Two years ago, even as other troubled European economies continued to deteriorate, some economic statistics seemed to indicate that Ireland’s troubled economy had turned the corner and was growing again.
The government reported that gross national product had grown in 2010 for the first time since the country’s property bubble burst in 2008, and that its current-account balance had turned positive for the first time since 1999. A positive current-account balance was a sign that the country as a whole was already paying down its overseas debt. Since that was clearly not happening to the government’s debt, it indicated a sharp turnaround for the private sector.
Other statistics were not nearly as rosy. Unemployment was continuing to rise, and domestic demand — the total purchases by people and companies in Ireland — was continuing to fall. But the fact that Ireland’s current-account surplus had turned around when nothing similar had happened in such countries as Portugal, Spain and Greece was viewed as a clear sign of success for the country’s economic policies.
Well, maybe not.
John FitzGerald, an economist with the Economic and Social Research Institute in Dublin, pointed out last month that a quirk in the way the statistics are computed, coupled with fears of a tax law change in Britain, had produced unrealistic increases in both the balance of payments and G.N.P. figures beginning in 2009.
The reasons are complicated, but the quirk is retained profits of multinational companies that chose to relocate their nation of incorporation to Ireland, even though they were, in fact, based in Britain. The G.N.P. and balance of payments data allocate those profits to Ireland, he said in a paper, even though “there is no profit to the Irish economy” because they are being held for the benefit of the foreign owners of the companies.
The G.N.P. figure is similar to the more widely known G.D.P. — gross domestic product — but it includes profits only of Irish citizens and companies, regardless of where they were earned instead of profits of companies operating in Ireland. In an interview, Mr. FitzGerald said the Irish statistics office understands why the numbers are misleading, but feels it cannot change them under European rules. He said that European Union taxes on its member countries were based on G.N.P. numbers.
The accompanying charts show the official figures, alongside Mr. FitzGerald’s estimates of the proper ones after adjusting for the foreign-owned profits. By his estimates, the balance of payments did not turn positive until 2012, when the surplus was much smaller than the official figure. Similarly, the G.N.P. did not begin rising until last year.
The International Monetary Fund, in its review of the Irish economy published this week, said Mr. FitzGerald’s numbers appeared to be better. “This adjusted G.N.P. path appears to be more consistent with other economic indicators, most notably domestic demand, which continued to fall in 2009-12,” the I.M.F. report stated.
The I.M.F. forecasts that domestic demand will grow by 1 percent in 2014 after six consecutive years of decline.
Government spending reductions are a major part of that weakness, but so is the country’s failure to fix the financial system. Despite huge bank bailouts that nearly bankrupted the government, the I.M.F. is still worried about the capitalization of the banks and concerned that little money is available for lending. Mortgage problems continue to grow. On Friday the Irish central bank said that 25 billion euros of home mortgages — more than 23 percent of the total outstanding — were behind on their payments at the end of March. Unemployment has declined a little, but remains above 12 percent for adults and more than double that for people under 25.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
Article source: http://www.nytimes.com/2013/06/22/business/economy/irelands-turnaround-may-not-be-so-rosy.html?partner=rss&emc=rss
