Ireland’s rate of economic growth last year was flattered by manufacturing carried out abroad for Irish-registered multinationals. In sum, internal changes in four or five big firms led to an appreciable uplift in growth.
But beware of statisticians bearing gifts. If the impact on the national accounts in 2014 seems akin to a dose of steroids, at issue now is what would happen if the steroids were suddenly withdrawn. This is a knotty debate and, at first glance, it might appear to have little relevance outside the arcane world of economists. It is more than that, however.
The statistical change in question centres on a big increase in the recorded value of “contract manufacturing” conducted outside Ireland for certain groups registered here. The Central Statistics Office does not disclose anything about the organisations themselves, but the assumption is that we are dealing with a handful of firms in the pharma and tech sectors.
Corporate whims
At issue is a change in the nature of the activities they carry out abroad, whether by shifting the location of physical manufacturing, or via accounting or legal manoeuvres, which lead to a higher level of recorded activity for the Irish entity. We are in the realm here of management decisions made by corporations.
Yet the rising value of goods they produce abroad and sell to buyers in third countries then appears in the tally of exports from the State. This is the case even when the finished product never actually passes through Ireland on its way to the end purchaser.
Strange as it may seem, the impact of this is carried all the way through into an increase in Ireland’s gross domestic product. This is significant, for key international metrics in respect of the budget deficit and the national debt are calculated as a proportion of Ireland’s GDP.
It happens, of course, that a big step-up in the value of this activity appeared in the quarterly national accounts at the very same time as economic recovery broadened. The strengthening in the figures reflected solid improvements both in the level of domestic investment and – latterly – consumer spending. This was on top of the established recovery in actual exports from Ireland. Thus the continuing acceleration in economic growth is real, even if the recorded rate of GDP growth received a discrete boost from contract manufacturing.
In spite of the acknowledged impact on growth, such activity does not generally add to employment and there is no clarity on whether it makes any meaningful contribution to tax revenue.
But what is the actual impact on growth? This is tricky, although a report in November by the Irish Fiscal Advisory Council suggested the adjustment to trade data in 2014 may have been in the order of 2.5 per cent of GDP. Some analysts believe that this estimate may be a little too large, yet the sense remains that a significant amount of the estimated 5 per cent increase in GDP last year is attributable to contract manufacturing. In its latest quarterly bulletin, the Central Bank said the underlying strength of the recovery was, indeed, less than signalled by a 5 per cent advance in GDP as a result of contract manufacturing.
Notwithstanding uncertainty over the precise scale of the growth uplift, there has been no attempt to hide the phenomenon. There was a note on the matter in the Government’s budget documents last October. In addition to the fiscal council and the Central Bank, the question has also been highlighted by the European Commission and the International Monetary Fund.
Boost to GDP
Whatever the precise GDP impact, the result is a reduction in the budget deficit as a proportion of economic output and also in the national debt as a proportion of output. This upside benefit from contract manufacturing is expected to be a once-off event, but it has still fortified the GDP base. Thus the real growth in economic activity anticipated this year and next would simply add to that base.
Still, the danger remains that the same kind of corporate fiat which increased Ireland’s growth in this manner could just as easily lower the growth rate if the value recorded here of the manufacturing dropped or simply went elsewhere. That, in turn, would have a negative bearing on deficit and debt ratios.
It is for this reason this scene remains under very close scrutiny within the Government. In its budget day note, the Department of Finance said developments in contract production “have the potential to unwind or accelerate, with potentially large impacts on measured GDP”.
