Irish Growth now likely to be at least 7% this year

The consensus growth forecast for the Irish economy in 2015 has moved up over the course of the year and currently stands around 6.4%. This now appears too low following the release of the third quarter national accounts and is likely to be revised up to 7% or so. The 2016 consensus will no doubt move higher, to above 5%. Nominal GDP  in 2015  may also emerge above the figure assumed by  Government, at €212bn instead of €210bn, so shaving another percentage point off the debt ratio, reducing it to 96%.

There was little in the way of revisions to previous releases (which is not always the case), so Irish GDP  is still seen as  having grown very strongly in the first half of the year, by 2,2% in the first quarter and 1.9% in q2. Growth slowed a little in q3, to 1.4%, but that still left the annual change at 7%  which is also the average over the first three quarters of the year. The q3 increase was  also the tenth consecutive quarter of growth and real GDP is now 7.2% above the previous peak having risen by some 21% from the cycle low .

The recovery was initially driven by exports but that has changed, as evidenced in the third quarter data. Domestic demand rose by an annual   10.2%, driven by a 35.8% increase in capital formation, which followed a similar rise in q2. Construction spending is increasing at a modest pace and spending on machinery and equipment actually fell (it is often affected by volatile aircraft orders) so the surge reflected intangibles, the national accounts name for items such as patents, trademarks and R&D.  Government spending fell but domestic demand was also supported by a 3.6% annual rise in consumer spending. Wages are finally starting to rise, employment is growing strongly and  price inflation is around zero so households are  seeing good growth in real incomes, which is supportive of spending, although the overall figure is lagging retail sales due to falling expenditure on services.

Exports are still performing strongly , rising by an annual 12.4% in q3, but that was dwarfed by an 18.9% rise in imports, with the result that net trade made a strong negative contribution to GDP, which is   fairly unusual in the  Irish national accounts. Multinationals in Ireland often price exports in US dollars and so the latter’s appreciation results in a recorded  price rise in euro terms, which no doubt explains why export prices are increasing at an annual rate of  7%  , which is also the main reason why nominal GDP is growing at a double digit pace against a real rise of 7%.

Multinational profits have also picked up strongly this year and the resultant outflows mean that GNP , the income of Irish residents, is lagging the growth in GDP, rising  by an annual 3.2% in the third quarter. We expect a 5% rise in GNP over 2015 as a whole but profit flows are volatile  and a weaker GNP figure is certainly possible,

All of the available evidence, from the labour market, retail sales, tax receipts and the monthly PMI’s , points  to strong Irish growth and the GDP figures now confirm that to be the case. An expectation that this trend will continue into 2016 is a reasonable presumption at his stage although it is hard if not impossible to get a handle on likely developments in spending on intangibles or indeed  on  external trade flows  as they now  dwarf the merchandise export and import  figures published on a monthly basis. That raises the risk of an unexpected quarterly slowdown or even fall in these variables but for the moment  the headline figures show that the economy is growing at 7% per annum, the strongest since the millennium.

Irish Domestic Demand rises in 2014 after 6-year decline

The Irish economy grew by 4.8% in real terms in 2014 according to preliminary data from the CSO, which was marginally below the consensus estimate, albeit slightly better than anticipated by the  Government. Nominal GDP expanded by 6.2% , taking it to €185.4bn, again slightly above the official estimate, which reduces the previously published debt  ratio for 2014  by around 1 percentage point , while not affecting the deficit ratio.

The Irish economy bottomed as far back as the final quarter of 2009 but  domestic demand has remained weak and in that context perhaps the most significant aspect of the 2014 data was the first rise in domestic spending in seven years; final domestic demand ( the sum of personal consumption, government consumption and investment expenditure) rose by a very healthy 2.9%. Government spending was flat ( the puzzling rise evident earlier in the year was revised away) and investment grew strongly, by over 11%, in part due to further growth in building and construction. Personal consumption also rose,  but by a modest 1.1%, which was  well below most forecasts  made last year. It is  certainly the case that the national accounts estimate is low relative to the recent trend in retail sales but in general it would seem that deleveraging has proven a very significant drag on household spending, partially offsetting  the positive effects of rising employment and falling prices. The net effect is that consumer spending now accounts for 45.6% of Irish real GDP, the lowest share in a decade. That said , consumption did rise strongly in the final quarter of 2014 , and with wages now picking up,  2015 may see household spending gain some momentum.

Net exports continued to provide the main impetus to Irish GDP last year, although the growth of external trade was massively stronger than anyone has initially anticipated, partly due to a rebound in chemical exports  and partly to methodological changes to the Balance of Payments (BOP) ; the volume of exports rose by 12.6% with imports up by 13.2% (the former have a much higher weight in GDP so net exports still made a positive contribution). As a result  Ireland’s current account surplus on the BOP rose to a record €11.5bn or 6.2% of GDP. The implication is that Ireland is now generating substantial excess savings, with the private sector surplus more than offsetting the public sector deficit, which of course it needs to do in order to repay external debt.

On a quarterly basis the national accounts  revealed a pronounced slowdown through the year, with GDP expanding by a seasonally adjusted 3.5% in the first half ( revised down from an initial 3.9%) and by just 0.6% in the second, with the final quarter recording a very modest 0.2%. Domestic demand  slowed in H2 , despite a 1.3% increase in consumer spending in the final quarter, and imports outpaced exports, although again the new BOP format had an impact, boosting merchandise exports but also increasing service imports. The respective growth rates of the two  have been spectacular as a result; the latter ended the year with annual growth of 22%, and the former at 27%.

Eternal trade has therefore ended the year at much higher levels that anyone initially envisaged  and adds a further degree of uncertainty to  GDP forecasts for 2015, particularly as the monthly merchandise trade data now gives little clue to the total external trade position. That aside, the headline outturn is unlikely to prompt any major revisions to the existing consensus ( around 3.8%) and the main positive is that domestic demand is growing again, with some signs that consumer spending is finally  beginning to pick up.