IBEC’s pre-budget submission is a tour de force. In the name of ending austerity it calls for . . . more austerity; namely, reducing public expenditure in real terms. This is done to pay for tax cuts that will primarily benefit higher income groups. And in calling for real cuts in investment it then proposes to use fiscally inefficient public-private-partnerships which will drive up the cost of investment in order to create new channels of profits. And in all this it manages to avoid the elephant in the room – the long-term chronic under-investment of Irish business in the economy.
Irish business has gotten all the breaks. Historically, it has been the beneficiary of ultra-low corporate tax rates and social insurance while paying below-average employee compensation (compared to most other EU-15 countries). And, yet, it is a chronic under-investor. The following data is taken from the EU Ameco database.
In 2012, Irish corporate investment is at the bottom of the table. Even when adjusted for multi-national accounting practices (which is what the Irish Fiscal Advisory Council’s hybrid-GDP effectively does), we come in marginally ahead of battered Greece. Our corporate sector invests 38 percent less than the EU-28 average – or nearly €6 billion less. It invests less than half the level that pertains in other small open economics (SOE) – or nearly €9 billion less. This is pretty bleak.
But it is not unusual. It is not just a blip due to our severe recession. Irish corporate investment has been an historical under-achiever.
Even during the bubble period when profits were booming and credit flowing, Irish corporate investment never reached EU levels, never mind the levels of our peer group – other small open economies. These are big numbers. Over the last decade:
The Irish corporate sector under-invested by nearly €50 billion when compared to the EU-28
When compared to other small open economies, the under-investment was €75 billion.
There is a caveat here: we don’t know to what extent corporate investment went into construction. The data doesn’t breakdown this information. However, it seems reasonable that Irish corporate investment disproportionately relied on construction activities during the boom period. If so, then Irish corporate investment in productive activity would fall even further in comparison to other EU countries.
We should take time out to deal with another measurement – foreign direct investment, or FDI. These numbers show a flood of money coming into Ireland from abroad. FDI into Ireland makes up 18 percent of GDP in contrast to the EU average of 2.5 percent. When criticism of corporate investment is aired, the FDI numbers are thrown about.
However, the FDI numbers measure ‘flows’; they are not an indicator of investment that actually ‘sticks’ in the economy.
The CSO classifies ‘reinvested earnings’ as investment for the purposes of determining foreign investment flows. However, the CSO defines this as ‘the direct investor’s share of the undistributed earnings of its branches, subsidiaries and associates.’ In effect, this is not so much ‘reinvested’ as ‘undistributed’.
‘FDI data in isolation do not give a good indication of the impact of foreign owned companies on the Irish economy. It is necessary to consider FDI statistics along with ‘real’ economic indicators such as employment, sales growth and value added to the economy.’
One of the ‘real’ economic indicators is actual investment – as recorded in national accounts by the CSO and Eurostat. This investment, which creates real activity in the economy comprises:
Dwellings & other buildings and structures (roads, bridges, airfields, dams, etc.)
Transport equipment (ships, railway, aircraft, etc.)
Other machinery and equipment (office machinery and hardware, etc.)
Cultivated assets (managed forests, livestock raised for milk production etc.)
Intellectual property-type fixed assets (mineral exploration, software and databases, and literary and artistic originals, etc.)
So when we discuss corporate investment, let’s keep an eye on real investment, not the ephemeral flows of money that do not make a significant contribution to growth.
So we return to the question: why? Why is corporate investment so low given all the incentives, tax breaks and ultra-low rates? This is not about bashing business or employer organisations. We need a strong, dynamic corporate sector that makes a real contribution to the Irish economy.
But we need an honest dialogue about what is wrong. There is a fundamental flaw at the heart of Ireland’s market economy. If we don’t ask the hard questions we won’t get the right answers. We won’t get a recovery – just a lot of statistics that cover up a dismal reality.
Stag-covery (n): a situation where statistical recovery occurs within a persistent economic stagnation
The CSO’s new release shows a statistical recovery and a stagnant economy – a state of affairs that can be described as stag-covery.
The headline rates show a GDP quarterly increase of 2.7 percent. This might seem solid enough but all this is driven by net exports. The domestic economy remains mired in stagnation.
The worst of the economic crash ended in 2010. Since then it’s just a matter of bouncing along the bottom. In 2013 consumer spending fell, spending on public services bumped up marginally while investment fell marginally. We can debate the swings and roundabouts (impact of the pharma cliff, aircraft leasing, etc.). But the narrative remains the same – the ship sunk to the bottom and is struggling to get back to the surface.
The first quarter of 2014 didn’t get off to a hectic start. On a quarterly basis:
Consumer spending fell, though this shouldn’t be too surprising given that it was coming off a quarter that contained Christmas spending.
Spending on public service resumed its long-term fall – by over 2 percent.
Investment fell by a substantial 8 percent.
It is this inability of the latter to generate any momentum upwards that is particularly worrying.
This represents is a potential problem for the Government. In the last quarter investment fell by 8 percent. Yet the Government has pencilled in investment growth of over 15 percent this year. Of course, the game isn’t even half over but this is an especially poor start.
Yes, GDP grew in 2013, thanks to the Eurostat revision (for an interesting thought on these revisions see Constantine Gurdgiev’s post). But it was marginal – at 0.2 percent. Quarterly GDP grew by 2.7 percent but this was down to net exports. Leave aside the issue of how real these exports are, especially in the services sector; the real question is whether this export growth will have a strong spill-over in the domestic economy (employment, wages, sourcing from domestic companies). Forfas shows that exports grew by 11 percent between 2008 and 2012. Yet, employment and direct expenditure (payroll and domestic sourcing) fell by 3 percent each.
On the swings and roundabouts, Philip O’Sullivan of Investec makes an interesting point:
‘The national accounts release is not something that we particularly look forward to, given its tendency to be significantly distorted by idiosyncrasies relating to the multinational sector (such as the patent cliff in the pharmaceutical industry) and subject to frequent revisions. Today’s publication does not disappoint on either front. We prefer to base our core narrative around the Irish economy on the encouraging signals emanating from high frequency data on the domestic side (as reflected in positive labour market, retail sales, industrial production and residential property price data) . . . ‘
Whatever about house prices (if houses were being built there would be more economic activity but house price rises might be depressed – is that good or bad?), let’s look at the high frequency data – that is, data that comes out more frequently and up-to-date.
Labour Market: Quarterly employment growth in 2013 averaged 14,700 (let’s pretend this is real - for a more cautious reading of this data see here). In the first quarter of this year employment only grew by 1,700.
Retail Sales: That average monthly Index for retail sales in the first five months of this year is 2.4 percent higher than the monthly average for last year. So this is positive. But in the last month the index fell marginally. Hopefully this is not an emerging trend.
Industrial Production: There has been solid growth since December of last year. But this is concentrated in the ‘modern’ sector (primarily multi-national sector) – in particular, the chemical / pharmaceutical sector - but there has been little growth in the sectors dominated by domestic industry. We need to see more growth in the domestic sectors which are employment and sourcing-rich.
All in all, the economy remains in stagnation mode. There are some small positive signs but against the backdrop of the phenomenal crash, it is just that: small. We can call it a recovery and there is data to substantiate that. But that recovery is not inconsistent with what can be called stag-covery.