Irish economy grew by 6.7% in 2018 but slowed sharply in final quarter.

The Irish economy, as measured by real GDP, grew by 6.7% in 2018 following a 7.2% rise the previous year. The outcome was marginally ahead of our 6.5% estimate but below consensus, with many expecting a figure around 7.5%. Nominal GDP grew by  8.3% and is now €318bn , or €150bn (88%) above the pre-crash level, which flatters ratios using GDP as the deflator, such as the debt ratio, which fell to below 65% in 2018 from a peak of 120% in 2012.

That surge in GDP  largely reflects the growth of investment and exports, and it is striking that personal consumption now only accounts for one-third of Irish GDP, indicating that it has far less influence on economic growth than the norm elsewhere. Consumption, as recorded in the national accounts, has also been surprisingly modest given the strong rise in household income seen in recent years;  the former grew by  4.4% last year or 3% excluding price changes, which implies a significant increase in the savings ratio given that household disposable income probably rose  by at least 5.5%.

In fact government consumption has outpaced personal consumption for the past three years, with a very strong real rise of 6.4% in 2018 bringing the  volume increase since 2015 to  14.5%.Clearly the government has taken the opportunity afforded by better than expected tax receipts, largely from corporation tax, to increase current  as well as capital spending at a robust pace.

Building and construction has been expanding strongly since 2013 and the rise in 2018 was 15.9%, similar to the previous year, with housebuilding up 26%, although the pace of growth is slowing, as one might expect given the low base for house completions post-crash and subsequent high growth rates in percentage terms.

Spending on machinery and equipment tends to be volatile in general but in Ireland’s case is strongly affected by the purchase of aircraft, with the latter particularly strong last year, contributing to a 37% increase. The other component of capital spending is Intangibles, covering R&D, and this fell, by over 10%, albeit recovering strongly in the second half of the year. The net result was that total capital formation rose by 10% in 2018 after slumping by over 30% the previous year.

Virtually all of the Intangibles spending is also recorded as a service import and total imports grew by 7% in real terms last year, albeit outpaced by an 8.9% increase in exports. giving a positive contribution from the external sector. Indeed, the current account surplus on the balance of payments rose to €29bn  or 9.1% of GDP from €25bn in 2017.

Looking at the quarterly data, a marked deceleration through the year is apparent,  with the annual growth rate slowing from 9.6% in the first quarter to 3% in q4,  the latter implying a softer carry-over into 2019 than many had expected.The slowdown was particularly evident in consumer spending and construction. In fact the quarterly change in GDP in Q4 was just 0.1% and modified domestic demand (which seeks to strip out multinational investment spending) actually fell marginally.  It is also noteworthy that unemployment actually ticked  higher in the final months of 2018 and that house prices fell in three consecutive months to January. Brexit uncertainty is no doubt a factor but it may be that the economy is approaching  or even at full employment and hence supply contrained as well as suffering from a short period of softer demand.

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.




Irish Q2 GDP; Deflation re-emerges.

Irish real  GDP contracted in the first quarter, by 2.1%, and the latest CSO data shows a modest  0.6% recovery in q2. Nominal GDP fell however, by 1.0%, which followed a 5.6% decline in the first quarter. Consequently, the consensus forecast for nominal GDP in 2016 is probably too high as indeed are forecasts for real growth of 4.9% and the coming weeks are likely to see some downward revisions.

Consumer spending was weak in the second quarter, declining by 0.5% in volume terms, and  business spending on machinery and equipment also fell, by over 10%. Exports, too, declined, albeit marginally. This broad weakness was offset by a 5% rise in construction and a surge in spending on R&D ( including patents and licences) which is classed under ‘intangibles’ . The latter component is extraordinarily volatile and actually more than doubled in the quarter alone ( +113%) , and as such  was the main factor behind the 39% rise in total investment spending. These intangibles are largely multinational and often purchased from parent companies abroad, so imports also rose strongly in the quarter, by 12%. There was also a postive stock build, adding 1.3% to GDP, although the sum of the components imply that real GDP actually fell, with a large statistical adjustment accounting for the positive growth figure.

On an annual basis real growth in q2 emerged at 4%, and the first quarter figure was revised up to 3.9% so giving an average for the half year also around 4%. Real GDP rose by 5.5% in the final two quarters of 2015 and that  base effect implies that annual growth may slow substantially in the second half of 2016, with the average for the year likely to be well below the 4.9% assumed by the Government.

Similarly, the nominal level of GDP in 2016 is also likely to be lower than anticipated, largely because export prices are falling . Consequently, nominal GDP only grew by an annual 0.5% in q2 , which followed a 1.5% rise in q1. On that basis nominal GDP may be largely unchanged in 2016 or indeed may even decline, with implications for the debt and deficit ratios.

Overall, a mixed bag. The real economy avoided recession , which was a risk given falls in retail sales and industrial production in q2, but deflation has re-emerged, via export prices.