Following the release of National Accounts for Q3 Ireland looks on course to record double digit real growth for 2022 as a whole: the annual average year to date is 11.7% and we now expect a figure of 12.4% for the full year.Moreover, thanks to higher inflation nominal GDP is likely to rise by 17% to over €500bn, from €175bn a decade ago.
Real GDP grew by 2.3% in the third quarter, following modest upward revisions to growth in the first half of the year, now put at 2.2% in q2 and 7% in the first quarter. Exports again performed strongly,. increasing by 4.8%, although this was dwarfed by a 27% surge in imports., albeit largely due to a massive increase in service imports, in turn captured by capital investment in intangible assets by the multinational sector. As such this is broadly neutral for GDP (the investment boost offset by higher imports) but is extremely volatile, not only quarterly but also in the annual data.
Capital formation actually fell in the quarter when adjusted for this multinational effect, declining by 4.6%; construction spending fell marginally but there was a 7.2% fall in investment in machinery and equipment. This was the main factor behind a 1.1% contraction in modified final domestic demand, with personal consumption barely rising (0.3%) and government consumption recorded a modest 0.3% fall.
In fact personal consumption looks to have held up well through the year , despite the hit to real incomes caused by much higher CPI inflation , largely due to robust growth in nominal disposable income, which may average over 7% in 2022, boosted by strong employment growth. We expect 6% consumption growth in 2022 and the savings ratio , although moderating, is higher (over 19% average ytd) than most expected as a result of the income growth.
We have revised up our capital formation estimate for the year as a result of the q3 outcome and now expect a rise of 23%, with a 9% increase in construction spending and a 28% rise in machinery , equipment and intangibles. The latter is also reflected in an upward revision to our import estimate, but exports too are stronger than we initially envisaged, and we now forecast a 14% increase in that component. Consequently the external sector is again the main driver of Irish GDP growth , with that export performance offset to some degree by higher multinational profits outflows, so reducing GNP growth to a forecast 8%. Modified final domestic demand is estimated to rise by 6.5%, with the recent slowdown offset by a strong carryover impact earlier in the year.
GDP growth is much stronger than earlier consensus estimates and Ireland’s fiscal position is also much more robust than initially envisaged by the Government; the 2022 Budget projected a €7.7bn Exchequer deficit , predicated on 2.6% growth in tax receipts, but by end-November the Exchequer had recorded a €14bn surplus, with receipts up 25%, with all the major tax headings well ahead of expectations. In response, the Government has put €2bn into the Reserve Fund, so reducing the surplus to €12bn. Corporation tax was expected to fall but is over 50% up on the previous year, maintaining a pattern of underestimation evident for the past decade. Ireland’s debt to GDP ratio will probably end the year below 45% and 10-yr bond yields have been trading around 45bp over Germany and as such below France and Belgium.
Inflation in Ireland may have peaked at 9.2% on the CPI measure in October, with falling fuel prices the main disinflationary factor, although the average for the year is likely to be around 8%. We expect a steady decline through 2023 with the average next year at 4.6%. This will again dampen real income growth , particularly as employment and labour force growth is slowing given the scarcity of labour, which has pushed the unemployment rate below 4.5%. We expect very modest employment growth next year and a modest rise in the unemployment rate to over 5%, and as a result project only 2% growth in real consumer spending for 2023.
House completions may surprise to the upside this year (we expect 29,000) but look on course to decline in 2023 given some of the forward indicators and we also expect total construction spending to fall by 8%, contributing to an overall 4.5% fall in capital formation, although the intangibles component can always spring a surprise. Consequently we expect modified final domestic demand to grow only marginally, by o.5%. GDP growth as a whole will again be largely determined by the export performance, which in truth seems impervious to global demand ; the annual change in exports is still strongly in double digit territory so even even with little growth through the year the average export figure for 2023 is still likely to be 8%. That assumption helps deliver GDP growth of 5%, with GNP increasing by 4%.