Latest Central Statistics Office figures show the multinational sectorcontinues to thrive and generate huge profits here, while the domesticeconomy languishes, writes Cliff Taylor, Economics Editor

"A tale of two economies" was one appropriate reaction to yesterday's figures from the Central Statistics Office (CSO) on economic growth.

On the face of it they suggest that the multinational sector is continuing to grow rapidly and generate huge profits here, while the domestic economy languishes.

A closer look at the figures suggests that this "dual economy" theory holds water, even if the gap between the 6.3 per cent rise in Gross Domestic Product (GDP) growth and the 0.6 per cent increase in Gross National Product (GNP) last year was exaggerated by certain special factors.

There is no "correct" measure for economic growth. GDP is designed to measure the total output of the economy. GNP, meanwhile, is a measure of total income.

Normally the growth in output would roughly align with the growth in income. However, the particular nature of the Irish economy means that this was not the case here last year.

The main reason for the gap between GNP and GDP is multinational profits. These are included in GDP - as they are part of the output of the economy.

However, for the purposes of GNP, all the profits earned here by multinational subsidiaries are deducted, on the assumption that they are not part of "income" to the Irish economy.

This means a significant difference between the absolute levels of GDP, which was almost €130 billion last year, and GNP, which was €105 billion.

But because multinational profits rose sharply - from about €26.3 billion in 2001 to €32.3 billion last year, according to recent balance of payments figures - the GDP and GNP growth rates also diverged sharply last year.

Much of the rapid multinational output growth last year came from the pharmaceutical sector and most of the growth appears to have taken place in a small group of companies, particularly Pfizer's operations in Cork, where Viagra is famously among the product range.

This is confirmed by the trade figures, which show a massive 75 per cent rise in medical and pharmaceutical product exports last year, at least partly due to a couple of new pharmaceutical plants coming on stream and the consequent reclassification of exports previously counted as chemicals.

Pharmaceutical companies are, of course, welcome contributors to the economy and are in a sector which employs around 24,000 people and provides stable and growing job numbers.

However, clearly the commencement of production of a couple of new drugs significantly pushed up GDP last year. In this sense, the GDP figure overstates the "real" level of economic growth.

In an interesting recent analysis, Mr Pat McArdle, Ulster Bank economist, demonstrated how switching production in a pharmaceutical plant from a lower value pill to a higher value one could affect GDP, conceivably without having any impact on the real economy through higher employment or purchases.

Last year's GDP growth appears to be based on just such a transition by a small number of companies, some of which may have moved from producing bulk chemicals for onward processing in other countries in 2001, to producing higher value pharmaceuticals here last year. So is GNP thus a better measure of the "real" level of growth? Normally it is, but last year it appears to have been depressed unnaturally.

To understand why, it is necessary to look at the flip side of multinational profit repatriations from subsidiaries here. As well as deducting these while calculating GNP, the CSO also adds back the profits earned overseas of Irish-based multinationals.

These profits appear to have fallen sharply last year, meaning there was less cash for the CSO to count coming back into the economy to offset the multinational profits moving out. The balance was a €24.9 billion net outflow, up from €17.7 billion the previous year.

The CSO will never disclose how it counts any particular company, but one contributor was Elan. It had a $2.3 billion loss last year, compared with a $300 million profit the previous year.

Only a portion of this would probably have been counted in the GNP figures, but the Elan turnaround is likely to have had some significant impact.

All in all, the lower profits of Irish companies may have knocked another 1 per cent off GNP growth, again a disproportionate impact in terms of its economic impact.

The CSO also breaks out the contribution of IFSC companies. Here a change in financial flows during the year appear to have cut GNP growth by around 1 per cent - as many of these are purely financial bookkeeping transactions, this does not represent a real change in economic activity.

Senior CSO statisticians at yesterday's briefing said that excluding the IFSC factor and the fall in Irish multinational profits, GNP growth last year might have been around 2 percentage points higher - in other words around 2.5 per cent.

While they did not say as much, this may represent a better measure of the real performance of the economy last year. Clearly, there was some growth, as reflected in a 2.6 per cent rise in personal consumption on goods and services.

Equally clear is that what growth there was largely fizzled out towards the end of the year, with personal spending rising just 1.2 per cent in the fourth quarter from the same period the previous year, a 1.8 per cent fall in exports and an 8.4 per cent drop in imports.

So while the 2.3 per cent drop in GNP in the final quarter probably overstates the position, it does appear that the economy stagnated towards the end of last year, caught by the international downturn and uncertainties with both consumer and business confidence suffering.