As part of its response to the 2008 problems the EU has set up the Macroeconomic Imbalance Procedure which “aims to identify, prevent, and address the emergence of harmful macroeconomic imbalances” possibly. The identification is done via a scoreboard of indicators with various thresholds. Our concern here isn’t on the decision of indicators, the thresholds chosen, or the one-sided character of the modifications but on the work done by the CSO to make some of the indicators logical from an Irish perspective.
We know that lots of macroaggregates in Ireland are distorted and unless this is determined a scorecard with arbitrary thresholds could lead deceptive conclusions and modification requirements. The task has continued with scorecards produced for 2014 and 2015 with the latest one for 2016 published last week. The graphics have got flashier and the insights into things like the current account and world-wide web international investment position have got better. The task on the total amount of Payments current account pays to give the need for this measure especially. A distorted current account offers few insights.
Here is Ireland’s headline current account from the total amount of Payments. Over the past few years the breakdowns provided by the CSO focused on the impact of redomiciled PLCs and the changing treatment of airplane for leasing. However, the outstanding recent jumps in the total amount are due to the impact of intangible resources and it was clear that would need to be addressed. The 2016 shape shows that all is not well with this process so that as we talked about here the problem was likely related to the acquisition of airplanes and intangible resources.
These were being bought by Irish-resident entities but being funded by intra-company loans so any deficits due to these acquisitions are of little concern to ordinary people. The CSO has included an updated approach to the altered current accounts in their 2016 macroeconomic scoreboard that will take this into account.
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Leasing and the expense of R&D related IP from the current balance. Some firms borrow funds abroad to fund their investment by purchasing IP off their parent company. In the long-term this personal debt is repaid from the revenue on the IP or the aircraft being leased. Several extra columns have been added to the table displaying the changes (again click to enlarge). As before the changes for depreciation and redomiciled income are subtracted while now changes for imports are added back to give the updated version of the altered current account.
This is much better and there is absolutely no doubt that this modified current accounts give a lot more knowledgeable view of the underlying position of the economy relative to the headline current account. This is further proof the task being undertaken by the CSO to provide significant indications of the fundamental conditions of the Irish economy.