By Padraic Halpin
DUBLIN (Reuters) – A statistician’s sleight of hand suggesting Ireland’s economy ballooned by 26 percent last year has muddied assessments of its true health and provided a complex challenge for a government already wrestling with the consequences of Brexit.
A swath of secondary numbers points to an economy still in sharp recovery, but the disproportionate jump in the prime measure of activity – gross domestic product – due to a handful of multinationals’ attempts to cut their taxes, raises questions about the relevance of the whole data set in analysts’ minds.
In a tweet to his 1.6 million followers, U.S. economist Paul Krugman dubbed the revision from an original growth estimate of 7.8 percent “leprechaun economics.”
“It throws away the European rule book in terms of its sensible application to Irish economic conditions,” KBC chief economist Austin Hughes added.
“A major re-think is required to formulate fiscal rules that are likely to lead to sustainable and healthy trends in Irish public finances.”
At the stroke of a pen, Ireland’s debt fell below that of Belgium, France and Austria to 79 percent of GDP, not 93.8 percent as originally estimated, raising issues over how investors should plot the sustainability of a debt burden that soared during the financial crisis.
Hughes said the “astonishing” revision also meant factors central to fiscal policy such as Ireland’s potential growth rate, output gap and structural budget balance were rendered virtually meaningless.
That made the task of setting appropriate levels of tax cuts and spending increases in upcoming budgets that much harder, he said.
Finance Minister Michael Noonan said on Wednesday that basing fiscal policy on a growth figure of 26 percent would be a mistake.
But it was still valid to use GDP as a denominator for assessing debt sustainability and he would instead rely on a 2016 forecast of 5 percent.
“It’s a soundbite, and in two months’ time when someone in New York or London is making some decision about investing, they’ll see that we’re in the mid 70s (debt as a percentage of GDP) and that’ll be the data they’ll work with,” he told a news conference.
A MATTER OF INTERPRETATION
Economists said investors seeking an accurate snapshot of Ireland’s economy should look to last year’s 2.6 percent rise in employment, the 8.2 percent jump in retail sales and 10.5 percent increases in tax receipts.
But some suggested a new, broader indicator to capture the economy’s nuances was now needed.
“Investors need to be able to rely on the data with acceptable forecasting errors to give the confidence to invest,” said Ryan McGrath, a bond dealer at Cantor Fitzgerald.
“There are certainly question marks over that debt/GDP number but that’s industry standard and is what investors will continue to watch, primarily due to the lack of credible alternatives.”
Many economists say the GDP data could remain volatile and difficult to interpret in coming quarters.
The 2015 figures were upended by a reclassification of assets from firms redomiciling to Ireland to cut their tax bill and others moving intangibles onshore, and by the leasing of aircraft in the major Irish hub.
Any of those could be a prominent feature again this year.
Indeed – and despite every other piece of data pointing to a strong start to the year – Ireland could even fall into a technical recession after GDP slumped in the first quarter, mainly on account of the 2015 revision.
Considered the economy most vulnerable to Britain’s decision to leave the European Union, particularly on the trade front, Ireland’s national accounts will also provide few answers on the impact of Brexit, leaving that to surveys like the Purchasing Managers’ Indices.
“The figures couldn’t come at a worse time as economic analysts try to gauge the impact on Ireland from the Brexit shock, but that is going to become that more difficult,” said Merrion Stockbrokers chief economist Alan McQuaid
“It won’t help policymakers either as more and more people will be looking for a piece of this “super-growth pie”, likely leading to over-aggressive wage demands, which if granted will do far more damage than good to the economy in the long run.”
(editing by John Stonestreet)