growth confined so far to the export sectors and the domestic economy as measured by GNP forecast to shrink by a further 0.7pc in 2012 -- the fifth successive year in which the domestic economy will have contracted -- our economic recovery, such as it is, remains very finely balanced.

Sunday Independent, 25th April

For GNP - which excludes foreign multinationals and better reflects the domestic economy - the forecasts show more contraction at -0.2%.

RTE.ie, 30th April

And there are many, many more similar references.  It would not be difficult for someone to believe that all falls in GNP are bad for the “domestic economy”.  On an annual basis GNP fell each year from 2008 to 2011.  GDP fell from 2008 to 2010 but registered some modest growth in 2011 but as the above show much of the emphasis remained on the falling GNP figure.  This might suggest that when GNP does what is shown in the figure below in Q2 2012 that it would be cause for celebration.

It should be little surprise that the increase in Q2 generated some positive-sounding headlines.

• Journal.ie: Domestic economy grows in second quarter but GDP flat
• Independent.ie: Domestic economy grows sharply in second quarter – CSO

Alas, all of this is misleading.  GNP is not the “relevant”, “best”, or “true” measure when it comes to economic performance in Ireland.  It is an important measure but it is not absolute.  It must be somewhat disconcerting for people who were told that the falls in GNP were reflective of continued contraction to be now be told that the big jump in GNP announced today is not proof “the state of the economy in Ireland” is improving – and sometimes by the same people!  Other headlines generated by today’s release  include:

• Irish Times: Irish economic growth stalls
• Irish Examiner: Economic growth remains flat
• Newstalk: No economic growth in second quarter

The “no economic growth” perspective is pretty clear when the GDP figures are examined.

There was a weak upward trend in GDP from the start of 2010 to the middle of 2011 but the past year the trend is very much sideways.  The overall GDP figure for Q2 2012 shows no change on Q1 2012 but every component of GDP declined relative to Q1.

Everything indicates a fall in economic activity.  The fall in C, I, G and X was just offset by the fall in M so that overall GDP was unchanged (the reported number rose 0.01%).

The reason GNP rose in the quarter was because of a drop in the net outflow of Net Factor Income from abroad (the balance of profits flowing in and out of Ireland).  As a result of the large presence of MNCs in Ireland this flow is negative.  In Q2 2012 the outflow was lower than it had previously been so the downward adjustment to GDP to find GNP was smaller than previously.

There was no extra activity in the Irish economy.  There was no extra money in the pockets of Irish residents.  It was simply that the MNCs sent less money abroad than they previously did.

The Balance of Payments shows that the outflow of ‘direct investment income’ was €11.7 billion in Q1 2012.  In the second quarter this outflow fell to €10.8 billion.  It is very difficult to seasonally adjust accounting decisions.  This drop in repatriated profits explains the rise the GNP.  There is little good news in yesterday’s release.

Of course, in MNCs financial flows can influence GNP when it is rising it is likely they can do the same when it is falling.  The drop in GNP was attributed to further contraction in the domestic economy.  Given the above explanation it is also instructive to note that the outflow of ‘direct investment income’ rose from €37.6 billion in 2010 to €41.1 billion in 2011.  This contributed significantly to the drop in GNP in 2011 but one would not gather that from the quotes used above.

So in 2011, GNP fell because the MNCs repatriated more of their profits and in 2012 GNP is rising because the MNCs repatriated less of their profits.  Most of the current moves in GNP have little to do with the domestic economy.  I have tried to make this point before.

To get a true measure of the “Irish economy” rather than the “economy in Ireland” we need something that reflects the following:

• Final consumption expenditure of households and charities
• Investment of households, firms and government (excluding MNC investment)
• Government expenditure on goods and services
• Exports of indigenous Irish firms
• The imports necessary for the above

No such measure exists.  In theory GNP should approximate this, but the GNP figure is derived by finding the overall GDP figure from C + I + G + (X – M) which includes the activities of MNCs and then subtracting Net Factor Income from Abroad (heavily influenced by MNC profits). 

GNP does not exclude the impact of the MNCs, it includes them twice but it might be expected that the positive effect of their activities on GDP is cancelled by the negative effect of their repatriated profits on GNP.  Over the long run this is probably true but it does not have to hold in the short run. 

Quarterly and annual changes in GNP can be hugely influenced by the changes to the booking of exports or the repatriation of profits by MNCs.  The total goods and services exports of the MNCs with operations in Ireland is equivalent to 95% of GDP.  It is clear that what might be regular business decisions for a large company can have a huge impact on Ireland’s national accounts.

The CSO do provide figures on what they call “total domestic demand”.  This is simply the sum of consumption, investment and government expenditure plus the impact of inventory changes.  It is a useful measure but it includes MNC investment (such as aircraft leasing companies adding to their fleets), excludes the exports of indigenous Irish firms (such as the agri-food sector) and completely omits imports.  We do not have had a useful broad measure of short-term changes in the “Irish” economy. 

How has “total domestic demand” been faring?

Oh.

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Bond Yields

The pattern of Irish government bond yields in the past few weeks has been remarkable.  Here the a six-month chart of the nine-year yield as calculated by Bloomberg.

This seems to be only term in the set provided by Bloomberg that still produces the interactive charts.  Anyway as we pointed out last week the drops have been right along the yield curve.

Since last week the falls have continued.  At the time the nine-year was at 5.3% and as can be seen above the continued decline has seen it drop below 5%.  This is all in the face of public finance data, national accounts data, employment data, retail sales data that fails to impress.  As before, this drop in bond yields should be considered a positive but one that, for the moment at least, should be viewed as transitory rather than permanent.

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