Tuesday, July 4, 2023

Still Waiting for US GDP to be Revised Up

We have been tracking the impact in Ireland’s national accounts of the structures of US MNCs for some time.  In recent years, many of those structures have changed leading to changes in several key metrics in Ireland such as the stock of intangible assets and the destination of outbound royalty payments. 

As a result of the changes in the destination of royalty payments we have been expecting revisions to US GDP.  See previous post here with an even earlier one here

The previous post goes through the impact of the changes introduced by Google and Facebook in 2020 when they ended their use of “double-irish” type structures.  We won’t repeat that detail here but will highlighted the updated position of the mismatch between the Balance of Payments figures for Ireland and the U.S.

One point we will reiterate is the changed nature of outbound royalty payments from Ireland.

Royalty Imports US v ROW 2014-2023

Obviously the first thing to notice is the scale. These outbound payments are enormous. In the 12 months to the end of March they came to almost €140 billion.  What the chart also shows is the change in the destination of these royalties.

Up to 2020, most of the royalty payments from Ireland ended up in offshore financial centres such as Bermuda and the Cayman Islands, now the bulk of them are going to the US.  The non-US portion is still quite significant (€34 billion in the year to March) but due to suppressed data we don’t have direct insight into the destination of these. It looks like most of these payments are going to The Netherlands, Switzerland and Singapore (which would also be among the potential locations for US MNCs to locate their IP). 

Anyway our interest here is in the royalty payments from Ireland to the U.S. and these now exceed €100 billion in annual terms.

To see the mismatch (and avoid any classification issues) here are the balance of payments figures for services trade between Ireland and the US. What is shows are Eurostat figures for services imports by Ireland from the US and BEA figures for service exports from the US to Ireland. In principle these should correspond. Is that what we see? Hmmmm, no.

Services Trade Ireland and US BEA and Eurostat

There is a few chart crimes going on there, most notable that the series are in different currencies, but the conversion from dollars to euro has nothing to do with the gap that has emerged since 2020 (and would actually only increase it).

We can see that Balance of Payments data on this side of the Atlantic is showing that, in 2022,  Ireland had almost $200 billion of services exports from the US.  Over on the other side of the pond, their Balance of Payments data shows that the US $85 billion of service exports to Ireland.  And as noted above, in principle these should be the same.

The chart is for all services so it cannot be a classification issue – unless the payments are accounted for by the BEA as goods exports or primary income, both of which are unlikely.

We cannot immediately assume that there is a GDP effect.  The trade could be in IP assets which, initially at least, would be GDP neutral.  There would be disinvestment (-) and exports (+) on the US side with investment (+) and imports (-) on the Irish side. 

But as might be expected given the contents of the post it is mainly a story of royalties.  Here are the royalties components from Eurostat and the BEA of the above overall services trade figures.

Royalty Imports to the US Eurostat v BEA

Mind the gap! Ireland reporting €102 billion of royalty imports from the US in Eurostat’s data becomes the US reporting just $16 billion of royalty exports to Ireland in the BEA’s data.  And as we started by looking at total services this cannot be explained by classification issues.  We have a difference of something approaching €90 billion.

For what it is worth, it can be noting that the revision to Ireland’s national accounts for 2015 (the 26% growth rate and all that) was of the order of €40 billion.  Some US commentators should perhaps be wary of skeletons in their own closets.

However, as the previous post goes through the likely GDP impact would not be the full difference shown above as a share of the royalty payments that previously went from Ireland to the like of Bermuda did subsequently flow on to the US as payments for R&D services exports.

Statements from Google and Facebook have confirmed that they are now licensing their technology directly from the US rather than offshore locations.  This should have led to a reduction in US R&D service exports and an increase in US royalty exports. 

The rise in royalty exports would be larger (reflecting the fall in profit reported in Bermuda etc.). It is possible there could be a GDP impact of $40-50 billion for 2022 – equivalent to around 0.2% of US GDP.  Not exactly headline grabbing.

Why the gap?

In part, the answer to this apparent puzzle comes down to scale. In a small economy like Ireland, the activities of companies such as Google and Facebook are relatively enormous. The Large Cases Unit (LCU) in the CSO will be in regular contact with these companies for filing updates and notice of any significant changes.  For an economy of the scale of the US, such companies are simply are not as important in and of themselves when it comes to the BEA’s production of their National and International Accounts.

In the BEA’s case they undertake “benchmark surveys” every few years of a wide number of market participants to get a deep understanding of what is going on.  Between these comprehensive “benchmark surveys” the BEA do quarterly surveys of a much smaller sample and extrapolate the data they publish from those.

The most recent benchmark survey for Transactions in Selected Services and Intellectual Property with Foreign Persons was carried out for 2017.  The data was collected in 2018 with the results published in 2019.  As it so happens, the BEA are in the process of collecting data for the latest such survey.  In this instance the benchmark year is 2022 with the data collected in 2023 and results not due until sometime in 2024.

So it looks like the significant changes implemented by US MNCs operating in Ireland fell in the middle of the gap between the BEA’s benchmark surveys that would have picked them up.  They were too early for the survey for 2017 and while they should be picked up by the ongoing survey for 2022 the results won’t be pulled together and incorporated in the BEA’s International Accounts until 2024.  It seems our wait for US GDP to be revised up will be going on for a while yet.

No comments:

Post a Comment