The volatility in Ireland’s quarterly national accounts has always been a feature and has increased of late, given the scale of the multinational influence on the headline data. The third quarter was no exception; real GDP rose by 4.2%, with the annual change at 10.5%, leaving the average annual growth rate year to date at 7.4%. Negative base effects would normally imply a marked deceleration in the final quarter ( the economy grew by 5.8% in q4 last year) and on that basis average growth for 2017 as a whole may well be around 6.5%, although given past experience anything is possible.
The growth surge in q3 occurred despite a 13% plunge in domestic demand. Consumer spending rose at the strongest pace for some time (1.9%) and government consumption expanded by 0.7% but capital formation fell by 36%, with modest growth in construction ( 2%) dwarfed by a 22% fall in spending on machinery and equipment and a 60% decline in outlays on Intangibles. The latter largely comprises spending by multinationals on R&D and is particularly volatile (a 58% increase in the previous quarter) but is offset in the national accounts by service imports. That largely explains why total imports fell by 11% in q3, against a 4% increase in exports. Consequently net exports contributed a massive 16 percentage points to q3 GDP growth, which alongside a big stock build offset the negative contribution from investment.
Total merchandise exports exceeded €49bn in the quarter, against under €28bn recorded in the Irish trade data, highlighted the scale of contract or offshore manufacturing. That export strength and the fall in imports contributed to a massive €14.5bn Balance of Payments surplus in the quarter, over 18% of GDP, with the surplus year to date at over €22bn.
On the headline data, Ireland’s real GDP in q3 is now 50% above the pre-crash peak ( recorded in the final quarter of 2007) with exports having doubled. Consumer spending is only modestly higher, however, by 4%, while government consumption is still marginally below that previous high. It used to be argued that GNP provided a better guide to national income in Ireland but that too is 47% above the pre-recession level, with re-domicilled multinationals now impacting the amount of profit outflows. To give a better idea of underlying activity on a quarterly basis the CSO have developed a modified domestic demand metric, which seeks to exclude multinational R&D flows and the impact of aircraft leasing. On that measure domestic capital spending actually rose, by 5%, as did domestic demand, by 3%.
Annual growth in modified final domestic demand was 5.0% in q3, bringing the average over the first three quarters to 4.9%. which is much closer to the consensus GDP growth forecast for the year as well as being similar to the pace of expansion implied by the employment data. Yet, GDP is the standard measure of economic activity and barring a massive fall in q4 Ireland is likely to record a much stronger growth figure in 2017 than anyone envisaged.