The consensus growth forecast for the Irish economy in 2015 has moved up over the course of the year and currently stands around 6.4%. This now appears too low following the release of the third quarter national accounts and is likely to be revised up to 7% or so. The 2016 consensus will no doubt move higher, to above 5%. Nominal GDP in 2015 may also emerge above the figure assumed by Government, at €212bn instead of €210bn, so shaving another percentage point off the debt ratio, reducing it to 96%.
There was little in the way of revisions to previous releases (which is not always the case), so Irish GDP is still seen as having grown very strongly in the first half of the year, by 2,2% in the first quarter and 1.9% in q2. Growth slowed a little in q3, to 1.4%, but that still left the annual change at 7% which is also the average over the first three quarters of the year. The q3 increase was also the tenth consecutive quarter of growth and real GDP is now 7.2% above the previous peak having risen by some 21% from the cycle low .
The recovery was initially driven by exports but that has changed, as evidenced in the third quarter data. Domestic demand rose by an annual 10.2%, driven by a 35.8% increase in capital formation, which followed a similar rise in q2. Construction spending is increasing at a modest pace and spending on machinery and equipment actually fell (it is often affected by volatile aircraft orders) so the surge reflected intangibles, the national accounts name for items such as patents, trademarks and R&D. Government spending fell but domestic demand was also supported by a 3.6% annual rise in consumer spending. Wages are finally starting to rise, employment is growing strongly and price inflation is around zero so households are seeing good growth in real incomes, which is supportive of spending, although the overall figure is lagging retail sales due to falling expenditure on services.
Exports are still performing strongly , rising by an annual 12.4% in q3, but that was dwarfed by an 18.9% rise in imports, with the result that net trade made a strong negative contribution to GDP, which is fairly unusual in the Irish national accounts. Multinationals in Ireland often price exports in US dollars and so the latter’s appreciation results in a recorded price rise in euro terms, which no doubt explains why export prices are increasing at an annual rate of 7% , which is also the main reason why nominal GDP is growing at a double digit pace against a real rise of 7%.
Multinational profits have also picked up strongly this year and the resultant outflows mean that GNP , the income of Irish residents, is lagging the growth in GDP, rising by an annual 3.2% in the third quarter. We expect a 5% rise in GNP over 2015 as a whole but profit flows are volatile and a weaker GNP figure is certainly possible,
All of the available evidence, from the labour market, retail sales, tax receipts and the monthly PMI’s , points to strong Irish growth and the GDP figures now confirm that to be the case. An expectation that this trend will continue into 2016 is a reasonable presumption at his stage although it is hard if not impossible to get a handle on likely developments in spending on intangibles or indeed on external trade flows as they now dwarf the merchandise export and import figures published on a monthly basis. That raises the risk of an unexpected quarterly slowdown or even fall in these variables but for the moment the headline figures show that the economy is growing at 7% per annum, the strongest since the millennium.