Having contracted by 0.4% in the first quarter Irish real GDP grew by 2.5% in q2, bringing the annual growth rate to 9.0%, following a 9.3% rise in q1. The implication is that is that the consensus forecast for the year as a whole ( 5.4% on Focus Economics) is too low and indeed our own projection of 6.5% may need revising, although the annual growth rate is likely to slow appreciably in the second half of the year given strong base effects.
One surprising feature of GDP in recent years is the modest growth recorded in consumer spending, given the pace of employment and income growth. That appears to be changing however, with the annual increase in real consumption accelerating to 4.4% in the second quarter. Government consumption is also growing strongly, at 4.2%, as is building and construction, up over 13% , driven by a 38% surge in house building. Spending on machinery and equipment excluding aircraft leasing rose by 26% so overall capital formation by the domestic economy rose by 13%, which when added to personal and government consumption gives a 6.2% rise in modified domestic demand, following a similar increase in q1.
Some prefer this concept as a better measure of real activity in the Irish economy but GDP as a whole is the international standard, which means taking account of aircraft leasing, spending by multinationals on R&D and intellectual property (Intangibles), and of course exports and imports. Intangibles are notoriously volatile and this was indeed the case in q2, with an annual decline of 63%, with the result that total capital formation actually fell very sharply, by 32%, giving a very different picture than the domestic investment data would imply about investment spending in Ireland.
Most of this Intangible spending is also captured as a service import, and as a result overall imports fell by an annual 6.0%, in contrast to an 11.3% increase in exports. So when account is taken of these largely multinational related activities net exports contributed some 20 percentage points to annual GDP growth, offset by an over 10 percentage points contraction from capital spending.
This contribution approach is particularly problematical when one looks at the quarterly change in real GDP. Here, the net export contribution was 6.8 points, which when added to a strong stock build and a modest rise in dometic demand implies the economy grew by 8.3% in the quarter. The reported figure of only 2.5% reflects a very large statistical adjustment of -€2.4bn