Most developed economies saw contractions in the first quarter, with the Euro Area (EA) decline at 3.8%. A fall in Irish GDP was also widely expected ( the Department of Finance projected -5.0%), reflecting the lockdown which began in March, although the most recent data had shown quarterly growth in industrial production, a substantial gain in employment and very strong performance from merchandise exports, driven by pharmaceuticals and medical devices. In the event Ireland appears unique in the EA during the early phase of the Covid pandemic as the only country to record GDP growth, with output rsing by 1.2%. This left the annual change in GDP at 4.6%, and although it does not mean that the average figure for the year will also be positive ( the q2 decline in domestic demand is likely to be large) , it does reduce the possibility of a double digit decline, as seen by some forecasters.
In truth a wide range of outcomes is possible given that exports account for 130% of GDP, so dwarfing any impact from consumer spending or domestic investment. The type of exports produced here by multinationals ( chemicals, pharma, business and computer services) does render them more resilient in the type of lockdown seen globally as a result of the pandemic, although contract or offshore manufacturing (largely in China) adds an additional degree of uncertainty to the export outlook. Indeed, the latter fell in the first quarter so reducing mechandise export growth to an annual 4% from the 12% recorded dometically. Service exports grew by over 10% and the volume growth for exports overall was 5.9% in annual terms, which clearly provides a massive boost to total GDP.
Imports must be captured as domestic demand or as an input into exports and so have no net impact on GDP. In the first quarter merchandise imports were flat but service imports rose by 69%, driven by a very large increase in the import of intellectual property, by a small number of firms. The corollary was a very strong increase in investment in Intangibles, and the CSO did not provide a figure for this or for spending on mechinery and equipment. We know that overall investment spending rose by 197% to €46bn, and that construction increased by over 8% to €5.6bn, leaving a residual of over €40bn for Machinery, Equipment and Intangibles , and an annual rise of 286%.
Retail spending fell by 5.5% in the quarter, weighed down by a collapse in car sales, and so a hefty fall in consumer spending was likely and duly emerged, with a 4.7% decline, taking the annual change also into negative territory at -2.5%. Consumption now accounts for less than a third of GDP however, and so even a fall of that magnitude was not sufficient to generate a negative print for GDP, although modified domestic demand, the CSO’s measure of domestic spending excluding the impact of multinationals on investment, did fall by an annual basis. by 1.2%.
The second quarter may well be different in that the fall in consumption and domestic demand is likely to prove strong enough to override exports and a double digit decline in GDP is widely expected , both for Ireland and across the EA. That may be the case but an offseting factor here may be a recovery in contract manufacturing exports from China. To reiterate; exports are key.