Notes on the Front

During the Cold War, lack of reliable information about Soviet Union politics forced Western analysts to seek out alternative signs  and portents:  the removal of portraits, the rearranging of chairs, positions at the reviewing stand for May Day parades, the choice of capital letters in official titles, how many times a Politburo member’s name was mentioned (or not mentioned) in the official press.  This was called Kremlinology.  The Germans had another term for this – Kremlin Astrology due to its vagueness and ambiguity.

The Irish economy is not a million miles away.  The official data is there aplenty but it is telling us less and less about what’s really going on.  For instance, we have the fastest growing economy in Europe.  But as we saw here, employment growth is rapidly falling off.  What does that tell us?

Here’s another sign and portent:  investment.  In this post I charted the long-term investment deficit – a deficit that didn’t get much attention in the general elections debate (scratch that; it got no attention at all).  Yet investment is the fundamental driving force in long-term sustainable growth.

When we look at recent investment level we find an even stranger thing going:  as the economy gains momentum, investment is actually declining.  Just as we did previously, we will look at investment excluding Intellectual Property (IP).  IP inflates investment numbers without necessarily contributing to growth.  Multi-nationals are re-locating IP activity into Ireland from tax haven locations.  But to what extent this is making any real contribution to growth-generating activity is open to question.  In 2013 70 percent of industrial R&D investment came from just three companies.

In the first three quarters in 2015 investment rose by 28 percent over the first three quarters in 2014.  This is consistent with high economic growth.  However, when you strip out the IP – which has minimal impact on real economic growth – investment actually fell by over 8 percent.  This was during a period when GDP and GNP growth was enjoying double digit numbers.

We can get a sense of this by looking at the raw numbers:

• Total investment rose by €6.8 billion
• Construction investment rose by €270 million
• Machinery and equipment fell by €1.8 billion
• Intellectual Property rose by nearly €8.6 billion

When you strip out IP, investment in the economy fell by €1.8 billion over this period.

Not all economic activity in IP is due to accountancy practices or transfers by multi-nationals.  There is real activity here bringing benefit to the economy.  But how much?  It is difficult to even guess.  However, this gives us some idea.

• IP makes up 20 percent of all investment in the EU-15
• IP makes up 47 percent of all investment in Ireland

So go figure.

We should expect investment to rise in the future (when IP is stripped out), mostly due to a rise in construction investment.  Investment in dwellings remain depressed, both in the private and public sphere as we are aware of.  However, a key category is the machinery and equipment items – tangible assets.  If this category continues to fall or stagnate this is a sign of a business sector that is not expanding.

In short, despite growing GDP we have falling investment and falling employment growth.  And here’s one more curve, as pointed out by a good friend who keeps an eye on these things.  In the first two months of the year, income tax rose by nearly 9 percent over the first two months of last year, consistent with rising employment and weekly income.  However, PRSI receipts fell by 6 percent.  This seems contradictory as PRSI is levied on PAYE and self-employed income.  There are a couple of potential explanations for this – notably that the Department re-allocates these monies later in the year.  This would mean lower income tax revenue but higher PRSI revenue to the extent that they would dovetail.  We’ll keep a watch on that.

In fact, you have to keep an eye on so much and not trust headline numbers.  You have to read what’s below the numbers.  You have to read the runes, the entrails, the signs and the portents.  You have to become an ‘econologist’.

End.