Irish GDP contracted in q2, as universally expected, but the 6.1% quarterly fall was not as severe as many predicted, although the first quarter is now also seen to have contracted, by 2.1%, instead of the initial 1.2% rise. On an annual basis GDP fell by 3.0% in q2 but this followed a 5.7% rise in the first quarter, leaving the average annual change over the first half of the year in positive territory, at 1.4%. The economy probably grew again in q3 and forecasts of contractions in the 8%-10% range over the full year now look far too pessimistic, with the consensus likely to move higher. Indeed our own forecast of -3.5% looks a tad low and we will revisit the forecast again, although with the caveat that the path of the virus remains the key uncertainty.
We have consistently emphasisied that Ireland’s GDP is largely dependent on exports and that the composition of that sector ( heavily weighted to Pharma, medical devices, organic chemicals and ICT) renders it far more resilient than both domestic spending and the export sector in most other developed economies. Consequently , although exports did fall in q2, the decline was modest compared to the trend elsewhere and left the annual change at zero, following a 6.5% rise in q1, which means that the substantial annual fall in exports envisaged by most forecasters is unlikely to materialise.
The Lockdown did have a significant impact on domestic spending of course, with personal consumption plunging by some 20% in the quarter, taking the annual fall to 22%. Spending on Building and Construction also collapsed, by an annual 35%, with a similar fall in residential construction. The other components of investment ( spending on machinery and equipment plus intangibles) also fell precipitously, by 75%, leaving total capital formation 71% below its level a year earlier. The only spending component of domestic demand to grow was government consumption, with an annual increase of 12%, a big acceleration from the 3% recorded in the first quarter.
The plunge in domestic demand was also reflected in Irish imports, with an annual fall of 37% in the second quarter. Imports are strongly affected by the capital spend from multinantionals, with most of the Intangibles component captured as a service import and as such GDP neutral, although adding huge volatility to the investment and domestic demand figures as well as the balance of payments.
The overall picture them is one in which domestic spending plummeted as a result of the pandemic and the lockdown but with an offset fom the export sector. The latter is what differentiates Ireland from its EU peers and is likely to ensure that the GDP fall here is much less severe than elsewhere, if indeed it falls at all.