The pace of Irish economic growth slowed sharply in the third quarter, with the annual increase in real GDP easing to 4.9% from 8.7% in the second quarter and 9.0% in q1. This reflected downward revisons to growth in the first half of the year and a modest 0.9% increase in GDP in q3 and in our view means that the average growth rate for the year as a whole is likely to be close to our 6.5% estimate.
Consumer spending rose by 1.0% in the quarter although the annual change slowed to under 3%, which is consistent with a degree of caution from households; cash deposits are rising strongly and the savings ratio is also moving higher.In contrast, government consumption is roaring ahead, rising by an annual 6.1% in q3, as is Building and Construction, with annual growth of over 18%. Against that, spending on machinery and equipment fell when adjusted for the impact of aircraft leasing, so the growth in modified domestic demand, which many use as a proxy for underlying growth in the economy , slowed to 4.1% from 6.0% in q2.
GDP measures total spending on machinery and equipment of course, and that virtually doubled in q3 relative to the previous year, reflecting a 215% rise in transport equipment, largely aircraft. Spending by multinationals on Intangibles ( R&D) is also extremely volatile and that too went up sharply on an annual basis in the quarter, by 34%, so reversing a declining trend of late. As a consequence total capital formation rose by over 43%, breaking a six quarter trend decline.
That fall had also resulted in weak imports but that too reversed in the third quarter, with an annual increase of 16%, subtantially exceeding the otherwise strong export growth of over 9%. So on the aggregate data , domestic demand made a very strong contribution to overall growth, offset by a negative contribution from the external sector.
As noted, we retain our 6.5% estimate for GDP growth in 2018 based on the assumption of a further slowing in the annual rate in the final quarter, which also implies a weaker base for 2019.