Michael McGrath (Cork South Central, Fianna Fail)
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76. To ask the Minister for Finance his views on the opinion expressed by a member of Independent Fiscal Advisory Council (details supplied) that up to half of the growth in GDP in 2014 may be attributable to contract manufacturing; and if he will make a statement on the matter. [45757/14]

Michael Noonan (Limerick City, Fine Gael)
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I am aware of the phenomenon of 'contract manufacturing'.  Indeed, the economic review and outlook that accompanied Budget 2015 contained a detailed explanation of the issue ().

Exports grew by 13.0 per cent year-on-year in the second quarter of this year, with goods exports up nearly 16 per cent. This was not matched by proportionate import growth, despite the growth in domestic demand in the same period. As a result net exports increased by 11.0 per cent year-on-year in the second quarter to stand at €11.2 billion, or 24 per cent of GDP.

Part of the strong performance in goods exports can be put down to what is known as contracted manufacturing'. This contracted production occurs when an Irish-resident (though not necessarily Irish-owned) enterprise contracts a plant abroad to produce a good for supply to a third country. The sale of the good is recorded as an Irish export as the economic ownership of the good prior to sale is regarded as belonging to the Irish-resident enterprise. Imports used in the production process are also recorded as Irish imports. Neither these exports nor imports associated with contracted production are recorded in the monthly trade series which is based on measurement of when goods physically cross the Irish border. 

The difference between national accounts-based and trade-based measures of exports and imports are known as national accounts adjustments. In the three years to 2013 national accounts export and import adjustments have largely offset each other. This relationship appears to have broken down in the first half of 2014. The export adjustment has increased considerably more than the import adjustment and is believed to be associated with a sharp increase in contracted production, adding significantly to the contribution of net exports to GDP growth. However, other adjustments (such as the correction for carriage costs of imports) are also made. It is important to stress that the contribution of contracted production to growth cannot be calculated with precision with the publically available data to hand.

Contracted production involves very little employment effect or second-round impact on the wider economy and complicates the task of forecasting net exports. Developments in contract production are sector-specific and product-specific and have little relationship with concurrent indicators of export performance. As such, they have the potential to unwind or accelerate with potentially large impacts on measured GDP.

Notwithstanding these developments, there is no doubt that economic recovery has gained momentum this year and that it has broadened to include a recovery in domestic demand.  High-frequency data such as retail sales, industrial production and purchasing managers' indices (PMIs) are all in strong positive territory. Employment growth resumed in 2012 and the Live Register continues to fall month-on-month. This recovery has manifested itself in tax revenues which are expected to come in €1 billion (or 2.5%) above original expectations.