Irish GDP contracts in second quarter despite booming service exports

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.