When more iPhones roll off production lines in China or a South Korean plant manufactures fewer drugs for Pfizer, it is hard to believe such shifts could seriously distort Europe’s economic data. But they do. In fact, they do so frequently.
The reason 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 much of the revenue these companies record in their Irish units comes from activities that provide few jobs or incomes for residents of Ireland or of anywhere else in Europe. Yet they still have a massive impact on perceptions about how the region’s economy is performing.
The latest example came when eurozone industrial production figures, published this month by the EU’s statistics arm Eurostat, showed month-on-month growth of 0.5 per cent in June, confounding analysts’ expectations for a slight decline.
The growth was entirely down to Ireland’s 13.1 per cent surge. Excluding “statistical quirks and distortions” in the Irish data, Mark Cus Babic, an economist at Barclays, calculated eurozone industrial production would have fallen 0.9 per cent in June.
While a double-digit percentage move in industrial production is rare for most countries, Ireland has recorded 14 of them in the past 24 months.
“Attracting these large industries to Ireland through the tax regime regularly causes havoc with Irish economic data,” says Stefan Gerlach, a former deputy governor of the Central Bank of Ireland who is now chief economist at Swiss bank EFG, adding that the issue “does little to enhance Ireland’s reputation”.
Melanie Debono, an economist at consultants Pantheon Macroeconomics, spotted another problem with Ireland’s contribution to the latest eurozone industrial production figures: they don’t add up.
Debono pointed out that when the subsectors were added up and weighted by their share of total output, the result was an overall decline of 0.6 per cent — rather than the rise of 0.5 per cent. “Something is wrong here,” she said.
Eurostat told the Financial Times that “some inconsistency” between the headline 0.5 per cent figure and the total of the subsector figures had been “caused by the data of one country”, which it refused to name.
The culprit? Almost certainly Ireland’s method for seasonally adjusting its data. The country’s Central Statistics Office told the FT that because it calculates each subsector separately to the overall industrial production figure, the total can differ from the sum of its parts.
Other eurozone members use the same direct seasonal adjustment method. But because their data is not as volatile as Ireland’s, it matters less.
Big swings in Irish industrial production even affect gross domestic product figures, including for the eurozone. In the three months to June, more than half the region’s 0.3 per cent growth from the previous quarter was due to Ireland’s 3.3 per cent expansion in the period.
The Central Statistics Office said much of the country’s second-quarter growth was “driven by increases in the multinational dominated sectors”. In other words, the activities of Apple, Pfizer and other big US groups such as Meta, Intel and Google — often in Asia — are distorting Europe’s GDP.
Analysts and officials are grappling for solutions.
Oliver Rakau, an economist at consultants Oxford Economics, has gone as far as to suggest Eurostat should publish some economic data excluding Ireland “where the impact of the Irish data quirks is the largest”.
The country’s statisticians are considering switches to a different technique. In the meantime, they have attached a health warning to the industrial production data and suggested analysts take a “longer term view”.
Ronan Dunphy, a research analyst at Irish brokerage Goodbody, said it tended to ignore the data that was “of very questionable value on a month-to-month basis”.
Ireland does benefit from multinational companies’ operations. They manufacture some products in factories there and their profits helped to boost Irish corporation tax receipts by 48 per cent last year to a record high of €22.6bn.
But as long as it keeps warping Europe’s economic data, the artificial boost coming from Ireland’s tax-minimising guests will only intensify calls for action to tame the wild numbers coming out of the Emerald Isle.
Source: Economy - ft.com
