Category: Irish GDP

The initial 2% estimate for Irish GDP growth in the third quarter was revised up to 3.5%, with the second quarter figure also revised higher. As a result the annual change in GDP was 2.9%, the first positive figure since the final quarter of 2022. It is also now likely that the average growth rate in 2024 will be marginally positive following a 5.5% contraction last year.

The quarterly growth figure was driven by a big rebound in capital formation, in turn due to a recovery in spending on R&D by the multinational sector, recorded as Intangibles. Construction spending also rose, by 4.5%, which supported modified capital formation growth of 5.2%. Modified domestic demand also rose in the quarter, by 1.3%, and looks on course for average growth in 2024 of 3%.

Service exports had been growing very strongly this year , driven by computer and business services, but the latter fell sharply in q3 and overall service exports fell 14% in the quarter, perhaps highlighting the company specific driver of quarterly volatility in external trade and capita formation. Exports in total fell 7% in the quarter, albeit still showing annual growth in excess of 10%.

The other negative contribution to growth in q3 was personal consumption. The fall was modest, at -0.2%, but that followed weak figures in the first half of the year (+0.3% in both quarters). Upward revisions often occur and as sit stands the weakness is surprising give the fall in inflation this year and the strong rise in employment and household incomes.

The Irish GDP data often surprises but the second quarter figure was unusual even by recent standards. The flash estimate,. produced in July, had projected a 1.2% quarterly rise but the national accounts revealed a 1% contraction in GDP. Yet this occurred despite a 12% quarterly increase in exports, which would normally translate into very strong GDP growth but in this case was offset by a collapse in capital formation . This component fell by 65%, driven by a massive decline in multinational investment in intangibles, largely R&D.

Spending on intangibles is notoriously volatile and may or may not rebound in the second half of the year but of more significance is the recovery in Irish exports and specifically the surge evident in service exports. These now significantly exceed merchandise exports ( €125bn versus €79bn in q2 alone) , driven by extraordinary growth in computer services (including software), which amounted to €66bn in the quarter, with annual growth of 27%. Ireland is Europe’s own silicon valley.

Construction spending fell in the quarter but another surprising feature is the limited growth seen in consumer spending, which did rise by 1.0% in the quarter but that followed zero growth in q1, leaving the annual increase at just 1.3%. Despite this and a rise in Government spending, modified domestic demand also fell in the quarter, by 0.5%, due to a contraction in adjusted capital formation.

Irish GDP ended last year down by an annual 9.1% so achieving a positive average growth figure for 2024 was a tall order, although possible given a very strong rebound in exports. That has indeed taken place (exports in q2 were up an annual 18%) but the Intangibles figure has been a big negative, with the result that GDP in q2 was still 4% down on the same period last year, following -4.7% in q1. The consensus did expect a modest positive growth figure for 2024 and this is less likely now in the absence of a huge rebound in capital formation. Modified domestic demand is also expected to increase this year and that looks on track, albeit with modest growth, with the annual rise in q2 slowing to 1.5% from 2.2% in the first quarter.

One final, again unusual, feature in the release was the Balance of Payments figure. This receives little attention now given Ireland’s euro membership but the current account surplus in Q2 alone was €35bn , equivalent to 28% of GDP.

The Irish economy, as measured by real GDP, contracted for four consecutive quarters last year, with the annual figure falling by 3.2% . Nominal GDP also declined, to €505bn from €506bn in 2022. The pace of decline accelerated through the second half of the year and real GDP fell by 3.4% in the final quarter, substantially worse than the initial -0.7% flash estimate. That left the annual change in the final quarter at -8.7%, which gives a very weak carry over into 2024, and the economy may well struggle to record positive growth even with a recovery in external trade.

Exports have been the engine of Irish growth for a long time now but 2023 saw a sharp reversal of the seemingly inexorable rise, with a 4.8% fall in volume terms following double digit annual gains over the previous four years. Service exports held up well, rising by over 8%, but there was an extraordinary collapse on the merchandise side, by €45bn or 13%. Goods shipped from Ireland fell by €10bn, reflecting weaker Pharma and organic chemicals, but goods outsourced to production abroad, largely in China, fell by €34bn, probably down to a specific phone manufacturer.Exports in total ended the year down 9.5% so a strong recovery would be required to give positive export growth for 2024.

Imports had also weakened through the year but rebounded sharply in q4 on the back of a surge in service imports related to intellectual property. That resulted in a modestly positive import growth for the year as a whole. The IP service import is also captured and offset by Intangibles in capital formation (therefore largely GDP neutral), so that component also rose modestly in 2023, despite a 1% fall in building and construction.

Consumer spending rose by over 10% last year, but prices increased by 7% so spending in real terms grew by 3.1%, with a notable switch by consumers to cars and services amid soft retail sales. Despite this growth, modified domestic demand rose by only 0.5%, dampened by the fall in construction and a decline in investment in machinery and equipment.

These GDP figures and indeed the modified domestic demand outturn sit uneasily with other data such as tax receipts and employment growth (up by 90,000 last year or 3.4%) and in this case GNP might be a better reflection of underlying economic activity: that adjusts GDP for profit and interest flows, and the net outflow was lower last year so GNP actually rose strongly, by 4.4%.

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 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.

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.

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.

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.

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.

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.