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.