Irish Q3 GDP: Volatility again to the Fore

The Irish economy grew rapidly in  the third quarter, expanding by a seasonally adjusted 4% according to the CSO, following a 2.1% contraction in q1 and a 0.7% expansion in q2. This boosted the annual growth rate in q3 to 6.9%, and took the average over the first three quarters of the year to 4.6%, implying that in the absence of big revisions or a very weak final quarter, growth for 2016 as a whole may come in above the current  consensus of around 4%.

Large quarterly swings are far from unusual however, given the impact of multinational trade and investment flows on the headline data and the expenditure components. Imports, for example, fell by 8.6% in the quarter and are down 6% year over year, partly but not solely due to a collapse in investment spending on intangibles (R&D). On the export side , modest growth of 1.7% was recorded in the quarter, so net exports boosted quarterly GDP by an extraordinary 10 percentage points. Merchandise exports, as captured in monthly trade flows, amounted to €29bn yet the figure quoted in the national accounts is some €45bn, with the difference reflecting offshore production from Irish registered firms. This is consistent with internationally accepted Balance of Payments (BoP) practice but it is impossible to predict these ‘additional’ exports, which have ranged of late from €15bn to €24bn per quarter.

Most of the R&D spending is captured as an imported service ( via payment of royalties  by multinationals or for the use of patents) so Q3 also saw a huge fall in spending on intangibles, of 61%, which followed a 124% rise in q2.  Yes, 124%. As a result total capital formation fell by 18% in the third quarter, despite a 30% rise in spending on machinery and equipment (itself distorted by airplane leasing) and another steady increase in building and construction (4.6%).

The  large fall in overall investment spending offset modest gains in personal consumption (0.7%) and government spending (0.8%) with the result that final domestic demand fell by 5.6%, so all the growth in the quarter came from net exports and a strong stock build ( which added 1% to GDP) although large statistical adjustments mean that the component contributions rarely sum to the headline growth figure.

So on the face of it the economy is booming, with GDP up a real 6.9% over the past 12 months. Indeed, if we use GNP as our measure ( this adjusts for income flows in and out of the economy) the growth rate is even more startling, at 10.2%, with the BoP surplus in q3 rising to €10bn, or almost 15% of GDP. Moreover, the CSO has also revised up nominal GDP , so the large falls recorded  earlier in the GDP deflator are now less pronounced.

Yet, some important measures of dometic spending are less robust. Personal consumption, for example, is surprisingly soft, given the strength of the labour market, showing annual growth of 2.1% in q3 and just 0.4% in the last six months. GDP is the internationally accepted measure of growth in the economy but it is clearly giving a distorted picture of underlying activity in Ireland.