If you followed the news yesterday, you may have heard that the Irish economy contracted by 1% in the second quarter of the year. As the Irish Times noted:
The revised figures, detailed in the Central Statistics Office’s latest quarterly national accounts, means GDP in the first half of 2024 shrank by 4.4 per cent compared with last year.
The latest figures show Modified Domestic Demand, a more accurate measure of underlying domestic activity, also fell by 0.5 per cent in the second quarter…..
….The CSO said activity in the globalised Industry sector, which is dominated by big pharma companies, fell by 0.7 per cent in the three months until the end of June while the information and communication sector posted a decrease of 0.9 per cent over the same period.
There was a mixed picture for sectors focused on the domestic market, with overall activity falling 1.8 per cent for the sectors combined.
The finance and insurance sector contracted by 9.8 per cent while the distribution, transport, hotels and restaurants sector declined by 1.1 per cent.
What you may also have heard, if you followed that news, was the Minister for Finance’s explanation for the whole sorry business:
Minister for Finance Jack Chambers blamed the unexpected contraction on “continued volatility in the multinational sector”.
“While I recognise the fall in GDP in the second quarter of this year, GDP is not a useful measure in assessing the living standards of domestic residents, given the outsized role the multinational sector plays in our economy. The fall in GDP reflects the volatile nature of activity in the multinational sector,” he said.
At this point, it might be useful to go back in time to just the previous morning:
“Commenting on the figures, the Minister for Finance, Jack Chambers T.D. said:
“The tax figures published today are further evidence of the resilience of our economy.
“The most notable feature of the August performance was the substantial increase in corporation tax receipts. While much of the increase in August relates to a technical timing factor, and offsets a decline earlier in the year, in the year-to-date this revenue stream is now well ahead of last year.”
Did you get that straight? At once, the poor performance of the Irish economy in the second quarter of the year is to be attributed to volatility and under-performance in the multi-national sector. At the same time, Irish Corporation Tax receipts – which are massively reliant on the multi-national sector – are at record levels, demonstrating the resilience of the Irish economy. Those two statements from the Finance Minister came, I kid you not, less than 24 hours apart.
If you read the figures on the economy carefully – and one might assume that the Finance Minister hopes you do not – then his line about economic performance being tied to multinational volatility is clearly absurd. The overall fall in economic activity was 1%, but in sectors focused on the domestic market, the fall was greater: 1.8%. In finance and insurance, it was almost 10%. This suggests less lending, and fewer new projects or purchases being insured, which would tend to point to domestic economic problems.
At the same time, the bumper corporation tax revenues are – broadly speaking – not tied to domestic economic performance. As every Irish person knows, much of this money is funneled through Ireland arising from profits on products sold outside Ireland: it will be tax on the EU-wide profits of a drug company, or facebook, for example. If anything, the corporation tax base is the part of the economy that is least tied to Irish domestic economic performance.
What the Minister is trying to hang his hat on, I think, is the contraction in the pharmaceutical sector post covid: That sector evidently received a large boost during the pandemic, in part from vaccine manufacturing and profits, and has recently fallen back to earth somewhat. Because those companies actively make products in Ireland, it is, in fairness, likely that scaling back of their performance might impact the Irish economy. But this is very thin spin, when you consider that pharmaceuticals represent only a tiny fraction of Irish domestic consumption, which has also fallen.
Politicians, of course, have every imperative to talk up the economy, and never to talk it down. This is for both political reasons – there’s an election coming – and economic reasons. If politicians start worrying aloud about economic performance and the risks of recession, then consumers might start tightening their belts, eating out less, and reducing their weekly expenditure. This would, in turn, actually cause a recession as demand for products fell. Therefore politicians have both a political and economic incentive to tell you that everything is fine, until it isn’t. It’s not lying, necessarily – but it might just be unwarranted optimism.
Where the Minister is correct is that foreign multinationals do distort Irish economic figures extensively. In 2023, for example, Ireland experienced a technical recession – two consecutive falls in GDP – which most of us barely noticed, because of the aforementioned pharmaceutical contraction. But the flipside is also true: Politicians rarely note that increases in GDP here are often meaningless in real terms, and instead reflect short-term accounting decisions made by Corporate Finance departments in New York and California about where and when to route their profits.
There is, for now, no sustained evidence that a major domestic economic downturn is coming – but we should be keeping an eye on those figures for finance, insurance, and the domestic economy. They can’t be simply written off as some quirk of multinational accounting, and people should be slow to believe Chambers or any other politician when they’re issuing two contradictory statements within 48 hours.