Market Comment Ireland's current account surplus overstated by 4.5% of GDP

09:10 17 May 2013 By Davy Research

Stock markets fell back marginally yesterday. The Euro Stoxx 50 fell 0.1% and the S&P -0.5%. A range of poor data releases on the US economy reminded markets that growth is expected to soften in Q2. US initial jobless claims spiked up to 360,000 and housing starts fell back sharply from above 1m to 853,000 in April. Furthermore, the Philadelphia Fed manufacturing survey for May fell back into negative territory, reinforcing the bad news on the sector following the weak Empire survey earlier this week.

US 10-year treasury yields fell back on the news to 1.87%. This followed a sharp fall in US CPI inflation to 1.1% in April, down from 1.5% in March. The fall in yields was contained by comments from San Francisco Fed President Williams that the $85bn of monthly asset purchases should be tapered back through the summer, and cease by the end of 2013. Similarly, the dollars’ rise against other major currencies halted yesterday, currently trading at 101.9 against the yen and $1.286 against the euro.

Yesterday, official Central Statistics Office data on the artificial positive impact of re-domiciled PLCs on Ireland’s current account balance was published for the first time. The data show that incoming net profits from re-domiciled PLCs have grown exponentially since 2009, up from €1.5bn to €7.4bn in 2012. The underlying current account surplus, excluding re-domiciled PLCs, was 0.4% of nominal GDP, well below the headline 5% measure.

The 5% current account surplus has been often used as a critical summary statistic of Ireland’s success in rebalancing the economy. The news that the balance, stripping out accounting distortions, is close to 0.5% of GDP will take some of the gloss off Ireland’s export-led recovery story. However, even excluding these distortions, there has been a sharp improvement in the deficit since 2009, up 3% from -2.5% in 2009. And the measurement problem has no bearing on the pace of household saving and debt reduction. So the underlying trends in the Irish economy have not changed. Nonetheless, the revelation that Ireland’s current account surplus may be overstated by 4.5% of nominal GDP illustrates a worrying trend, with volatility in the national accounts and balance of payments driven by tax accounting strategies.

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