Irish GDP and GNP grow 7% and 5.6% in 9 months to Sept 2015
The Irish economy has grown strongly in the nine months to Sept 2015, according to new figures from the Central Statistics Office today. However, the headline growth may be overstating real growth due to tax inversion and overseas contracting distortions. Gross domestic product (GDP) expanded 7%, while GNP (gross national product) grew by 5.6%.
On a 12-month basis, the economy by 7% of GDP and 3.2% of GNP, which strips out the effect of foreign multinational companies operating from Ireland but in recent years have been also subject to distortions.
In the third quarter of 2015, GDP in volume terms rose by 1.4% and GNP fell by 0.8% as a result of funds transfers by foreign multinationals.
The CSO said that a Balance of Payments current account, a measure of Ireland’s financial flows with the rest of the world, had a surplus in the third quarter of 2015 of €2.5bn. This is a fall from the €3.12bn surplus in the third quarter of 2014. A surplus of €17.6bn on merchandise trade was offset by a deficit of €15.1bn on invisibles (services and income) in the quarter.
However, this year the Balance of Payments data was revised back to 2008 and John FitzGerald, the former ESRI economist, said that the revisions suggest that there was a much slower turnaround in the current account than had previously been understood.
The revised figures have important implications for policy today. If the current account surplus had been as large as previously believed, this would have suggested significant room to stimulate domestic demand, even though this would have increased imports. However, the revised figures indicate that there is not much scope for such action. Instead, the necessary expansion in investment should be funded out of domestic savings.
See also here an analysis by Seamus Coffey, the UCC economist, on the vanishing surplus.
Pfizer as Irish firm would swamp Ireland's national accounts — in 2016 American firms but "Irish" as legal entities, will employ over 700,000 staff worldwide including Pfizer, which will be the world's biggest drugs company, and these firms will furter distort GNP and Balance of Payments data.
Prof Patrick Honohan, the then governor of the Central Bank, in a letter to Michael Noonan last August on Budget 2016. warned:
The interpretation of both GDP and GNP statistics as measures of economic performance is seriously complicated by the way in which the activities of multi-national corporations are measured, and a significant part of the recent growth in these production numbers can be attributed to these distorting features.
There was an overall increase of 2.5% in the industry sector in volume terms between Q3 2015 and Q2 2015, including building and construction that recorded a 1.2% increase. The other services sector increased by 1.4% in real terms over the same period while the distribution, transport, software and communications sector grew by 1.3%. Agriculture, forestry and fishing recorded a quarterly increase of 11.4%. Public administration and defence recorded a quarterly decrease of 0.7%.
Capital formation (investment) increased by 4.9% compared to the previous quarter. Personal consumption, the largest component of domestic demand, rose by 0.7% in the quarter, while government expenditure decreased by 1.0% over the same period.
Export growth during the quarter of 2.2% was outpaced by import growth of 5.4%. Total domestic demand rose by 3.0% in Q3 compared to Q2 while net exports for the quarter decreased by €1.4bn resulting in an overall increase in real GDP in Q3 2015 of 1.4%. Net Factor Income outflows were €1.0bn higher than the previous quarter leading to a decrease in GNP of 0.8%.
“Today’s figures are once again very strong and provide further confirmation that economic recovery is now firmly embedded," Michael Noonan, finance minister, said. "GDP rose by 1.4% between the second and third second quarters and, as a result, the level of real GDP was 7.0% higher year-on-year."
Dermot O'Leary, chief economist at Goodbody commented: Surprising slowdown in core domestic demand...Our focus continues to be core domestic demand (domestic demand excluding planes and R&D). Surprisingly, this suggests that growth slowed to 2.1% yoy in Q3, down from 5.0% in Q2. Within this, current government spending fell by 1.4%, but this is likely to be reversed in Q4 given the spending increases announced in Budget 2016. Core investment was flat, but consumer spending continued to grow strongly, increasing by 3.6% yoy in Q3 (2.9% yoy in Q2).
...but investment trends look hard to reconcile with wider evidence: While the trends in aircraft and R&D are exceptionally volatile and thus difficult to predict, we are quite surprised at the relative weakness of core investment. Within this, business investment was down modestly, having grown rapidly for nine consecutive quarters. This does not correspond with the rapid growth in new lending to SMEs this year. The 3% yoy growth in construction spending is also surprising, given the trends identified by companies operating in the sector and the 13% yoy increase seen in construction employment in the same quarter. We believe the data may be underestimating the ongoing growth in investment spending.
Significant economic momentum going into 2016: Although there is a significant amount of noise in the data, they are clearly spectacular in a European context. Moreover, as we look into 2016, the latest trends suggests that momentum is continuing. We are currently forecasting growth of 4.5% in 2016. Today’s data do nothing to alter this very positive scenario."
David McNamara, economist at Davy commented: "The recovery has largely reflected a surge in investment spending by the multinational (MNC) sector and a recovery in consumer spending. Consumer spending rose by 3.6% in the year to Q3. Tax cuts, lower oil prices and employment growth have all helped household spending. Investment spending rose by 35.8% in the year to Q3, led by MNC spending. Exports are also performing well, helped by the weak euro — up 12.4% on the year. The recovery is broad-based, with industry up 17.8%, construction up 3% and services up 5.4%.
Investment by multinationals; spending by consumers...Irish GDP is now 7.3% above its pre-recession peak in 2007 — in line with the UK. However, the recovery has been led by the MNC sector. Exports are now 41% above their last peak in 2007. In contrast, consumer spending is still 2.5% below peak and employment 8.7% from peak, reflecting ample spare capacity. However, higher imports have offset the contribution of net trade in 2015, taking 3.1 percentage points (pp) off annual GDP growth. In contrast, the recovery in consumer spending accounts for 1.6 pp of GDP growth in the year to Q3, while investment spending accounts for 6.4 pp – explaining this year’s supercharged GDP growth.
On the face of it, domestic demand is now driving the recovery. This is true of the consumer, but the investment surge is predominantly related to R&D spending by MNCs, up a massive €5.3bn in real terms on the year (over 200%). This relates to the re-domiciling of patents to Ireland; this reorganisation of activity by MNCs has created significant volatility in the GDP data. Nevertheless, investment activity by domestic firms is also growing, reflected in an 11% yoy rise in housing investment and 3.3% in other construction. The underlying domestic economy is now recovering at a solid pace, reflected in the fall in unemployment and the pick-up in wages this year, and this should sustain into 2016."
The exports do not provide many jobs.