Category Archives: GDP per capita

3/8/20: Ireland’s Real Surreal Economy

In recent months, I have mentioned on a number of occasions the problem of Ireland's growing GDP-GNI* gap. The gap is a partial (key, partial) measure of the extent to which official GDP overstates true extent of economic activity in Ireland.

In general terms, GDP is an estimate of the total value of all goods and services produced within a nation in a year. The problem is, it includes capital and investment inflows into the country from abroad and is also distorted by accounting manipulations by domestic and foreign companies attributing output produced elsewhere to output produced in the country. In Ireland's case, this presents a clear-cut problem. Take two examples:
  1. An aircraft leasing company from Germany registers its 'capital' - aircraft it owns - in Dublin IFSC. The value of aircraft according to the company books is EUR10 billion. Registration results in 'new investment inflow' into Ireland of EUR10 billion and all income from the leases on these aircraft is registered to Ireland, generating annual income, of, say EUR100 million. EUR 10.1 billion is added to Irish GDP in year of registration and thereafter, EUR 0.1 billion is added annually. Alas, none of these aircraft ever actually enter Ireland, not even for services. Worse, the leasing company has 1/4 employee in Ireland - a lad who flies into Dublin once a month to officially 'check mail' and 'hold meetings', plus an Irish law firm employee spending some time - say 8 hours a week - doing some paperwork for the company. Get the idea? Actual economic activity in Ireland is 12 hours/week x EUR150 per hour x usual multiplier for private expenditure = say, around EUR230,000; official GDP accounting activity is EUR100 million (in years 2 on) and EUR10.1 billion (in year 1).
  2. A tech company from the U.S. registers its Intellectual Property in Ireland to the tune of EUR10 billion and attributes EUR 2 billion annually in sales resulting from the activities involving said property from around the world into Ireland. The company employs 1,000 employees in Dublin Technology Docks. Actual economic activity in Ireland is sizeable, say EUR 7 billion. Alas, registered - via GDP - activity is multiples of that. Suppose IP value grows at 10% per annum. In year 1 of IP transfer, company contribution to GDP is EUR 2 billion + EUR 10 billion + EUR 7 billion Normal Activity. In Year 2 and onwards it is EUR 2 billion + 10%*EUR 10 billion + EUR 7 billion Normal Activity. 
Now, normal GNI calculates the total income earned by a nation's employees and contractors, etc, and businesses, including investment income, regardless of where it was earned. It also covers money received from abroad such as foreign investment and economic development aid.

So GNI does NOT fully control for (1) and (2). Hence, CSO devised a GNI* measure that allows us to strip out (1) above (the EUR 10 billion original 'investment'), while leaving smaller parts of it still accounted for (employment effects, appreciation of capital stock of EUR 10 billion, etc), but largely leaves in the distorting effects of (2).  Hence, GNI* is a better measure of actual, real activity in Ireland, but by no means perfect.

Still, GNI*-GDP gap is telling us a lot about the nature and the extent of thee MNCs-led distortion of Irish economy. Take a look at the chart next, which includes my estimates for GDP-GNI* gap for 2020 based on consensus forecasts for the GDP changes in 2020 and the indicative data on flows of international trade (MNCs-dominated vs domestic sectors) implications for potential GNI* changes:

As it says in the chart, Irish GDP figures are an imaginary number that allows us to pretend that Ireland is a super-wealthy super-duper modern economy. These figures are a mirage, and an expensive one. Our contributions to international bodies, e.g. UN, OECD et al, is based on our GDP figures, and our contributions to the EU budget are, partially, based on GNI figures. None are based on GNI*. For the purpose of 'paying our way' in global institutional frameworks, we pretend to be a Rich Auntie, the one with a Gucci purse and no pension. For the purpose of balancing our own books at home, we are, well, whatever it is that we are, given GNI*. 

This distortion is also hugely material in terms of our internal policies structuring. We use international benchmarks to compare ourselves to other countries in terms of spending on public goods and services, public investment, private entrepreneurship etc. Vast majority of these metrics use GDP as a base, not GNI*. If we spend, say EUR10K per capita on a said service, we are spending 14% of our GDP per capita on the service, but 23% of our GNI*. If, say, Finland spends 20% of its GDP per capita on the same service, we 'under-spend' compared to the Finns on the GDP basis, but 'over-spend' based on GNI* basis.

There is a serious cost to us pretending to be a richer, more developed, more advanced as an economy, than we really are. This cost involves not only higher contributions to international institutions, but also potential waste and inefficiencies in our own domestic policies analysis. Gucci purse and no pension go hand-in-hand, you know... 

12/12/15: Irish National Accounts 3Q: Post 6: Measuring Recovery

In previous posts, I have covered:

  1. Irish National Accounts 3Q: Sectoral Growth results 
  2. Year-on-year growth rates in GDP and GNP in 3Q 2015 
  3. Quarterly growth rates in GDP and GNP 
  4. Domestic Demand and
  5. External trade side of the National Accounts 

Now, as usual, let’s take a look at the evolution of 3 per-capita metrics and trace out the dynamics of the crisis.

In 3Q 2015, Personal Expenditure per capita for the last four quarters totalled EUR 19,343, which represents an increase of 2.78% on four quarters total through 3Q 2014. Relative to peak 4 quarters total (attained in 4Q 2007), current levels of Personal Expenditure on Goods & Services on a per capita is 7.14% below the peak levels. In other words, 7 and 3/4 of the years down, Personal Expenditure on a per capita basis is yet to recover (in real terms) pre-crisis peak.

Per capita Final Domestic Demand (combining Personal Expenditure, Government Expenditure and Fixed Capital Formation) based on the total for four quarters through 3Q 2015 stood at EUR 34,616, which represents an increase of 7.75% y/y. This level of per capita Demand is 11.19% lower than pre-crisis peak attained in 4Q 2007. As with Personal Expenditure per capita, Final Demand per capita is yet to complete crisis period recovery, 7 and 3/4 of the years down.

On the other hand, GDP per capita stood at EUR 42,870 on a cumulative 4 quarters basis, which is 6.2% above the same period for 2014 and is 0.98% above the pre-crisis peak (4Q 2007). Hence, GDP per capita has now fully recovered from the pre-crisis peak and it ‘only’ took it 7.5 years to do so.

GNP per capita has recovered from the crisis back in 2Q 2015, so at of Q3 2015, 4-quarters aggregate GNP per capita stood at EUR 36,508 which is 5.85% ahead of the same period through Q3 2014 and is 2.39% above pre-crisis peak. In other words, it took 7 and 1/4 years for GNP per capita to regain its pre-crisis peak.

It is also worth looking at the potential levels of output per capita ex-crisis.

To do so, let’s take average growth rates for 4 quarters moving aggregate GDP. GNP and Domestic Demand, for the period 1Q 2002 through 4Q 2007. Note 1: this period represents slower rates of growth than years prior to 1Q 2002. Note 2: I further removed all growth rates observations within the period that were above 5 percentage points for GDP and GNP and above 4% for Final Demand, thus significantly reducing impact of a number of very high growth observations on resulting trend.

Here is the chart, also showing by how much (% terms) would GDP, GNP and Domestic Demand per capita have been were pre-crisis trends (moderated by my estimation) to persist from 4Q 2007:

I’ll let everyone draw their own conclusions as to the recovery attained.

1/8/15: Irish 1Q 2015 Growth: Recovery on Pre-Crisis Peak

In previous posts, I have looked at:

So now, let's try to answer that persistent question: has Irish Economy regained pre-crisis peaks of economic activity?

To do so, we need two things:

  1. We need 12-months running sum of total activity measured by GDP (mythical metric for Ireland), GNP (increasingly also mythical metric, but slightly better than GDP); and Final Domestic Demand (basically an approximation for the real, domestic economy); and
  2. We need population figures to get the per-capita basis for the above metrics.

We can compute all metrics in (1) based on actual CSO data. But we cannot know exactly our population size (CSO only provides estimates from 2011 through 2014 and no estimates for 2015). So I did a slightly cheeky approximation: I assumed that 2015 will see increase in Irish population of similar percentage as 2014. This is cheeky for two reasons: (1) population change can be slightly more or less than in 2014 due to natural reasons; and (2) emigration might be different in 2015 compared to 2014. Specifically, on the second matter, there has been some evidence of slower emigration out of Ireland and there have been some migrants coming into Ireland on foot of MNCs hiring.

Still, this is as good as things get, so here are the numbers, all referencing inflation-adjusted (real) variables:

Irish Personal Consumption per capita (not shown in the chart above) on 12 months total through 1Q 2015 stood at around EUR19,074.79 or 8.4% lower than pre-crisis peak in 4Q 2007. Meanwhile, Final Domestic Demand per capita was some 15.43% below pre-crisis average. Irish GDP per capita was around 2.4% lower than at pre-crisis peak. However, Irish GNP per capita in 1Q 2015 based on 12 months total was 0.2% above pre-crisis peak.

So in simple terms, by one metric of three, we are back at pre-crisis peak levels in per capita, inflation-adjusted terms. This metric is somewhat better than GDP per capita, but not perfect by any means and is getting worse, not better, in terms of measuring the real activity on the ground. Still, after 8 years, the recession cycle is complete in terms of GNP. It is still ongoing in terms of Domestic Demand.

7/3/15:Euro Area GDP per capita: the legacy of the crisis

I have posted previously on the decline in GDP per capita during the current crises across the euro area states, the US and UK. Here is another look:

Let's take GDP per capita at the peak before the crisis.

For some countries this would be year 2007, for others 2008. Keep in mind, many comparatives in the media and by analysts treat the peak as 2008. This is simply not true. Only 89countries of the sample of 20 countries comprising EA18, plus US and UK have peaked their GDP per capita in real terms in 2008, the rest peaked in 2007. Hence, for the former countries, the GDP per capita decline started in 2009 and the for the latter in 2008. Now, take GDP per capita declines cumulated over the years when the GDP per capita was running, in real terms, below the peak. Again, the sample of the countries is not homogeneous here: for some countries, GDP per capita regained pre-crisis peak by 2011 (Germany, Malta and Slovak Republic), by 2013 (Austria and U.S.) and by 2014 (Latvia). For all the rest of the countries, the GDP per capita peak was not regained through 2014.

Now, let's plot the overall cumulated losses over the years of the crisis (over the years from the crisis start through either the year prior to regaining pre-crisis GDP per capita levels for the countries where this was attained, or through 2014 for the countries that did not yet recover pre-crisis levels.

Chart below plots these in euro terms (remember, this is loss through end of crisis or 2014 per capita) (note figures for UK and US are in their respective currencies, not Euro):

Thus, per above, in Greece, cumulative GDP per capita losses during the crisis (through 2014) amount to around EUR42,200, while in Malta cumulative losses from the start of the crisis through the end of the crisis in 2011 amounted to around EUR500 per capita.

Since the crisis was over, before 2014, across 6 countries (in other words the regained their pre-crisis peak GDP per capita levels in inflation-adjusted terms), it is worth to note that through 2014, in these countries, losses have been reduced.  In Austria, through 2014, cumulative losses on pre-crisis GDP per capita levels stood at EUR 2,107 per capita, in Germany there was a cumulative gain of EUR4,078 per capita, in Latvia a cumulative loss of EUR5,696 per capita, in Malta a cumulative gain of EUR1,029 per capita, in Slovak Republic a cumulative gain of EUR1,352 per capita and in the U.S. a cumulative loss of USD258 per capita

Taking the above figures covering either gains  or losses from the start of the crisis in each country through 2014 as a percentage of the pre-crisis peak GDP per capita, the losses/gain due to the crisis through 2014 amount to:

And that chart really tells it all.