Stay informed with free updates
Simply sign up to the Eurozone economy myFT Digest — delivered directly to your inbox.
A 7 per cent monthly drop in Irish industrial output — mainly caused by shifts in the activities of big multinational companies based in the country — has dragged production for the entire eurozone sharply below economists’ forecasts.
The figures underline how data for the 20 countries sharing the euro are regularly distorted by wild swings in Irish figures, even though the country accounts for only 4 per cent of the bloc’s gross domestic product.
Ireland’s statistical volatility is making it harder for economists to gauge the strength of underlying activity in the eurozone and to therefore predict how the European Central Bank, which is due to publish fresh forecasts of its own on Thursday, will respond.
In October, eurozone industrial production fell 0.7 per cent from the previous month, according to data released on Wednesday by Eurostat, the EU’s statistics arm. That was a bigger fall than the 0.3 per cent decline forecast by economists in a Reuters poll. But economists calculated that, excluding Ireland, factory output in the rest of the eurozone was almost unchanged from the previous month, declining no more than 0.1 per cent.
Melanie Debono, an economist at Pantheon Macroeconomics, said the eurozone figures were “distorted” by the “whopping” fall in Ireland, “where the industrial production figures are heavily influenced by multinational corporations’ transfer pricing practices and therefore not truly reflective of industrial production there”.
In another example, the eurozone economy contracted 0.1 per cent in the three months to September from the previous quarter. But excluding a 1.9 per cent decline in Irish GDP, Dermot O’Leary, an economist at Goodbody, estimated that output in the rest of the bloc was unchanged.
Still, economists interpreted the weaker than expected industrial production figures as a sign that another contraction in the eurozone economy is likely for the final quarter of this year.
“Another quarterly contraction in industry is a done deal by this point,” said Daniel Kral, an economist at consultancy Oxford Economics. “With construction reeling under high rates and services out of steam, we’re looking at a shallow technical recession in the eurozone.”
Tomasz Wieladek, an economist at investor T Rowe Price, said the “significant downside surprise” in eurozone industrial production made it “more likely” the ECB would start cutting interest rates by next April in response to a likely cooling of price pressures.
But he added: “Without Ireland the numbers don’t look as bad. I think that this supports the idea that June is still more likely than April” for the ECB to start cutting rates.
He suggested that Eurostat could adjust how it presents industrial production data. “I think politically it would be hard to exclude one particular country,” he said. “But I do think that there is value in excluding the most volatile countries on a rolling basis.”
A big factor behind the large swings in Irish economic data is that many of the biggest US technology and pharmaceutical companies have headquartered their international operations in Ireland to take advantage of the country’s relatively low 12.5 per cent corporate tax rate.
Groups such as Apple and Pfizer increasingly use contract manufacturing or merchanting arrangements to have their products made in low-cost countries, often in Asia, but they keep the intellectual property rights and income in their Irish subsidiaries.
So when the international activities of these companies declines it has a magnified impact on Irish production figures. Goodbody estimated that part of the recent decline in Ireland’s industrial output reflected “the fall-off in pharmaceutical exports after the Covid boom”.
The Irish statistics office tries to strip out this impact by calculating the production of traditional industrial sectors separately from the more “modern” ones that are often distorted by the activities of multinationals, such as pharmaceuticals, computers and electronics.
It said last week that production in the modern sectors fell 32.2 per cent in the three months to October compared with the same period a year ago. But production in the traditional sectors was up 2.9 per cent in that period.
While a double-digit percentage move in industrial production from one month to the next is rare for most countries, Dublin has recorded 13 of them since mid-2021, indicating the problems of including Ireland in the data.
Source: Economy - ft.com
