Irish GDP to contract 2% this year with zero growth likely in 2024.

We had expected Irish GDP to contract this year, by just over 1%, but following the release of the third quarter national accounts we have revised down our forecast to -2%, with 2024 growth now projected at zero. The 1.9% fall in q3 GDP was the fourth consecutive quarterly decline , a sequence last recorded in 2009. and brought the annual contraction to -5.8%, with the final quarter unlikely to record a big rebound. Consequently the carryover into 2024 will also be negative and even with some growth through the year the average may well struggle to get into positive territory.

The path of Irish GDP has been set by multinationals for some time now and total exports have also fallen for four consecutive quarters, with some growth in services offset by large falls in merchandise trade. This appears to be related to two factors; a post- covid fall in pharma and organic chemicals, produced in Ireland, and a collapse in outsourced exports , largely made in China. As a consequence total exports in q3 were down an annual 9.8% and the October industrial production figures point to another big fall in q4. That starting point for next year means that even with some rebound, export growth may be zero or even negative again.

The weakness in multinational exports has also translated into slower growth in net profit and interest outflows so GNP, which adjusts for such flows, is growing and we expect a 3.5% rise in 2023. Official forecasts now tend to highlight domestic demand as modified to exclude the impact of certain multinational flows on capital formation and that metric too has been weaker than most expected, with zero growth over the first three quarters of the year. Consumer spending is growing, boosted by spending on autos and services, but construction spending likely fell in 2023 as a result of a decline in non-residential building, while domestic spending on machinery and equipment is also negative. We expect modified domestic demand to grow by only 0.6% but to pick up to 2.2% growth next year.

There has been some some better news on inflation, with a sharper than expected decline in November, taking the HICP measure down to 2.3%, with the average for the year likely to emerge at 5.1%. The latter could fall to 2% in 2024 absent another energy shock. CPI inflation is higher as it includes mortgage rates and that may average 6.2% for 2023 before falling faster than the HICP measure next year on the assumption interest rates have peaked.

Does the negative GDP figure matter, if largely multinational related and indeed to specific export sectors?. One impact will be on the debt ratio, which has tumbled in recent years as a result of the stellar rise in GDP but is now forecast to fall at a much slower pace given only a 2% rise in nominal GDP in 2023 -the ratio eases to 43.8% from 44.4% in 2022.The debt figure is also impacted by the Government decision to eschew a more rapid debt decline in favour of transferring surpluses to two new medium term funds to support future infrastructure spend and the impact of an ageing population on the Budget.

Weaker multinational profits could also have a major impact on the fiscal position given the importance of Corporation tax and that seemed to be materialising as as issue over the Autumn but a strong rebound in receipts in November implies the General Government surplus will emerge at around €8bn or 1.6% of our projected GDP. The Corporation tax rate is set to rise from 12.5% to 15% in 2024 and this should help to support receipts.

The most serious potential impact from falling GDP could be on the labour market but although there has been layoffs in the ICT sector overall employment growth is still rising at a rapid clip,up by 100k or 4% in the third quarter. The unemployment rate has risen, however, to 4.8% in November from 4.1% earlier in the year, but that reflects a further rise in the participation rate, with labour force growth now outpacing employment.That means the potential growth rate of the economy may well be higher than official forecasts indicate.Cracks in employment though would be much more significant than the recorded GDP figure because of its impact on household incomes, Government finances and the housing market.

Irish economy contracts for fourth consecutive quarter

Irish GDP fell by 1.9% in the third quarter according to the latest national accounts, marginally worse than the 1.8% flash estimate, the fourth consecutive quarterly decline, a sequence last recorded in 2009. The cumulative fall left the annual change in q3 at -5.8% , implying that our forecasts for a 1.2% average decline for 2023 now looks too optimistic.

Exports, long the driving force behind Ireland’s stellar GDP growth, have also fallen for four consecutive quarters, and are now down an annual 9.8%. Service exports have risen , up an annual 4.2%, so the issue have been on the merchandise side, with exports there down a massive 22%. Goods for export produced in Ireland are dominated by Pharma and Organic chemicals and weakness there appears to be related to a post-COVID drop off in vaccine demand. However the annual fall in merchandise exports produced here is €5.7bn against a €23bn plunge in overall merchandise exports, so a big factor is the collapse in outsourced exports, generally thought to be smartphone related and produced in China for an Irish based company.

The fall in multinational exports has had a knock on effect on profits and hence Corporation tax receipts while also impacting net profit outflows, which fell sharply in the the third quarter. As a result, GNP, which adjusts for these flows, grew by an annual 10.8% in Q3 and is likely to have grown strongly over the year as a whole.

Retail sales fell for a sixth consecutive month in October and consumer spending overall has been supported by services, with personal consumption rising by 0.7% in q3 and an annual 2.6%. Government consumption has slowed post the Covid related boost , rising by an annual 1.2%, although overall domestic demand is is much weaker, declining by an annual 5.6% , due to a big fall in capital formation. This is part reflects weaker investment from the multinational sector but construction spending and domestic investment spending have fallen. Consequently, modified domestic demand, the metric often preferred in official forecasts, fell by annual 0.4% in q3 following a 1.2% decline in q2, and is likely to grow by 1% at best over the full year, weaker than consensus expectations.

Normally one might expect such as sequence of GDP declines to have fed in to the labour market, and although the unemployment rate has risen from historic lows in the past few months employment to date is still growing strongly, as also reflected in income tax receipts. So the issue appears to be largely related to the multinational sector and to specific factors in Pharma and more importantly in China. As such the near term outlook is highly uncertain despite better news in other ares, notably the fall in inflation and the probability that interest rates have peaked.

Irish GDP growth to slow to zero this year and Fiscal outlook cloudier than appeared.

For some time now Irish exports have grown at a double digit pace, even during the Pandemic period, seemingly immune to cyclical developments in the global economy, and as such driving stellar growth in GDP, which averaged 9.2% a year between 2017 and 2022.. Chemicals and Pharma were key in that period, but there was also a remarkable rise in goods produced elsewhere but owned by Irish based entities and as such classified as an Irish export. These appear to be largely ‘machinery and equipment’ and generally thought to be semi-conductors for phones and made in China. The impact of this outsourcing is significant; in 2022 total Irish merchandise exports as per the national accounts amounted to €354bn, with goods produced here at €208bn or less than 60% of the total.

That long trend growth in exports came to a halt in the final quarter of last year and exports fell again in the first and second quarters. The fall in merchandise exports was particularly large in q2, at over 10% in the quarter in value and volume, so driving a 4.1% fall in total exports (including services) . Yet merchandise exports produced in Ireland actually rose marginally so the decline was due to outsourced exports, with goods for processing down €15bn or 58%. This may be company specific or due to issues in China itself and as such exports may rebound to some degree but that is uncertain and we have cut our export forecast to zero for the year.

We now expect domestic demand to contract by over 1%, with an 8% fall in investment spending offsetting growth in consumer spending and government consumption. Construction is forecast to fall by 3%, including a decline in housebuilding, with a 10% contraction in spending on machinery, equipment and Intangibles.The latter is strongly impacted by multinational R&D and is excluded from the CSO’s measure of modified domestic demand, which we expect to grow by 1.5%, supported by a 3% rise in consumer spending, which is considerably weaker than the 9.4% recorded last year, following a significant upward revision. The corollary was a significant downward revision to the savings ratio, although still running at a double digit pace.

Real pay per head is falling but aggregate real income for households is now rising again , thanks to the strength of employment growth. Inflation has been slower to fall than many anticipated, with the CPI measure at 6.3% for August. That is well down from the 9.1% peak but the fall was largely due to base effects from energy prices (although food inflation is slowing sharply) with service inflation now the driver, including a significant rise in mortgage costs, which added 1.4pp to the latest annual figure. Moreover fuel prices have started to rise again, so we expect only a modest fall from here to year-end and an annual average figure of 6.5%. The Government and the Central Bank now use the HICP measure in their forecasts, which excludes mortgage interest and is consequentially lower, and we expect that to average 5.6% this year. Both measure should fall gradually next year on base effects alone absent another energy shock.

We have emphasised for some time now that Ireland is at full employment, with the unemployment rate now trending around 4%. Employment growth has been strong, despite some high profile redundancies in part of the ICT sector, with a 78k rise on average likely this year, or 3.1%, broadly matched by a similar increase in the labour supply. That strength has been crucial in preventing a sharper correction in the housing market and in mortgage lending for purchase than seen to date, despite the rise in mortgage rates, and helped support tax receipts, with income tax up an annual 8.2% in August.

That heading is slowing though as indeed is tax revenue overall, to 6.6% in August from double digit growth rates seen earlier in the year. Some headings are flat (excise duty,impacted by the cut on fuel duty) and others well down on the year, including capital taxes and stamp duty ( affected by weak commercial property sector). VAT is still strong, rising by over 11%, but again is slowing, no doubt impacted by the fall in inflation. The big change though is in corporation tax, which is still well ahead of last year , by over 7%, but was growing by over 50% at one stage. One might expect the weaker export performance to eventually feed through to multinational profits and in that sense some softening is to be expected.

The upshot though may be that the Budget surplus expected this year could be lower than expected. Moreover the €65bn cumulative surplus flagged in April over the period 2023-2026 may not emerge as predicted, due to higher spending than initially projected and to some softening in receipts, including no transfers from the Central Bank. which will probably record losses.Employment growth too is likely to slow with a knock-on effect on income tax receipts and VAT.

Consumer boom has driven Irish inflation

The CSO has just published revised national accounts for the the Irish economy. The initial 4.6% decline in real GDP in the first quarter of this year has been revised down to -2.8% , thanks in large part to a smaller fall in exports than initially thought, but the most interesting aspect of the new data relates to consumer spending . It now transpires that we have been experiencing a consumer boom which also helps to explain why Irish inflation has remained stubbornly high.

Consumer spending in 2022 is now put at €133bn, which is €10bn higher than previously published, with 2021 also revised up,this time by €6bn. In volume terms personal consumption grew by 8.4% instead of the initial 6.6%, with 2021 now put at 8.4% from the original 4.6%. In other words real consumer spending over the past two years rose by 18.6%. As a consequence modified domestic demand ( which includes government spending and investment adjusted for multinational investment flows) is now seen to have risen by 17.5% instead of the initial 14.5%.

Consumer spending had fallen in 2020 because households could still buy goods but not a a range of discretionary services and it is spending on the latter which grew very rapidly last year.Spending on food and alcohol fell in volume terms but spending on restaurants and hotels rose by 27%, with a similar rise in spending on recreation and culture while spending on foreign travel rose by a massive 248%.

The most recent inflation data, for June, highlights the impact that spending has had on the price level in Ireland. The annual inflation rate is certainly slowing, down to 6.1% from a peak of 9.2% last October, but that largely reflects falling energy prices. Indeed the core inflation rate , which excludes energy and fresh food, is actually rising, hitting 7.1% in June.

Goods price inflation in Ireland is now just 1% while services inflation is 10.3% so it is the latter now driving the overall inflation rate. This does reflect higher mortgage rates ( adding 1.3 percentage points to the total) but the rebound in spending on the discretionary services noted above is clearly apparent in the CPI data: inflation in package holidays is 43%, airfares are up 34%, hotels are up 13% with restaurants at 6.6%.

The growth in consumer spending is slowing, to an annual 5.1% in the first quarter, and that would appear to be necessary if inflation is to fall back to the levels forecasters expect.

Irish GDP contracts by 4.6% in First quarter

The Irish economy contracted by 4.6% in the first quarter, a much steeper decline than the flash estimate of -2.7%. The scale of the fall allied to a massive base effect (GDP had risen by 7.9% in the first quarter of 2022) pushed the annual growth rate into negative territory at -0.2%.

The headline figure in the Irish national accounts often masks a wide disparity in the performance of the indigenous and multinational sectors and this was the case in q1, although for a change it was the former that outperformed. Consumer spending rose by 1.7%, boosted by strong auto sales, with construction spending increasing by 8.7% while investment in machinery and equipment excluding aircraft leasing jumped by 16%. Government consumption did fall, by 3.5%, but overall final modified domestic demand grew by 2.7% and by an annual 5.5% which is more consistent than GDP with the very strong employment data seen this year.

The fall in GDP was largely due to a 2.1% fall in exports with merchandise exports down 4.6%. This reflects a fall in contract manufacturing (offshore production for Irish based entities) and may relate to a certain mobile phone company’s issues in China.Imports also fell, by 2.2%, but in this case it was due to a decline in service imports, reflecting weaker spending on R&D and royalties. This is also captured as investment spending on Intangibles and this duly fell sharply as well , by 36%, which also explains why overall capital formation fell by 12.7%.

It is also worth noting that the fall in the quarter is much larger than the component parts would imply, due to a large change in the statistical adjustment figure and as such may be revised.

Irish economy still growing at double digit pace and on course for €500bn.

The Irish economy grew by 13.6% in real terms last year and the annual growth rate remains remarkably strong, at 11.1% in the second quarter from 10.8% in q1. Growth may soften over the second half of the year, notably from weaker consumer spending, but absent a fall in exports a 10% figure looks plausible.

On a quarterly basis GDP grew by 1.8% in q2, with the expansion more balanced than often seen in the Irish data, where exports dominate. Consumer spending had fallen for two consecutive quarters but rebounded in q2, rising by 1.8%. This may seem at odds with the very weak retail sales seen of late but the latter also rose in q2, albeit solely due to a surge in spending in April, with sharp declines to July. The implication is that consumer spending may fall again in q3.

Government spending also rose in q2 , by 2.7% and there was also a strong rebound in capital formation, rising by 17.9%. Building and construction spending rose by 4.8% in the quarter,while investment in machinery and equipment increased by 26% , with spending on Intangibles also positive, at 22%.

Strong domestic demand, particularly from investment, would normally be reflected in imports, and growth there was 5.5%, which outstripped export growth of 3.3%. GNP, which adjusts for net profit and interest outflows , also expanded, by 2.1%.

The annual GDP figures also reflect the scale of price inflation seen this year, notably in external trade, construction and consumer spending. Consequently GDP in nominal terms rose by an annual 17.7% in q2 following a 15.7% rise in q1. Absent a contraction in the second half of the year the implication is that the combination of very strong real growth plus the impact of inflation could result in Irish nominal GDP rising by 17% , so reaching €500bn for the full year.

Irish consumers cut spending

The US economy contracted for a second successive quarter in q2, so fulfilling one of the most common definitions of recession, although consumer spending there is still growing and the economy is around full employment. Growth in the euro zone, in contrast, has surprised to the upside in the first half of the year, contrary to expectations , in part due to a big rebound in tourism across France, Italy and Spain, although markets are still projecting a period of very weak or falling GDP which it is assumed will limit the degree to which the ECB can raise interest rates.

The future path of Irish GDP will largely depend on how the external sector performs and the composition of exports makes it less likely that a big decline there will materialise judged on the evidence from the Pandemic period. The labour market here also appears robust, although it is clear that households have retrenched in response to the surge in consumer prices since last autumn.

Indeed, we have seen two consecutive quarters in which real consumer spending fell; the decline in the final quarter of last year was modest, at 0.6%, but that was followed by a sharper fall in the first quarter of 2022, at 1.3%. Retail sales , a more timely indicator of household spending, did recover in the second quarter, rising by 2.2% in volume terms, but that was due to a big increase in April, as sales have actually fallen in nine of the past twelve months. Excluding the motor trade, retail sales also picked up in q2, albeit by only 0.5%, and again reflecting a strong April as sales fell in May and June by a cumulative 4%.

The annual change in the monthly retail sales data is volatile given the distortions due to Lockdowns last year but the fall in June was notably large, at 6.6%, with only two sectors recording positive growth- Bars and Chemists- so the squeeze on real household incomes is clearly biting. CPI inflation was probably unchanged in July at 9.1%, a welcome respite if true following five consecutive months of acceleration, and the ongoing fall in fuel prices offers some hope that we may be at or near the inflation peak. The scale of the weakness in retail sales may also prompt shops to offer more sales, so putting additional downward pressure on the monthly CPI but the big upside risk remains the broader energy picture, with European gas prices still rising and hence feeding through into higher home heating costs.Ireland may avoid a recession in terms of GDP but household spending and the High Street have not escaped.

Domestic spending falls but exports spur double digit Irish growth in First quarter

Ireland’s economic performance in the first quarter of the year was marked by a dichotomy between domestic spending and exports; the former fell, no doubt impacted by the acceleration in inflation, while the latter grew strongly. The net impact was a double digit rise in GDP,which also implies that the consensus growth figure for the full year, currently around 4%, is too low.

The monthly data on industrial production and Irish trade had implied a strong quarterly reading in exports, although the national accounts figure also includes output manufactured offshore, largely in China, so adding a degree of uncertainty given the Lockdowns there. In the event the outsourcing component was lower than of late but not enough to prevent a 5.2% quarterly rise in the volume of exports. which boosted GDP by 7.5 percentage points. There was also an unusually large contribution from stock building of 3.8 percentage points and these two components largely explain the 10.8% surge in q1 GDP.

The consensus view this year envisages strong growth in consumer spending, in part fuelled by a big fall in the savings ratio, although we are skeptical on that issue. The upside surprise in inflation may also be having an impact though, and personal consumption actually fell in volume terms in q1, by 0.7%, following a 0.5% decline in the final quarter of last year. Government consumption also contracted in volume terms, by 0.4%, while the other component of domestic demand, capital formation, plunged by 39.5%, driven by another large fall in spending on Intangibles . This component is extremely volatile on an annual let alone quarterly basis but is broadly GDP neutral as most of it is also captured as a service import (which reduces GDP) . Consequently that component fell sharply in q1 , by 19%, with total imports falling by 12%.

The annual growth rate of GDP picked up to 11% in the first quarter, from 9.6% , and as such means that Ireland would have to record a recession in the coming quarters to leave the average for the year anywhere near the 4% consensus. GDP growth forecasts will therefore probably be revised up in the near term, although domestic demand projections are likely to be revised down, notable consumer spending.

Irish GDP growth to slow to 4.5% this year, with inflation seen at 5%

The Irish economy as measured by real GDP grew by 20% over the pandemic years 2020/21, expanding by 13.5% last year following a rise of 5.9% . The final quarter saw a substantial contraction, however, of 5.4% , and a combination of negative base effects over the first half of 2022 , much higher inflation and the negative impact of the Russian invasion of Ukraine on asset prices and economic activity has prompted us to reduce our forecasts for growth this year to 4.5%. That could prove optimistic if crude oil and gas prices spike higher , thus having a much more significant impact on real household incomes.

GDP growth last year was again largely driven by exports, recording a 16.6% rise including over 20% from merchandise exports. The latter includes contract manufacturing, goods produced abroad (mainly China) for an Irish domiciled company, and the impact of this production is now extremely large; total merchandise exports last year amounted to €283bn with €165bn actually produced in Ireland.

The export figure alone would have delivered GDP growth of 20% and that was partially offset by another large fall in capital formation , declining by 38% following a 23% contraction in 2020. Construction fell again , by 3.5%, although the decline in house building was modest, largely reflecting a Lockdown in the first quarter. Investment in machinery and equipment did recover strongly, up 24%, but that was swamped by another huge fall (55%) in Intangibles. The latter includes spending on R&D and Patents by multinationals and is broadly GDP neutral as it is also captured as a service import.Consequently total imports fell, by 3.7%, with a large decline in service imports offsetting a recovery in merchandise imports.

Consumer spending had fallen sharply in 2020, by 10.7%, and a recovery was expected, supported by the build up in ‘forced savings’ evident through the pandemic. In the event the recovery in consumer spending was relatively modest , at 5.7%, with the decline in the savings ratio rather less pronounced than some envisaged; the third quarter figure was 16.7% against 21% a year earlier. Government consumption growth (5.3%) was similar to that of households but in contrast slowed from the double digit pace of 2020.

Nominal GDP in 2021 grew by 13.1% to €422bn, so flattering the fiscal ratios; the fiscal deficit is now put at 2.1% while the debt ratio appears to have fallen to 56% from 58.4% in 2020 (the end-year debt figure has yet to be confirmed). GNP, which adjusts for profit and interest flows in and out of the economy, also grew very strongly in real terms, by 11.5%. The CSO also publishes a figure for modified domestic demand (which adjust for some multinational spending on headline capital formation) and that grew by 5.5% last year, although it excludes all exports and takes no account of how that demand is satisfied ( i.e. from domestic or imported output).

Base effects play an important role in any forecast for GDP and the carryover effect in 2022 is lower than we expected, as GDP fell by 5.4% in the final quarter of 2021, reflecting a substantial rise in imports. Capital formation also rose but export growth was weak and consumer spending actually fell. Given also that the growth surge seen in the first quarter last year is unlikely to be repeated we now forecast a substantial slowdown in Irish growth this year, to 4.5%. Exports, as always, will largely determine the GDP figure and we expect a much weaker trade performance given an expectation of slower growth in Europe and the US with supply issues evident in China. Building and construction ,in contrast, is forecast to recover strongly,growing by 12%, boosted by housebuilding, with a more modest increase expected in overall capital formation on the assumption that Intangibles grow after two successive annual declines.

Households will also face a much more difficult year, with real incomes eroded by much higher CPI inflation. That averaged 2.4% last year but spiked in the latter months of the year and into 2022, with the February figure at 5.6%. The surge in the CPI was largely due to two components (Housing +Utilities and Transport) and hence largely energy related but the most recent data showed the beginnings of a broader increase ( albeit also impacted by the minimum pricing on alcohol introduced in January) reflecting energy costs on producers, supply issues and the impact of the fall in the euro, notably against sterling. The March figure will capture another surge in fuel costs following the Russian invasion of Ukraine and we now expect inflation to average 5% this year, although this assumes a stabilisation in oil and gas prices and so the risks to that projection are to the upside. As a result we now expect consumer spending to rise by just 2% in real terms this year.

The Labour market reveals a more positive picture, with the total number employed surpassing 2.5 million for the first time in the final quarter of 2021, following an annual increase of 230,000.The unemployment rate is back down to around 5% and with a record vacancy rate Ireland is around full employment, with labour scarce and jobs plentiful. In 2022 we expect the unemployment rate to fall marginally to 4.8% , with employment growth of 115,000. The tightness of the labour market may also help to maintain weekly earnings growth at around 5% in 2022 (fro 4.8% last year).

On the fiscal side tax receipts have surprised to the upside relative to Budget projections in each of the past four years. Last year receipts grew by 20% and exceeded the initial Budget target by €8bn and this year (at end-Feb ) were still rising at a similar annual pace. The 2022 Budget envisaged a 2.6% rise in receipts by year end so a much lower deficit than projected is on the cards, with a large capital deficit offsetting a substantial current budget surplus . The Government may well revise the fiscal targets but also has the scope to take further action to offset the impact of higher energy prices on households, having already introduced a rebate on electricity bills and a (temporary) cut in excise duty on fuel at a total cost of over €800m. Nonetheless the fiscal deficit may fall below 1% of GDP, with the debt ratio declining to 52%.