Fiscal advisory council casts doubt on credibility of growth figures

Exports may be back, driving GDP growth once more, but are these growth figures less credible than might appear at first glance?

According to the seventh report from the Irish Fiscal Advisory Council, it would appear so. This is due to the "idiosyncratic" impact of so called contract manufacturing exports, which "flattered" the recent sharp acceleration in real GDP growth, the council said, accounting for some 2.5 per cent of GDP in the first half of the year.

According to the advisory council, contract manufacturing or “contracted production” occurs when an Irish-resident firm (not necessarily Irish- owned) contracts a manufacturer abroad (which is often part of the same multinational group) to produce a good for supply to an end-client abroad.

The sale of the good is recorded as an Irish export of goods, while the contracted production is considered a service import.

Employment

"This activity is unlikely to be associated with any significant domestic employment and its contribution to the tax base is unclear," the council said, noting the growth in the first half of the year is likely to be attributable to one Irish resident company operating in the high-tech sector, but its identity is unknown, as the Central Statistics Office does not disclose such information.

Typically, the difference between the import and export national accounts adjustments broadly offset each other, meaning no impact on net exports. However, it appears that this relationship broke down in the first half of the year leading to a sizeable boost for exports.

What happens next is unclear.

“It’s hard to predict what kind of path will emerge,” said advisory council economist Eddie Casey yesterday, noting it’s “unusual” for such a surplus to not unwind over such a long period. As such, the council noted it is “uncertain whether these activities will continue to improve overall figures, whether they will represent a once off boost to real GDP growth or whether they will actually unwind over coming quarters thereby weakening overall activity”.

Given these uncertainties, it said that forecasts of the out-turns for 2014 and 2015 are subject to “potentially greater margins of error”.

The advisory council was established after the economic crash to provide impartial oversight of Irish fiscal policy.

The council is chaired by Prof John McHale of University College Galway. The other council members are Sebastian Barnes, Prof Alan Barrett, Dr Donal Donovan and Dr Róisín O’Sullivan.