Surging energy costs will take the wind out of Ireland Inc’s sails

Gross domestic product (GDP) has never been the most accurate measure of Irish economic performance because of the impact of the multinational sector. The headline numbers became even more opaque after 2015 as a few multinational enterprises relocated their intellectual property and related profits to Ireland, making it difficult to gauge what was actually happening to our national income. Some commentators disparaged, unfairly, the Irish data as being “leprechaun economics”.

With the help of detailed explanations from the Central Statistics Office, including extensive additional information, we have come to understand better what the numbers mean. However, for anyone looking at Ireland from abroad, unless they have great patience or a very special interest, they just give up, or draw the wrong conclusions.

An exception is the US Bureau of Economic Analysis, the US version of the CSO, which is fully au fait with the detailed Irish data and how to interpret them. This is because the activity by some very large US firms in Ireland could alter the understanding of some US data. For example, unless they took account of Irish activity by US tech firms, they could underestimate productivity in the IT sector in the United States.

Last week, the CSO published updated national accounts for 2021. As usual, it was necessary to look behind the headline numbers to understand what was going on. Today the best measure of growth in the real economy is provided by what is called “adjusted national income” or GNI* , which grew by 15 per cent last year. However, this incorporates the very big recovery in 2021 from the pandemic. A better comparison is with 2019, showing an average growth over the past two years of 5 per cent.

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This is still a very high number by comparison with our neighbours, but it reflects two unusual features of the Irish economy. Firstly, we have a strong presence of sectors, such as medical devices, pharmaceuticals, IT services and food processing, which were largely unaffected by the pandemic and where world demand continued to grow strongly in 2020 and 2021. The second is the exceptional revenue from corporation tax paid by multinationals, which stays in the Irish economy.

This accounted for between one and two percentage points of the 5 per cent average annual growth. Even stripping out this factor, we would have had average yearly growth of 3-4 per cent over the 2019-21 period, still a very high rate by EU standards.

The strong performance of the economy in 2021 is reassuring, and is reflected in rapid growth in employment, especially highly-paid employment. However, we shouldn’t get carried away.

Firstly, much of the corporation tax revenue is possibly ephemeral, as the Fiscal Council and the Central Bank of Ireland have warned. Changes in US tax law, in the internal policies at a handful of top US firms operating here, or in their profitability, could see a drastic fall in corporation tax revenues. At its most extreme, we could lose 3-4 per cent of national income. This would also represent a serious hit to our public finances.

As these are global companies, they are vulnerable to developments in the world economy. We can see the example of California, whose state revenues suffered a major fall after 2008 when the profitability of their big tech companies fell during the recession.

The second factor that must be taken into account in assessing the latest growth figures is the implications of the Ukraine war, its consequences for energy prices and how paying more for oil and gas from abroad makes us all poorer. So far this year we have spent more than €3 billion extra on buying oil and gas compared to 2019.

If we are lucky enough to keep the oil and gas flowing to the end of the year, it could cost us at least an additional €6 billion in 2022 – 3 per cent of national income – just to keep us warm next winter. Our increased national energy bill is like wiping out all the revenue we earn from food exports.

Paying higher energy prices will eat up most, if not all, of the growth in the economy this year. Under these circumstances, the economy has to run very fast even to stand still in terms of living standards.

Even worse, if there is a European recession this winter as a result of a shortage of gas, we could find ourselves running very hard, while our standard of living actually falls.

Developing indigenous energy sources, like onshore and offshore wind, is critical to mitigate the impact of the higher sums being paid to foreign energy providers.