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'Almost impossible' to estimate how sustainable economy growth is, says ESRI

The ESRI has called for a new method of calculating national accounts to tell if the economy is at risk of overheating.

Image: graja/shutterstock

ASSESSING THE CONTINUED strong performance of the Irish economy is “bedevilled” by difficulties with the national accounts, according to the latest economic commentary from the Economic and Social Research Institute (ESRI).

It said that initial estimates have said the Irish economy grew by 7.8% last year, and the ESRI expects it to grow by 4.8% in 2018.

Due to how these growth estimates are influenced by “large transactions of a select number of firms”, however, the ESRI said that a “more comprehensive approach” is needed.

The need for this comprehensive approach, it said, “becomes all the more pressing given the persistently strong rates of growth experienced in recent years, thereby giving rise to the possibility of overheating in the domestic economy”.

‘Strong growth’

Despite the uncertainty, strong consumption and investment, as well as favourable international conditions, were the main drivers behind the strong growth last year.

The ESRI said: “We also expect that these components will result in growth of approximately 3.9% in 2019. In preparing forecasts for 2019, we assume that a European Economic Agreement (EEA) will exist between the UK and the EU.”

The effects of a Hard Brexit, meanwhile, have also been calculated by the ESRI, estimating that it would increase the cost of living for all households in Ireland by 2% to 3.1%.

This would mean an annual increase of €892 to €1,360 per household. Costs would rise the most for lower-income households, as these spend a greater share of expenditure on food products, many of which are imported from the UK and would be subject to tariffs.

Households with the lowest incomes would face a 4% price increase in the highest-impact scenario, whereas households in the highest-income group would face a 2.4% price increase, the ESRI said.

Issues

Despite the figure of 7.8% economic growth in 2017, the ESRI said “it is likely that the headline figure has been impacted by certain developments amongst a small number of multinational firms operating in the Irish jurisdiction”.

“Therefore, it is very difficult to assess from the national accounts what the rate of underlying activity in the Irish economy actually is,” it said.

From a policy perspective, this becomes all the more pressing given the persistently strong rates of growth experienced in recent years, thereby giving rise to the possibility of overheating in the domestic economy.
It is almost impossible to derive accurate estimates of sustainable economic growth based on the current set of national accounts.

This gap in separating the activity of much bigger companies in Ireland requires a “more ambitious approach” to how we calculate the national accounts, the ESRI said.

It called for a separate set of accounts to be made that excluded “large distortionary transactions”.

This issue has been raised before, with claims of “leprechaun economics“ after Ireland’s GDP figures rose 26% in 2015.

At the time, Sinn Féin’s David Cullinane said the figures showed there was “no consistency, coherency or credibility to the national account figures that are supposed to serve as the bedrock for future fiscal planning and expenditure”.

David McNamara from Davy Research said in a note that the problem lies with the standard for accounting national finances. He says it is not suitable for a small, open economy like Ireland.

“Clearly, the standard European national accounting methodology is not fit for purpose as an indicator of economic growth in an economy like Ireland at present,” he said.

With reporting from Órla Ryan, Paul Hosford

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Sean Murray

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