Irish Growth now likely to be at least 7% this year

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.

Ireland should move the Budget back to December

The last three Irish Budgets have been presented in mid-October, a departure from  the previous practice of delivering them later in the year, usually in early December. The change was triggered by new Euro  rules designed to improve economic surveillance (the two-pack)  which stipulated that member States ‘ must publish their draft budgets for the following year’ by October 15, although budgets need not be adopted till December 31. Ireland chose to present and adopt the Budget at the earlier date although others do not pass theirs till later in the year, and there are a number of reasons why the Irish Government should consider publishing a broad outline of its fiscal targets in October but wait till December to adopt the full Budget.

Ireland’s GDP is much more volatile than the norm across developed economies, which makes for large forecasting errors in terms of  economic activity and tax receipts ; the average  annual forecast error for the Exchequer balance  since 2000 is €1.5bn. Forecasting  the following year is difficult enough in early December as  the only published GDP data relates to the first two quarters of the year but at least there is some available information about the third quarter, which is not the case in mid-October.

Another factor is the November tax month, which includes income tax from the self-employed and is also a big month for corporation tax; in 2015, for example, total  receipts in November were expected to be  €6.5bn against a monthly average over the rest of the year of €3.3bn. Consequently, a much stronger or weaker November inflow may  not only render redundant the end-year fiscal projections made in October  but also compromise the forecast made for the  year ahead.

The past few months has highlighted that risk in Ireland, albeit this time  with the forecast errors on the positive side. The 2015 Budget projected tax receipts of €42.3bn, or 2.5% above the 2014 outturn, and it became clear as the year unfolded that economic growth was running well above expectations and  tax receipts would substantially exceed the initial target, albeit largely due to a massive overshoot in one category, corporation tax. In  October the Government formally revised up its tax forecast for the year, by €2.3bn to €44.6bn and announced additional spending of €1.5bn. The projected Exchequer deficit  was also reduced from the initial €6.5bn to €2.8bn, reflecting unbudgeted  capital receipts as well as the tax bounty. The Exchequer balance is a cash based measure  and the broader General Government deficit  (the preferred  EU fiscal metric) for 2015 was also revised down, to 2.1% of GDP from 2.7%, with a 2016 target of  1.2%.

The November Exchequer returns  have changed the picture. Receipts in the month came in at €6.9bn or €470mn above profile, leaving the overshoot year to date at €2.9bn, with corporation tax 58% or €2.3bn above expectations, a spectacular forecasting error. Spending is also still running behind the original target, so it appears unlikely  the Exchequer will actually meet the higher spending figures announced in October. The net result is that tax receipts will probably end the year at €45.4bn, 10% above the 2014 outturn and €800mn above the official estimate made just six weeks ago. That and the fact that the revised spending target will not be met implies an Exchequer deficit  of €1bn or less and a General Government deficit of 1.7% of GDP. Moreover,the Exchequer estimate does not include the €1.6bn payable from the partial redemption of AIB’s Preference shares so  a cash surplus for the year is possible, depending on when the money is transferred,

The 2016 Budget projected  a 5.8% rise in tax receipts which now implies a tax figure of €48bn next year or €0.8bn above the existing forecast, which even with the same spending targets gives a General Government deficit of 0.9% of GDP instead of the budgeted 1.2%. Of course there is no guarantee that  the 2016 tax receipts will emerge on target ( particularly in relation to corporation tax) but on the face of it fiscal policy in Ireland was tighter than the authorities wanted it to be in 2015 and will now be tighter than planned in 2016. Government debt will be lower as a result on this occasion but a return to a December Budget would probably reduce the  scale of forecast errors, although not eliminating them.