Paul O'Donoghue

IRELAND’S ECONOMY CONTRACTED so far this year. Except it didn’t – it actually grew.

How can both of these things be true at once?

Thanks to a pesky little statistic referred to as ‘Gross Domestic Product’, better known by its abbreviated form, GDP.

Basically, GDP measures the value of all the goods and services produced by a country.
It’s essentially used as a shorthand for the size of the economy.

You’ve probably seen plenty of articles titled ‘economy grows by X over the last year’. These almost refer to how much GDP has increased.

Not only the media – more importantly, international bodies such as the United Nations, the European Commission and the International Monetary Fund all tend to first look at GDP when considering how a country’s economy is doing.

Ireland’s GDP is down this year. It fell by 3.3% in the first nine months of the year compared to the same period in 2023.

So does this mean the Irish economy is weaker in 2024?

Well, no. The Irish economy is still one of the fastest-growing in Europe. It just isn’t being properly reflected in our GDP.

So let’s explain why GDP is such a tricky number for Ireland.

Why GDP doesn’t work for Ireland

In short – multinationals. Remember how we mentioned GDP measures all the stuff moving in and out of a country? That used to be a good measure of economic activity, when that consisted of the likes of making physical products and exporting them.

The problem nowadays is that multinational companies have extremely complicated corporate structures, which often involves them moving money from one country to another.

This money is then counted in a country’s GDP.

As previously explained, for a variety of reasons, Ireland is one of the most popular destinations in the world for corporate profit shifting.

Just one giant company shifting its profits here could have a similar impact on GDP as thousands of ‘normal’ businesses.

So because Ireland is a relatively small country, and there are lots of these big companies moving money here, it has a big impact on our GDP.

Normally, all the money being moved here inflates our GDP beyond what would be normal. That’s basically what happened a few years ago during Ireland’s ‘Leprechaun economics’ controversy.

Normal GDP growth for a country would probably be somewhere between 2% and 5% a year.

In 2015, Ireland recorded annual GDP growth of 26% – a figure which is basically unheard of, especially in a developed nation such as Ireland.

Since then, Ireland’s GDP often moves around fairly wildly depending on the activities of multinationals.

What we should use instead

It’s been pretty clear to experts in Ireland for a while that GDP isn’t a reliable measure of Ireland’s economy because of the scale of the impact of multinationals.

The Central Statistics Office has tried to produce numbers which discount the impact of this profit shifting by foreign companies, and instead look at how well the underlying economy is doing.

The key one here is called ‘Modified Domestic Demand’, which tries to exclude the effect of large multinational transactions which have basically nothing to do with Ireland’s real economy.

By this measure, the Irish economy is expected to expand by 2% in 2024, which would be considered a pretty decent year.

We can also look at things such as the country’s unemployment rate or average earnings.
These numbers also point to the economy doing well.

Irish average weekly earnings were rising by almost 6% year on year at last count, while the unemployment rate is hovering around 4%, a historically low figure.

Why Ireland’s GDP is still a problem

Even if every stats boffin in Ireland knows we should use different numbers for measuring our economy, GDP is still the international standard.

Even with our GDP falling recently, Ireland’s GDP per person is still one of the highest in the world, making it look like we’re easily in the top 10 of the world’s richest countries.
This makes Ireland appear to be much wealthier than it actually is.

This was explored a few years ago by former Central Bank governor Patrick Honohan, who tried to look at how closely the Irish economy corresponds to how well off the average person is.

By that metric, he found Ireland was somewhere near the middle of the pack in the EU, or around in the upper third.

Good, but not near what our GDP would imply.

This is a problem which is often compounded by statistics bodies and the media. International media still uses GDP for reporting on how Ireland’s economy is doing.
Even more problematically, it is still almost always the first statistic cited by respected international bodies such as the EU.

Domestic politicians have gotten better lately for recognising that high GDP growth doesn’t necessarily mean the economy is doing well, although the association has proven hard to shake in the minds of some.

Basically, if you take one thing from this article, take this.

The next time you see a headline ‘Ireland’s economy did X’ and the first thing mentioned is ‘GDP’ – an alarm bell should go off!