Ireland to add 0.1% to 2020 US GDP

US MNCs causing distortions within Ireland’s national accounts is not unusual.  As a small economy it means the impact of these can be outsized (e.g. the 26 per cent GDP growth rate in 2015). 

It looks like something similar to happen to the US national accounts for 2020 – though the relative impact on the much larger US economy will be much smaller. Here we identify something that could add 0.1 per cent to US GDP.  This is small but non-trivial.

The issue in question is something we have looked at before: the changing nature of outbound royalties from Ireland.  The earlier post goes through more of the details but for our purposes here we note that there has been a very significant drop in outbound royalty payments from Ireland to The Netherlands and directly to Offshore Financial Centres.

It is easy to see that these collapsed in 2020.  Royalty payments to the Euro Area – almost all of which went to The Netherlands – plunged in Q1 2020, while the same happened for payments to Offshore Financial Centres – Bermuda, Cayman etc. – in Q3 2020.  This corresponds to announcements by companies such as Google and Facebook that they were unwinding their “double irish” (and “dutch sandwich”) structures.

Some companies have chosen to onshore their IP to Ireland thereby eliminating the royalties shown above.  On the other hand some companies have repatriated their IP to the US.  This means there are still outbound royalty payments from Ireland but now they are directed to the US which is where US GDP comes in.

Here are outbound royalty payments from Ireland to the US up to Q3 2020:

Up, up and away!  For ten years up to 2019, these payments were little changed and typically were between €6 billion and €8 billion a year.  They surged to €9 billion in Q1 2020 alone, with the first three quarters of 2020 already totaling €28 billion.  If the Q4 figure is close to what was seen in Q3 then the annual figure will be something around €40 billion.

Previously these payments, for licenses to use technology developed in the US, went to the likes of Bermuda and the Cayman Islands, sometimes with a stopover in The Netherlands.

The profit accumulated in these jurisdictions did not contribute to US GDP but it did contribute to US GNP via factor flows in the balance of payments.  The profit is no longer being reported on small islands and the inbound factor flows to the US have been replaced by royalty income.

What are royalty imports in Ireland are royalty exports in the US.  The payments are now going to where the R&D that developed these platforms is undertaken.  Some payments would have gone from Bermuda and Cayman to the US to co-fund the R&D undertaken but the amount of these US exports would have been calculated as a share of the R&D cost. Now more of the value of the IP is flowing to the US.

So, in 2020, it looks like there be an additional €30 billion of royalties flowing from Ireland to the US.  There will be a partially offsetting reduction of around €10-15 billion in R&D exports from the US to Bermuda and the Cayman Islands etc.  So there could be a net increase in US GDP of €15-20 billion or so from these changes.

Of course, pretty much nothing will have changed in the US economy.  Just like little changed when Irish GDP recorded a 26 per cent increase.  Early estimates suggest that US GDP in 2020 was around €19 trillion, with 0.1 per cent of this being €19 billion. 

Balance of payments figures from the BEA do not seem to reflect the changes in royalty payments shown above in Ireland’s balance of payments data.  When this is incorporated it could could add something in the region of 0.1 per cent to GDP.

And, yes, the title here is a little bit disingenuous. There isn’t really anything that has happened in Ireland to change US GDP.  In overall terms the level of outbound royalties from Ireland is actually little changed.

There is a reduction in the recent data and this is likely due to onshoring of some IP but outbound royalties from Ireland in 2020 are likely to have been around €70 billion, in line with the 2018 outturn. The dramatic changes of the earlier charts have to do with the destination of these royalties more than the quantum of them.

Now more of the payments are going to the US and making a larger contribution to US GDP. This better reflects the economic reality of these companies as the majority of the R&D behind their technology is undertaken in the US.

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Aircraft imports take a nosedive

We have looked aircraft imports before and today’s release from the CSO of the Trade Statistics for September further highlight the drop in aircraft imports in 2013.

Imports of large aircraft in the first nine months of 2012 were 51 units worth €2.2 billion.  In the same period in 2013 there have been 21 units imported worth €0.7 billion.  The most notable changes are the reductions in aircraft imported from Brazil and the United States (which were usefully explained in a comment to the previous post).

The impact of these large changes relative to 2012 is that the balance of trade will be improved and the level of investment (fixed capital formation) will be reduced.  The €1.5 billion reduction in aircraft investment will be a significant drag on the measure of “domestic demand” that will be published with next week’s quarterly national accounts but the impact on the ground will be negligible.

Of the large aircraft imported last year 29 units worth €1.6 billion were imported in the first three months.  This led to a significant spike in gross fixed capital formation in Q1 2012 in the Quarterly National Accounts that was reversed in Q2.

As item 792.50 in the table above shows imports of spacecraft remain zero.  Maybe we don’t need any for the economy “to take off like a rocket”.

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Imports on the rise – but in a good way

Today’s External Trade release shows that exports to March are up 8.5% on the year with imports showing a rise of 12.3% with the net effect of these leading to a rise of 4.4% in the balance of trade (though all of this is due to chemicals).  In the arithmetic of national accounts, imports are subtracted in the calculation that leads to GDP.  However, it is also important to look at the composition of those imports.

The CSO provide a useful table that gives a breakdown of imports by use. Click to enlarge

Imports are up €1.4 billion on the year and there is annual growth in all the categories.  What is noteworthy is that capital and intermediate goods for production make up nearly two-thirds of total imports.

Of the €1.4 billion rise in imports, €0.3 billion is for capital goods for production and €0.6 billion is for intermediate goods for production.  The remaining €0.5 billion is for consumption goods.

On the whole, the rise in imports may subtract from GDP figures now but over the coming months as these capital goods and materials are put into use it will lead to an increase in economic activity and a likely increase in exports which will push GDP up.  Here is the same data in a graph.

The rise in the imports of production materials since the middle of 2010 is evident as well as a gradual recovery in imports for consumption.  The capital goods series is more volatile.

Here are a couple of notable import categories that are also showing increases.

1. Petrol

2. Cars

3.  And some goods involved in production

After scratching around for the past two years, these categories have been showing some smalls signs of growing over the first three months of the year (though they are all well down on the peaks of 2006 and 2007 – see graph here).

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The Computer Services Sector in Ireland

After our analysis of the largest merchandise export sector (chemicals at 60% of the total) we will now consider Ireland’s largest services export sector. According to the most recent Balance of Payments data, Computer Services now account for close to 40% of our total service exports.

You can find some analysis of the official CSO data here.  The CSO data is great for the quantities but is lacking information on the impact.  To this end we have turned to the Annual Business Survey of Economic Impact from Forfás, which by value covers about 85% of our total exports (and the missing proportion is largely tourism and travel).

Here’s a run through our Computer Services sector using this data.  And like the Chemicals sector we start with the same conclusion.  Exports have increased (particularly since 2005) but direct expenditure in the Irish economy hasn’t budged.

Since 2003 exports of computer services have grown by 76.8% from €27.9 billion to €47.4 billion.  During this period direct expenditure in the Irish economy has fallen by 13.1% from €11.5 billion to €10.0 billion.

Like the Chemicals sector, Computer Services are dominated by foreign-owned firms which in 2009 accounted for 98.2% of exports in the sector.

As expected most of the contribution to the Irish economy comes from the foreign-owned sector, but this is down on the levels seen in 2001-2003 period.

The computer services sector does buy nearly €7 billion of materials a year, but the vast bulk of this comes from abroad.

Not surprisingly, these companies buy a lot of services, but unlike the Chemicals sector where only 6.4% of services are bought from Irish sources, in the Computer Services sector the purchase of Irish services makes up 41.7% of the total.  In fact, across the companies in the survey purchases of Irish services totalled €13.6 billion in 2009.  At €6.4 billion purchases from the Computer Services sector made up 47.3% of the total.

We can get some information about the purchases of these Irish services by looking at a breakdown of the type of companies buying the services.

Over half of the purchases of Irish services are by Computer Programming companies.  Computer Consultancy companies purchase the bulk of the remainder with the than 5% bought by Facilities Management companies.

Although the purchases of Irish materials and services by these companies has declined from peaks seen nearly a decade, payroll expenses have risen.

Total payroll expenses rose from €2.1 billion in 2000 to just under €3.0 billion in 2009, with most of this rise coming from foreign-owned companies.  However, this has not been because of an increase in employment.  Again we have the situation of a sector with booming exports offering no employment growth.

[Forfás do not directly provide the employment numbers.  These figures are derived from the Total Sales and Average Sales per Employee figures and are cross checked against Total Payroll and Average Payroll per Employee figures.]

Total employment was 52,800 in 2000 and had FALLEN to 49,700 in 2009.  This 5.8% drop in employment took place during the same period when exports rose by 80%.  Thus the increased payroll costs are due to increases in the costs per employee.

Average payroll costs in the computer services sector was €62,400 and unlike the Chemicals sector the cost for Irish- and Foreign-owned companies were largely the same.

What isn’t the same is the added value per employee.  There was always a gap between Irish and Foreign-owned firms but beginning in 2005, this gap has ballooned.  In 2009, foreign-owned firms had an average added value per employee of €745,000, dwarfing €104,000 added value per employee in Irish-owned firms

Here is a breakdown of added value by company type.  Can you spot the series break??

Those Computer Facilities Management workers sure are productive!!  Looking at a breakdown of exports by the type of company.

We see that, while all categories are growing, most of the growth in computer services exports is attributable to Computer Facilities Management (again with a huge jump after 2005).  This sector must be contributing hugely to the economy.  Let’s see.

Where’s the jump? Initially I thought that this graph was wrong but unless the original Forfás data is right then this is what has happened.  The the Computer Facilities Management sector exports have increased from €1.8 billion in 2000 to €16.2 billion in 2009.  This is an increase of nearly 800%.

At the same time the direct expenditure by companies in this sector (i.e. their contribution to the economy) has gone from €733 million to €810 million, a rise of 10%.  Maybe it’s worth putting these two lines on the same graph.

And  what about employment in this sector that is clearly driving our “export-led growth”?

A sector that has seen exports rise by nearly €12 billion since 2005 (our total exports were €145 billion in 2009) has seen employment FALL from 11,000 in 2005 to 7,600 in 2009.

Sometimes I’m sorry I ask myself these questions.

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The Chemical and Pharmaceutical Sector in Ireland

The CSO released the November External Trade statistics earlier today and we will consider them in due course.  The dominant category of our merchandise exports is the Chemicals and Related Products category which now accounts for nearly 60% of goods exports from Ireland.  We will use the Annual Business Survey of Economic Impact from Forfás to examine the size and contribution of the Chemicals Sector to the Irish Economy.

First up is the key graph – exports in the chemical sector and the level of direct expenditure (payroll, goods and services purchases) in the Irish economy.  Mind the gap!

In the ten years from 2000 to 2009 chemical exports, in the Forfás sample, increased from €18.2 billion to €37.7 billion, an increase of 107%.  Over the same period the direct contribution from this sector to the Irish economy from €2.1 billion to €3.1 billion, an increase of 48%.  As a percent of exports of the direct expenditure from this sector in the Irish economy is just 8.2%.  Exports can soar in this sector (and they have) but there will be little impact felt on the ground of this “export-led growth”.

Now we will work through the sector in a little more detail.  First up total sales.  There is an Irish Chemicals sector there I promise. Look closely.  Sales in 2009 from Irish-owned companies at €412 million make up just over 1% of the €39.7 billion total sales in the sector.

In fact, looking at sales is a little redundant as exports make up 96% of sales, though this figure is 57% for Irish owned companies.  The only a negligible difference between the total sales graph above and the total exports graphs below.

Although Irish firms only make up 1% of sales they do manage to contribute 7% of the direct expenditure in the Irish economy from this sector (€235 million versus €3,113 million).

Of course, there is no way Chemicals companies in Ireland can generate nearly €40 billion of sales from just €3.1 billion of inputs.  They do spend much more than than but the vast majority of it comes from abroad.  First, let’s look at materials.

Only 6.4% of the €7.6 billion of materials purchased in 2009 came from Irish suppliers.  The pattern of services purchases is not much different.

It may seem strange in a manufacturing industry that over 50% more is spend on service inputs than materials inputs but that is to forget that the most expensive input into the production of a pharmaceutical product is the cost of the patent.  Import expenditure on patent royalties has been soaring in recent years.

These companies have been using more materials and more services in the period that has seen exports rise by more than 100%.  But have they employed more workers? Erm, no.

In the period of this huge increase in exports total employment in the sector has fallen by 1,100 from 24,500 to 23,400, with most of this drop occurring in foreign owned companies.  Although Irish companies generate only 1% of sales they do provide just over 10% of the employment (2,400 versus 21,000).

The numbers might be falling but total payroll has been rising and in 2009 was up almost 60% on the 200 level – up from €1 billion to €1.6 billion.

Falling employment numbers and rising payroll costs must mean that payroll costs per employee are rising and indeed they are, particularly in the foreign-owned sector.  According to the Forfás data, the average payroll cost across all exporting manufacturing sectors was €49,800 in 2009.  The sector that ranked highest was the chemicals sector with an average payroll cost of €68,300.

But don’t feeling sorry for these chemical companies.  In the foreign-owned sector where average payroll costs are €71,200 the value added per employee (as defined by Forfás) is a staggering €934,700.  Now that’s productivity.

All that aside, the key issue remains.  Our export figures may provide the arithmetic for growth but it is likely that an “export-led growth” strategy will make little inroads into our unemployment crisis given that, over the last ten years, our most important trade export category has seen exports rise by over 100% and employment has fallen!

The Chemicals and Pharmaceutical category accounts for nearly 60% of our exports and these are generated by just 1% of the workforce.

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Prospects for an “Export-Led Recovery”

Here are the slides I used in a seminar today to the Faculty of Commerce in UCC on the prospects of an export-led recovery in Ireland.

Prospects of an Export Led Recovery

Slideshare seems to have thrown a few of the graphs out of whack and the vertical axis labels are missing on all the graphs.  Bar the area plots most of fine with the line charts largely unaffected.

Anyway the presentation had 30 slides to keep me going for the hour and has some interesting bits and pieces on Irish exports and imports of goods and services, but the crux of the matter can be gleaned from just four.

1. Net exports are surging ahead.

2. Our trade surplus is generated by our merchandise exports.

3.  Until recently this was because imports were falling rather than exports rising.

4.  Take away Chemicals and the balance you’re left with is …

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Ireland’s Import Performance

With the domestic economy in continued freefall, the positive growth recorded for Q3 2010 in the Quarterly National Accounts published before Christmas was entirely due to the performance of the trade sector.  We are now following an “export-led growth strategy” and our exports are being described as ‘strong’, ‘robust’ or ‘resilient’.

Indeed, the balance of trade in the Q3 National Accounts reached a record level.

However, the increase in the Balance of Trade seen in 2008 and 2009 was not down to a surge in exports, but rather a collapse in imports.  It is only in 2010 that exports resumed an upward trajectory.

As we can see even though exports were falling in 2008 and 2009 the net export position was improving because imports were falling even faster.  It is the poorer performance of imports relative to exports, rather than a standalone increase in exports that has given the slight positive sheen to our growth figures.  So as with our export performance, it is worth looking at our import performance in a little more detail.

In the National Accounts Quarterly the CSO provide a breakdown of imports by goods and services.

Quite clearly the drop in Irish imports has been on the goods side rather than in services.  This pattern of service imports is confirmed if we look at the equivalent figures from the Balance of Payments from which the National Accounts draw (graph here), with Royalty/License imports the fastest growing category.

But this doesn’t tell us why imports are falling.  To get a deeper understanding of the reasons for the fall in goods imports we can turn to the monthly External Trade statistics also provided by the CSO.  Here are the seasonally adjusted monthly merchandise imports since 2005.

What is of more interest, though is the type of goods we have stopped importing.  Imports can be generally divided into imports of goods for consumption and imports of intermediate or capital goods for production.  The patterns of these are rather revealing.

It is clear that the category showing the biggest drop is the imports of production materials.  The decline in the import of consumption goods has been far less pronounced.  Here same data in tabular form.  Click table to enlarge.

Imports of production materials are nearly one-third on their 2007 levels.  Although the monthly series of production capital goods is a little more erratic we can see from the table that these imports are down a similar amount.  These are not good trends and although production material imports have risen very slightly in 2010, production capital goods imports have continued to fall.

The Quarterly National Accounts reveal that consumption expenditure for the first three quarters of 2010 is about 12% below the equivalent figure from 2007.  This ties in with the 14% drop seen in the imports of consumption goods.  It is noteworthy that imports of consumption goods in 2010 to September are running 6.7% ahead of the 2009 level.  Consumption goods now make up close to 32% of Ireland’s merchandise imports.

With the above External Trade figures revealing that consumption imports have risen in 2010 and Retail Sales figures showing the retail expenditure is lower than last year, it appears that the bite of the continuing falls in consumption expenditure is hurting domestic producers more.

It is not a good sign when an economy’s “growth” figure is driven by a drop in this category.  The following table provides details of the ten main NACE categories provided by the CSO for the January to September period for the years 2007, 2009 and 2010.  Click table to enlarge.

From the peak in 2007, goods imports for the first nine months of the year, have fallen by nearly €13 billion or 27.7%.  Of this fall, more than €9 billion is accounted for by the near 50% drop in machinery and transport equipment imports.  No category has shown a larger percentage decrease.  This category made up 39.7% of total merchandise imports in 2007 but by 2010 this proportion was down to 27.8%.

Here are the sub-categories that make up the Machinery and Transport Equipment group.

Since 2007 there have been substantial drops in specialised machinery (-61%), general machinery (-45%), office machines and computers (-71%) and electrical machinery (-35%).  All of these categories have continued to fall in 2010. 

It is possible that the huge drop in the import of Office Machines and Computers is linked to the comparable drop of exports in the same category.  We may have been importing intermediate materials and exporting the finished products.  There may be an associated drop in employment (Dell?) with this drop in imports.  Remember this the next time someone tells you imports are ‘bad’ for the economy.

Imports of road vehicles are down more than two-thirds of the 2007 peak but in line with the new car sales figures they did exhibit a rebound in 2010.  This is the only significant sub-category in this group to show growth in 2010.

Outside of the substantial drops in the sub-categories of Machinery and Transport Equipment shown above the sub-category with the next largest drop since 2007 is NACE 67 – Iron and Steel which has fallen 60% ( from imports of €819 million in the first nine months of 2008 to only €325 million in 2010).  This is likely linked to the collapse of the construction sector.

The sub-category with the best growth since 2007 is NACE 54 – Pharmaceutical and Medical Products, which is up 40% (from imports of €1,830 million in 2007 to €2,559 million in 2010).  This is also our best export category but there is a huge disjoint between imports and exports.  See graph here.  There is no merchandise imports category that can account for the huge increase in medical and pharmaceutical exports since 2007 but it may be linked to increase in service imports payments on patent royalties shown above as the biggest cost of a pharmaceutical product is the research (which is not undertaken in Ireland).

The poor import performance, and in particular the very poor merchandise import performance, since 2007 might be having a positive effect on Ireland’s growth arithmetic, but the outlook for the economy cannot be positive as long as production materials are the main cause of the fall in imports.  An “export-led growth strategy” might provide the numbers that give the appearance of growth but unless this is converted in job growth there will be no real improvement in the economy.  The spin-doctors might be crowing about our export performance but is equally as likely (maybe more so) that increases in our imports are what we actually need.

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