The Irish economy contacted in the first quarter of 2018 according to preliminary data from the CSO. Real GDP declined by 0.6% , largely due to a sharp 5.8% fall in exports, including both goods and services. Trade data indicated that exports leaving Ireland had risen substantially so the weaker figure was due to a fall in contract manufacturing (offshore exports credited to Irish based firms). Final domestic demand was broadly flat, with modest increases in investment (0.6%) and government spending (0.4%) offsetting a 0.3% contraction in consumer spending. Surprisingly, perhaps, construction spending actually fell, by 0.4%, but this was offset by a 9% rise in spending on machinery and equipment. The big negative contribution from exports was in contrast to a very large stock build which added over 3 percentage points to GDP growth.
Looking at the annual change, real GDP growth in q1 was 9.1%, largely driven by the external sector ( export growth of 6.1% against a 1.1% fall in imports) and the strong stock build. The weakness in imports partly reflected a fall in investment spending of 3.8%, with growth in construction and machinery and equipment offset by a plunge in R&D expenditure, which largely relates to multinationals and deemed a service import.
The CSO release incorporated revisons to past data, including reductions in the level of GDP; the 2017 figure is now some €2bn lower at €294bn. Real growth last year is also now lower, at 7.2% versus an initial 7.8%. Last year’s quarterly figures have also changed, although the previously published pattern- weak growth in the first half of the year followed by a surge in the second half- is still intact. That still implies that the anual growth rate will slow as the rest of the year unfolds, which of course is required if the consensus growth figure of around 5.5% is achieved.
The revisions also impacted Modified National Income, the concept developed by the CSO to adjust GDP for the effect of multinationals on profits, R&D expenditure and aircraft leasing. The 2016 figure is now put at €176bn, from an initial €189bn, with the 2017 estimate at €181bn, or less than 62% of published GDP. The CSO believes that this modified figure is a better indicator of Irish income although in 2017 it grew by just 3% and that is in nominal terms, which sits uneasily with other indicators such as the growth in employment , tax receipts and household incomes .
According to the CSO the Irish economy, as measured by real seasonally adjusted GDP, contracted by 2.6% in the first quarter of 2017. This still left the annual increase in GDP at 6.1%, however, following substantial revisions to the quarterly pattern in 2016, with growth of 3% in q3 and a bumper 5.8% in q4. The impact on annual growth for 2016 was only marginal ( now 5.1% from 5.2%) but the CSO revised up nominal GDP over recent years by significant amounts; the 2016 figure is now €275bn, a full €10bn above the previous estimate and a massive €100bn above GDP in 2012.
This is the denominator used to measure the various debt and deficit ratios incorporated into the Euro zone’s fiscal rules, and means that Ireland’s debt ratio last year is now 72.8% as opposed to over 75%, with every likelihood of a 70% reading in 2017. Yet many have argued that a better measure of domestic economic activity is required, given the extraordinary influence on the national accounts of the mulitinational sector. Personal consumption is now only 35% of GDP, for example, and is only €9bn higher than Investment spending, 32% of GDP. To that end the CSO, for the first time, have published a modified national income figure. This takes GNP ( which is lower than GDP as it adjusts for net cross border income outflows such as profits and interest payments) and deducts the profits of domicilled multinationals as well as adjusting for R&D spending on imports. This gave a figure of €189bn in 2016, compared with a €275bn GDP reading, and a debt ratio of 106%. However, it is clear that the economy has still being growing strongly in nominal terms on the new measure , by 9.4% last year and by 42% since 2012.
Investment spending tends to be the most volatile component of GDP and this was indeed the case in the first quarter, declining by 38% and hence accounting for the contraction in GDP. Building and Construction rose ( by 5.8%) but this was swamped by a 22% decline in machinery and equipment investment and a 56% plunge in intangibles ( the term for spending on R&D, patents, etc). Virtually all of the latter is imported so service imports also fell sharply ( by over 10%), with total imports down by over 12%. Exports were broadly flat and government consumption barely grew ( 0.3%) leaving consumer spending as the only GDP component showing any positive momemtum, rising by 1.2%. This is still soft relative to retail sales, implying much weaker spending on services, at least as estimated by the CSO. and this divergence has been a feature over recent years.
Where does this leave this year’s annual forecast for GDP growth? The Department of Finance expect 4.3% but the base effects for the second half of the year are now much more negative, albeit against an annual figure in q1 above 6%. Our own existing forecast is less than 4% and we will produce an update in the next week or so.