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 GDP surges, impressing the Government but not consumers

Ireland’s quarterly GDP figures are volatile and often surprise, with the latest no exception; the economy grew by a seasonally adjusted 1.5% in q2, following a 2.8% expansion in the first quarter, the latter revised up marginally from the initial release. That surge in Irish output left the annual growth in real GDP in q2 at an extraordinary 7.7% and means that in the absence of revisions the average growth rate for 2014 as a whole would average 5% even if GDP was to remain flat in the second half of the year. The consensus growth forecast has moved steadily higher as the year  has unfolded , from an initial 2% to around 3%, but this latest data will no doubt prompt a further substantial upgrade- the Finance Minister has already mentioned 4.5% and that requires a fall over the second half of the year. Some commentators prefer GNP as a better measure of economic activity in Ireland (it adjusts for net  external flows of profits, interest and dividends) but that tells a similar story-indeed, the annual GNP  growth rate in q2 was 9%, although base effects in the second half may mean that the annual  GNP growth rate in 2014 will also be around 5%.

The monthly external trade data had implied a strong  merchandise export performance in q2 (the Patent Cliff impact on chemicals appears to be over, at least for now) but the national accounts included  even stronger figures,  which alongside a better performance from service exports resulted in a 13% annual increase in export volume. Import growth was also very strong, at 11.8%, but such is the dominance of exports (now 117% of GDP)  that annual GDP growth would have been 4% even if the other components made no contribution.

In the event they all contributed. Investment rose by 18.5% on the year, adding 2.5 percentage points to GDP growth, following strong gains in construction output and spending on machinery and equipment. Government spending  also rose , and by a puzzling 7.9% in volume terms, which sits uneasily with the idea of spending cuts and fiscal austerity and may reflect problems with the price deflator. The third component of domestic  demand, personal consumption, also rose, but by a modest 1.8%, and even that was flattered by base effects from last year as the quarterly increase in q2  this year was just 0.3% following a meagre 0.2% rise in q1. It is clear from other data sources that Irish households are still  paying down debt at a steady clip and it is impossible to say when this deleveraging will end. Employment growth has also slowed sharply in 2014 and in the absence of a marked change in household  behaviour personal consumption growth in 2014 is likely to be nearer to 1% than the 2% many expected.

Such is the volatility  and unpredictability of exports and investment that real GDP  growth in 2014  could be over 6% or nearer 4%, but we currently expect  5%.Export prices are falling, as is the deflator of government spending, and for that reason the rise in nominal GDP this year may be less than that recorded for real GDP – we expect 4%.That would give a nominal GDP figure  in 2014 of €182bn but still substantially above the €171bn forecast in the 2014 Budget. Tax receipts are also  running well ahead of target and so we now expect the General Government deficit for the year to emerge at 3.4% of GDP compared with the 4.9% originally forecast by the Government. The implication is that a fiscal adjustment of the order of €2bn in 2015, as originally envisaged and still advocated by the Fiscal Advisory Council (although the Council’s latest paper did  not take account of the q2 GDP figures), would probably push the deficit well below 2% of GDP and therefore comfortably under  the 3% target set by the Excessive Deficit procedure. The  strength of tax receipts had moved the Government towards a much smaller adjustment in any case  but the latest GDP figures appear to have convinced them to abandon austerity and at worse go for a neutral budget, with tax cuts funded by higher taxes elsewhere, mainly the Water Charge.