How's the economy doing?

Latest in our regular series

Jim Power

IRISH ECONOMIC SNAPSHOT

·      The provisional first quarter national accounts data are as confusing and frustrating as ever, with the distortions created by IP transactions, profit repatriations and depreciation causing all sorts confusion, not to mention the fact that important data breakdowns are not made available due to reasons of confidentiality. Nevertheless, the data available shows the strength of the multi-national sector, and the immense pain suffered by those sectors most exposed to COVID-19 restrictions. Very much a dual economy.                                                          

·      The high level of Exchequer borrowing is being driven exclusively by strong Covid-related expenditure on health and social protection, rather than issues on the tax revenue side.                                                                                                                        

·      Tax revenues are performing very strongly so far in 2021. €23.7 billion was collected in the first 5 months, almost €2 billion ahead of last year. Income tax and VAT receipts very strong. The income tax performance reflects the high quality of employments in sectors not affected by Covid restrictions, and the very progressive nature of the Irish income tax system.                                                                 

·      Government expenditure continues to be adversely affected in a dramatic fashion by COVID-19, with social protection expenditure very high. Health and social protection accounted for almost 65% of total net voted current expenditure in the first 5 months of the year.                                                                                                   

·      Very strong PMIs for manufacturing and services as the economy re-opens, but price pressures are building, which is a theme everywhere at the moment. Inflation will remain the big issue and concern everywhere over the coming months.

As the Irish economy and society are being gradually re-opened, economic indicators are suggesting that activity levels are bouncing back very strongly, which is pretty much what we are seeing in many other countries.

This week we got a combination of some historic data (Q1 National Accounts) which provides a good indication of what was going on during the peak of the lockdown in the first three months of the year, and more up to date data relating to the Exchequer finances, and the purchasing managers indices.

PROVISIONAL FIRST QUARTER NATIONAL ACCOUNTS

Ireland’s growth numbers are becoming increasingly difficult to interpret due to the strange activities of the multi-national sector in areas such as IP, profit repatriations, and depreciation. This problem has been building since 2015. Personally, I am finding the CSO’s quarterly national accounts press conferences increasingly frustrating, but it is not the fault of the CVSO who have to work to certain legal guidelines. How can we possibly analyse what is happening on the investment side of the economy for example, if we are not given access to many of the components for reasons of confidentiality?

Nevertheless, we have to work with what we are given, and the clear messages from the latest data are that Covid had a dramatic impact on the economy in the first quarter, and also the very strong dual nature of the economic performance, which stretched from dramatically good to pretty awful.

Table 1 provides a breakdown of the Quarter-on-Quarter and Year-on-Year changes in the components of economic activity based on expenditure.

The quarter-on-quarter changes show that domestic components of the economy were weak, and external components were strong. Modified Domestic Demand (MDD) declined by 2.9%, due to a decline of 5.1% in personal consumer expenditure; growth of 1.1% in net expenditure by central & local government; and a decline of 1.5% in domestic investment activity. The quarter-on-quarter increase of 7.8% in GDP is seriously distorted by multi-national activities, which in turn seriously distort investment and imports. It is all very confusing. The year-on-year comparisons are in turn further distorted by Covid restrictions this year compared to last year.

Table 1: Irish National Accounts on an Expenditure Basis (Q1 2021)

Source: CSO Quarterly National Accounts, June 4th 2021

Table 2 provides a breakdown of the Quarter-on-Quarter and Year-on-Year changes in the components of economic activity based on output. Analysis of the output side of the economy provides further evidence of the dual nature of the economy and the impact that COVID-19 had in the first quarter.

It goes without saying that one’s perspective on the economy will be heavily influenced by the sector one happens to work in or be exposed to.

Output from multinational companies increased by 17.9% during the second quarter, while output from indigenous companies declined by 2.1%.

Output from construction declined by 23.4% during the first quarter. In the 12-month period the output of new dwellings down by 21.1%. This reflects the lockdown of the construction sector, and shows why the housing supply crisis is getting worse rather than better.

Table 2: Irish National Accounts on an Output Basis (Q1 2021)

EXCHEQUER RETURNS (JANUARY-MAY 2021)

The Exchequer returns for the first 5 months of the year show that the Exchequer recorded a deficit of €6 billion in the first 5 months of the year, which was €104 million better than the equivalent period in 2020. The big story here is that tax revenue buoyancy is very strong, while the pressure on public spending remains intense. On a 12-month rolling basis, which is regarded as a better indicator in these Covid times, a deficit of €12.2 billion was recorded.

·      Total tax receipts in May were 21.3% ahead of a very depressed May a year ago. In the first 5 months of the year, total tax receipts are an impressive 9.1% up on last year, equivalent to almost €2 billion.

·      Income tax receipts performing very strongly, up 11.2% on the first 5 months of last year, or just over €1 billion. Notwithstanding the Covid-related impact on the labour market, the quality of employment in the economy and the very progressive nature of the income tax system are delivering very buoyant income tax returns.

·      VAT receipts are 22% ahead of last year, equivalent to €1.3 billion. May VAT receipts were similar to May 2019, so it is clear that VAT-related activity is rebounding very strongly. As an example, data from the SIMI show that new car registrations in the first 5 months of the year were 17.9% higher than last year, when car dealerships were shut down for a large part of the period.

·      Customs receipts are growing strongly, due to Brexit.

·      Corporation tax receipts in May were €196 million lower than May of last year, but €60 million of this is due to corporation tax being withheld to make payments under the Covid Restrictions Support Scheme (CRSS). Corporation tax receipts should improve as the year progresses.

Table 3: Tax Revenues January-May 2021

On the expenditure side:

·      Total net voted current expenditure at €24.7 billion, was €727 million or 3% ahead of the first 5 months of 2020.

·      Health spending at €7.7 billion was €262 million lower than last year and accounted for 31% of total net voted current expenditure.

·      Social protection expenditure at €8.2 billion was €750 million ahead of last year, and accounted for 33.8% of total net voted current expenditure.

Covid is continuing to have a dramatic impact on Government expenditure and the public finances. 

PURCHASING MANAGERS INDICES

The Purchasing Managers Index (PMI) for the manufacturing sector jumped to a fresh record high of 64.1 in May, with output rising at a record pace as the economy was gradually re-opened. However, input costs increased at the fastest pace in 10 years, and output prices rose at a series-record pace.

The service sector PMI jumped to 62.1, which is the highest reading since March 2016. This reflects the gradual easing of Covid restrictions, but intensifying inflationary pressures are becoming evident in the services side of the economy also. Capacity pressures are continuing to build, and input cost inflation hit the highest level since July 2008. Labour, fuel, insurance, Brexit, energy and freight charges are all highlighted as cost pressure points. The charges levied by service providers in May rose at the fastest pace since November 2019. The inflation debate continues apace!