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The Irish economy is not contracting. Here's why.

Although The Irish Times recently published an article claiming Ireland's economy has lurched back into recession, Karlsson argues that GDP is a poor measure of how the country is really doing. Ireland is actually recovering from its economic slump, Karlsson says.

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Yves Herman/Reuters
Ireland's Prime Minister Enda Kenny, whose country is holding the rotating EU Council presidency, holds a news conference at the end of a European Union summit in Brussels on June 28, 2013. Despite seeing its GDP drop, Ireland is recovering from an economic slump, Karlsson says.

"Ireland’s economy lurches back into recession" says the headline in The Irish Times, based on a drop in GDP. The problem is that for Ireland, GDP is misleading.

The reason for that is that because of Ireland's low corporate income tax rate, multinational companies, tend to attribute too much of their profits to Ireland, by having their Irish subsidiaries charge their non-Irish subsidiaries unreasonably high prices when supplying them with goods & services and similarly having their non-Irish subsidiaries charge their Irish subsidiaries unreasonably little. Yet apart from the (at most)12.5% of the profits that is paid in corporate income tax, those profits goes to foreigners, not the Irish. And because those alleged profits only reflect tax avoidance, it gives a misleading picture of how much value is produced there. For this reason, GNP, which subtracts the profits of foreign companies in Ireland, provides a more accurate picture of the Irish economy than GDP.

And  for some unknown reason, foreign companies have sharply reduced the profits they attribute to their Irish subsidiaries during the latest year. As a result, even as real GDP fell by 0.9%  real GNP rose by as much as 6.1%!

That 6.1% number seems implausibly high considering that the unemployment rate has fallen by only 1½ percentage points, something that probably reflects price index problem. Nominal GNP rose by only 4.8% meaning that the real GNP number assumes 1.3% deflation, even as consumer prices rose by about 1%.

Still, while growth was almost certainly lower than 6.1%, it was clearly far above zero, meaning that Ireland has joined the Baltic countries in recovering from the slump.

In a separate report, BTW, Ireland's current account surplus rose to a record €9 billion, or nearly 7% of GNP, in the year to the first quarter.

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