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

Thursday, March 22, 2018

The Consumption Conundrum

Ireland’s national accounts get a bad rap but amidst all the distortions one would think that personal consumption expenditure on goods and services (the “C” of C + I + G + (X – M)) would be a distortion-free zone.  Of course, in relative terms, the consumption component of aggregate demand is as oasis of calm but there are a few wrinkles worth exploring.

By almost all metrics the Irish economy is motoring along nicely.  Employment is growing rapidly (+3.1% in Q4 2017), full-time employment is growing even faster (+5.4%) average weekly employees earnings are rising (+2.5% in Q4), agricultural incomes boomed (+35.2% in 2017) and though we have seen some modest income tax changes the PAYE and total USC component of Income Tax was up 8.6% in 2017.  And the population is growing (+1.1% in the year to April 2017).

But is this being translated into consumption growth?  Here are the year-on-year growth rates of personal consumption expenditure from the Quarterly National Accounts with the Q4 2017 update provided last week.

QNA Consumption Year on Year Real Growth 2011-2017

The improvement from 2011 to the middle of 2016 is probably close to what one would expect.  Growth rates returned to positive territory and then continued to edge upwards.  But the growth rate slumps from the middle of 2016 and has hovered around two per cent for the past 18 months or so.  Such sluggish growth does seem to fit with the strength seen across other indicators (a point made recently here).

We do have indicators that point to more rapid growth in consumption. At the end of 2017 the Retail Sales Index was showing volume growth of more than six per cent (excluding the volatile motor trades).

Retail Sales Index Dec 17 Growth

The index does show a slowdown in growth (but from mid-2015) rather then (mid-2016) but only briefly fell to three per cent and has been moving upwards for the past 18 months or so.

So why isn’t this being reflected in the growth of consumption in the national accounts?  One reason why the rates are different is because the measures are different.  Retail sales are only one element of consumption and exclude almost all services consumption.

The largest item in consumption is housing services.  Housing accommodation makes up one-fifth of the national accounts measure of consumption for Ireland (in nominal terms it was €17 billion out of €87 billion in 2017). 

For tenants, the amount of money paid on rent represents their spending on housing (or at least on the accommodation part).  But about 70 per cent of Irish households don’t make a regular payment for their housing – they are owner-occupiers.  They may make mortgage payments but that is a combination of a loan repayment (saving) and an interest payment for a different service – credit. For these households an “imputed” rent is calculated as if the owner was renting from themselves. 

This “imputed rent” is also counted as household income but as it is matched by imputed expenditure the net effect is zero.   Of the €17 billion of rent in consumption in 2017, €4 billion was actual rent paid by tenants and €13 billion was the imputed rent of owner-occupiers.

Regardless of the ins and outs and it should be little surprise to see that our consumption of housing has been pretty static recently. 

Housing Consumption 2004-2016

It is hard for the consumption of housing to increase when the stock of housing available for consumption is barely increasing.  So, even if other the other components of consumption are growing strongly (as the retail sales index suggests) the overall growth rate of consumption will be dragged down because the largest component (housing) is not growing at all.

But that doesn’t explain the fall off in growth seen in 2016.  We don’t get a quarterly breakdown of the components of consumption so we can only look at annual data.  In annual terms the real growth of real consumption has gone from 4.4 per cent in 2015 to 3.3 per cent in 2016 to 1.9 per cent in 2017.  Housing may be dragging the overall rates down but it is not causing them to fall.

One culprit might be insurance.

Insurance Consumption 2004-2016

Whoa!  This shows a 80 per cent fall from 2005 to 2012 and then a 200 per cent rebound up to 2014 and declines since.  Insurance isn’t a huge component of consumption (the nominal amounts are fairly close to the constant (2010) price amounts shown in the chart) but it has been volatile in recent years.

The volatility may be down to how insurance is included in consumption.  There are a number of moving parts but in rough terms it is net cost to households, i.e. Premium + Supplements – Claims.  Part of the reason for the rapid increase since 2012 shown above was a fall in claims.  They were €9.7 billion in 20112 and had fallen to €8.7 billion by 2015.

So the consumption of insurance rose rapidly from 2012 but not necessarily because households were spending more on insurance premiums but because they were getting less back in claims.  And this may have reversed in recent years so higher claims reducing the consumption of insurance. 

As stated insurance is a relatively small component of consumption but it may be partially to blame when it comes to the growth of consumption not matching our expectations based on other indicators.  And the detailed data only yet go up to the 2016.  We will learn more when we see the 2017 figures later in the year. 

The growth rates of consumption for items such as food, clothing and furniture did slow markedly in 2016 compared to what they were in 2015 but we’ll wait until the updated (and possibly revised) figures up to 2017 are published before establishing whether this is a pattern.  There is something funny going on with the volume figures for hospital services in personal consumption expenditure but it probably doesn’t add much to our narrative here though it may be a reason for some revisions.

The growth of consumption is lower than we might expect but, in looking at housing and insurance at least, this seems likely to be due to how consumption is measured for national accounts purposes rather than anything untoward in household spending patterns.  The retail sales index is probably better aligned with the money coming out of people’s pockets and the growth of that continues to tick up.