Wednesday, April 16, 2014

The rise in GNP

Of the notable features of the first estimates of the 2013 national income statistics was the 3.4 per cent rise in real GNP.  The following table draws on data from the subsequently released quarterly non-financial accounts for Q4 2013 to get some insight into this. 

Final year figures for 2013 have not yet been released so the 2013 figures in the table reflect the sum of the individual quarterly outturns for 2013 so are incomplete and subject to revision.  Figures for earlier years are annual figures taken from the non-financial accounts.  All the figures are nominal.  Click to enlarge.

GNI from GDP

The table starts with Gross Domestic Product (GDP) ends with Gross National Income (GNI).  GNI is very similar to GNP with the only difference being minor flows of international (i.e. EU) taxes and subsidies on products. 

What do we see? The 2013 increase in GNI was 3.8 per cent which is close 4.0 per cent increase in nominal GNP shown in the preliminary results from the quarterly national accounts.   It can also be seen that the starting point of nominal GDP was largely unchanged over the last year with a rise of 0.1 per cent recorded.

From there the primary reason for the €5.1 billion increase in GNI is the €3.4 billion reduction in the retained earnings of companies in Ireland.  It is likely that most of this is owed to non-residents (the Rest of the World sector) and is related to the fall in profitability in the pharmaceutical sector arising from the ‘patent cliff’.

An unusual feature of this is that it is not reflected in the GDP figure which serves as the starting point in the above transition to GNI .  It must be the case that something else rose to offset the GDP impact of the reduction in profits of foreign-owned firms.

Part of this can be seen in the table above: product taxes collected by the government.  These rose by around €1 billion during the year.  This increases GDP but on their own are not enough to explain the stability of GDP.

Within the GNI calculation itself it can be seen that dividends received by the domestic sectors increased by €1.4 billion.  Dividends received by government, financial corporations and non-financial corporations all increased in 2013.  Click to enlarge.

Dividends and Retained Earnings

The increase in the dividend receipts and retained earnings resources of non-financial corporations since 2010 is particularly noticeable but, as stated, much of the 2013 increase is attributed to the government and non-financial corporate sectors.  If these arose from the profits of domestic firms then it would be reflecting in the GDP and GOS figures but to the extent that these dividends are paid from abroad they would be a reason behind the increase in GNI.

Finally, in the first table there is the measure of “Property Income” which excludes dividends and retained earnings and includes interest, rent and income attributed to insurance policy holders (pensions and life assurance).  By far the largest elements of this is interest.  The net amount of this property income increased from €6.2 billion in 2012 to €7.4 billion in 2013. Here are the recent interest flows (these are the interest amounts after the FISIM adjustment).


The numbers are very large.  Looking at the net flows with the Rest of the World we have interest paid by ROW to Ireland minus Interest paid by Ireland to ROW which gives:

  • 2012: €35,989m -  €28,081m = €7,908m
  • 2013: €32,972m - €24,153 = €8,819m

Ireland has a large external debt but there is more interest paid into the country than leaves (after the FISIM adjustment).  In 2013, this net flow provisionally increased by €0.9 billion.  This probably didn’t have a large impact on GNI though. 

The lower panel of the above table shows that almost all of the interest is received by the non-financial corporate sector: €39.1 billion out of €41.1 billion.  Most of this again is received by collective investment funds which form part of the IFSC.  And most of the return/profit earned on this will be in the €25.5 billion of dividends/retained earnings owed by financial corporations shown in the previous table with the likelihood being that most of that is owed to non-residents.  For the years up to 2012 it can be seen that the bulk of dividends/retained earnings is owed to the Rest of the World (in 2012 it was €57.4 billion out of €80.6 billion).

So interest doesn’t really explain the increase in GNI.  One point worth noting in the table is the drop in interest receipts of the household sector from €4.3 billion to 2008 to €0.6 billion in 2013 (after the FISIM adjustment).  Lower interest rates are good for borrowers but not for households with savings.

Anyway, why did GNP rise?

  • GDP remained unchanged (with increased product taxes offsetting some of the fall in company profits from the ‘patent cliff’)
  • Retained earnings owed by companies fell by €3.4 billion (with most of the likely owed by non-resident companies)
  • Dividends received by domestic sectors increased by €1.3 billion (with some of this likely paid by non-resident companies)

But this doesn’t really answer the question.  The key is GDP remaining flat in spite of the drop of profits for foreign-owned companies.  So the question is not why did GNP rise, but why did GDP stay flat.

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