Home Personal Finance Economists doubt Ireland’s sharp contraction

Economists doubt Ireland’s sharp contraction

Economists doubt Ireland's sharp contraction

Ireland is a country so wealthy it is preparing to set up a state fund to deal with its bulging budget surpluses, but official growth figures suggest it was the worst performing EU economy in the first quarter.

The Central Statistics Office said on Friday that Ireland’s gross domestic product contracted by 4.6 percent in the first three months of this year. That puts the country behind Lithuania, an economy much more exposed to high inflation fueled by the war in Ukraine.

The plunge in the first quarter also came after Ireland reported 12 percent growth in gross domestic product last year – a stellar performance that helped the entire Eurozone avoid stagnation.

However, economists and the government have downplayed the recession, saying the latest numbers highlight the shortcomings of using GDP to measure growth in a relatively small economy used by a large number of multinationals as their European base.

Officials say using modified domestic demand, or MDD, which cuts out the activities of the US tech giants and global pharmaceutical companies headquartered in Dublin, is a more accurate measure.

Like GDP, MDD covers personal consumption and government and private sector spending, but measures discounts for investment in imported intellectual property. It showed that the economy grew by 2.7 percent in the first three months of the year.

Bar chart of GDP (% change in Q1 vs. Q4) showing Ireland's economy falling behind early this year

Treasury Secretary Michael McGrath highlighted lowering energy prices, improving consumer confidence, strong employment and robust capital spending as key drivers of MDD.

Construction investment rose 8.7 percent in the quarter as Ireland built more homes. “Incoming data suggests momentum has continued into the second quarter,” he added.

Economists agreed with his optimistic assessment.

“MDD tells a very positive story — continued growth in consumer spending and corporate spending and construction spending,” said Dermot O’Leary, chief economist at brokerage Goodbody. He added, “It’s a dataset full of contradictions today.”

O’Leary blamed falling industrial output from pharmaceutical companies for the contraction in GDP, saying it “collapsed in March” for unclear reasons, but which could be related to patent developments or other factors.

Dan O’Brien, chief economist at the Institute of International and European Affairs, noted that exports of computer services fell from the previous quarter, but still increased by 8 percent compared to the first quarter of last year. “I am a bit perplexed [by the numbers] but certainly not bothered by them,” he said.

Despite the sharp distortion of GDP figures, the multinationals – lured to Ireland by the low corporate tax rate – are driving a spectacular increase in government revenues.

Their activities are expected to translate into a budget surplus of €65 billion over the next three years. That has led Ireland, whose economy collapsed a decade and a half ago following runaway lending and a property bubble, to now plan to invest surpluses in a sovereign wealth fund at a time when its EU neighbors face deficits that weigh on them. to make. tightening spending.

But as a third of all corporate tax revenue comes from just three companies, the government has warned that Ireland would be foolish to rely on the tax bonanza forever.

This year’s corporate tax numbers highlight the volatility. Although revenue so far this year is more than €1.1 billion higher, the monthly amount for May 2023 was more than €200 million lower than in May 2022.

McGrath said the May earnings data, released on Friday, “highlights that while the headlines appear positive, there are real underlying vulnerabilities in our government finances.”

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