Hopes for recovery pinned on Irish-owned firms

Seeing through what one analyst called the “statistical fog” of yesterday’s quarterly national accounts from the CSO is no easy thing.

At face value, the 0.3 per cent fall in GDP in 2013 suggests the Irish economy has technically fallen back into recession.

Most worrying was a large and unpredicted contraction in GDP in the final quarter of last year. The numbers – which are subject to revision – indicated GDP fell by 2.3 per cent between October and December last year. Economists polled by Reuters before the release had expected Irish GDP to grow by 0.4 per cent in the final quarter.

This was a much weaker performance than the euro zone as a whole, which expanded by 0.3 per cent in the final quarter.

Patent cliff
The big question is whether the figures can be satisfactorily explained away by the distorting effects of so-called pharma patent cliff.

There is little doubt the phenomenon is acting as a serious drag on Ireland's recovery. The scale of the problem is perhaps best illustrated by drug giant Pfizer, which saw profits fall $5.5 billion in 2012 largely on the back of a 60 per cent decline in sales of its blockbuster cholesterol drug Lipitor, most of which is produced here.

Yesterday’s figures indicated repatriated profits from multinational companies operating in the Republic declined 16.9 per cent last year.

Unsurprisingly, Minister for Finance Michael Noonan was keen to point to the better-than-expected GNP figures, which screen out the profit flows of multinationals, suggesting they were the true indicator of the economy's health.

The data showed GNP rose for the second successive year in 2013, growing 3.4 per cent, significantly ahead of even the most optimistic prediction, and by 0.2 per cent in the final quarter of 2013.

Noonan also suggested the underlying trends in the economy were at odds with the GDP numbers, most notably in terms of employment growth, which has been on an upward trajectory for 20 months.

One possible splinter in this argument, however, is why this boost in employment is not showing up – in any meaningful way – in income tax or in domestic demand.

Yesterday’s figures showed personal consumption, which accounts for two-thirds of domestic demand, fell 1.1 per cent last year. This was significantly worse than expected. The view by some is that most of the employment growth is in sectors that are not paying big salaries.

There is also the fact that disposable income is still on a downward trajectory, not helped by the introduction of the property tax last year.

The disparity between the recovery in employment and domestic demand may reflect what economists call a “lead-lag effect” whereby one variable is correlated to another at different times. In reality, it means a large swathe of the economy is not feeling the effects of recovery.

Irish-owned businesses
In contrast to the country's economic renaissance of the 1990s – when the turnaround was led by big foreign multinationals – Prof John Fitzgerald of the Economic and Social Research Institute said yesterday he believes the recovery this time will be led by Irish-owned businesses. "The Irish firms are small and they're not showing up in the data; they're being swamped by huge multinationals," he said.

Prof Fitzgerald’s argument is to some extent being borne out by the fact that there was sizeable employment growth recorded in the traditional manufacturing sectors last year, which are largely populated by Irish-owned firms.

Whether the home team will be strong enough to pull the entire economy out of the mire only time will tell.