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.