Irish GDP growth weak in Q2 2016 as FDI distortions continue
On a seasonally adjusted basis, initial estimates from the Central Statistics Office on Wednesday show that GDP in volume terms rose by 0.6% for the second quarter of 2016. Growth in GNP also increased by 0.6% in this quarter. The data are again subject to significant distortions by mainly US-owned FDI (foreign direct investment) firms. On an annual basis, GDP expanded by 4.1%.
The revision of GDP growth to 26.3% in 2015 was mainly reflected in the first quarter of the year.
The CSO said that total domestic demand increased by 9.1% in the quarter, driven primarily by a €9bn investment in intellectual property products imported from abroad (FDI distortions). This increase in investment has offset the negative result for personal consumption, which decreased by 0.5% in the quarter, impacted by lower levels of car registrations.
Overall investment/capital formation rose by 38.9% in Q2 2016, while personal consumption fell by 0.5% in the quarter. Net exports (exports minus imports) declined in the quarter by 31.4%, driven by an 11.8% increase in imports and in particular the imports of intellectual property products.
With regard to Balance of Payments results for Q2 2016, there was a current account surplus of €4.6bn in the quarter, a decrease on the €7.5bn current account balance in Q2 2015, mainly as a result of increased imports of intellectual property. Service exports increased by €1.7bn to €32.3bn for Q2 2016 compared to Q2 2015, "with the increase driven largely by growth in exports of computer services" e.g. Double Irish exports booked in respect of overseas sales by the likes of Google, Microsoft, Facebook and Oracle. Apple's onshore services sales are either in 'computer services'" or 'business services.'
The mainly American companies that have tax residencies in Ireland for avoidance purposes, typically artificially boost both GNP and Balance of Payments surpluses.
Following the 26.3% 2015 GDP growth revision in July that had been dubbed "Leprechaun Economics" by Paul Krugman, the US economist, Jennifer Banim, assistant director General with responsibility for Economic Statistics at the CSO, commented on the need to develop a broader suite of domestically focused indicators and information to supplement internationally agreed indicators:
The small, open and highly globalised nature of the Irish economy makes it increasingly difficult to represent the complexities of economic activity in Ireland in single headline indicators such as GDP or GNP...The CSO is committed to meeting user needs and is convening an expert group that will develop recommendations on how best to meet the statistical needs of national users and provide guidance on the development of indicators that can provide the necessary insights.
This issue only got attention at official level when the huge 2015 revision became an international joke.
Dermot O'Leary of Goodbody commented:
On our preferred measure of growth, core domestic demand, the Irish economy grew by 1.7% yoy in Q2, down from 3.0% yoy in Q1. This is somewhat slower than recent quarters due to slower consumer spending growth and another decline in core business investment. In relation to the consumer, real spending grew by just 1.8% yoy in Q2, its slowest rate of growth since Q3 2014. The CSO notes that this is as a result of weaker services spending (-1% yoy), while goods spending rose by 5.0% yoy. This is a surprising result; we would not be surprised if this estimate was revised upwards in the future, in line with revisions that have occurred over recent years. While there appears to have been a minor impact on confidence as a result of the Brexit vote, ongoing solid employment and earnings growth should see consumer spending continue to make a strong contribution to economic growth in the coming quarters.
Construction strong, but core business investment weak
Investment grew by 21% yoy in Q2, but this was heavily influenced by R&D spending. Core investment (investment excluding R&D and aircraft) was weak for the second consecutive quarter, falling by -6% yoy (-10% yoy in Q1). The weakness was caused by a decline in core business investment, which fell by 25% yoy in Q2 (-24% yoy in Q1). This weakness is surprising and not consistent with the lending trends in the banks. Construction is making a strong recovery on the back of a resurgence in housebuilding; in Q2, total construction grew by 8% yoy, with residential construction up 31% yoy. Given the low base, we believe construction will make an important contribution to Irish economic growth over the course of the next few years.
Conall Mac Coille of Davy commented:
Disappointing 0.6% GDP growth in Q2 2016
This morning’s Irish GDP data show output up just 0.6% in Q2 2016, up 4.1% on the year. The modest growth in Q2 is disappointing given the 2.1% contraction in Q1 GDP has been left unrevised and seems artificially weak in view of the 1.0% employment growth over the same period and with the composite PMI averaging close to 60. There was also an extremely surprising 0.5% fall in consumer spending, which seems hard to credit given buoyant retail sales. On balance, we still believe the underlying rate of GDP growth is closer to 5% and that the recovery accelerated in H1 2016.
Multinational sector still distorting Irish GDP data
Although the big distortions created by the transfer of intellectual property into Ireland last year have largely worn off, a €9bn investment in intellectual property in Q2 is still creating volatility. This contributed to an 11.8% surge in imports in Q2, offset by a 39% rise in investment. Our core domestic demand measure, which strips out trade flows and investment spending on intangible assets, grew by 1.2% in the year to Q2.
CSO’s measure of Irish consumer spending is also artificially weak
However, even our core domestic demand measure is artificially weak. According to the CSO, consumer spending contracted 0.5% in Q2, up 1.8% on the year. However, this figure has been distorted downwards because the CSO’s seasonal adjustment fails to account for the new pattern of car sales. Hence, retail sales volumes fell by 2.8% in Q2 but grew by 12.6% in July 2016 as the new 162 number plate was rolled out. The underlying trend is that retail sales volumes were still up 6.3% in July. We also have concerns regarding the CSO’s measure of consumption of services, down 0.8% on the year, which is difficult to reconcile against buoyant jobs growth and rising wages.
Domestic investment shows further signs of growth
One section of Ireland’s national accounts free of distortions was the plain vanilla components of investment spending. Residential investment grew by 31% in the year to Q2 2016, repair and maintenance by 4.6% and other construction by 1.6%. The always volatile machinery and equipment (ex-planes) fell 25% in the year to Q2 but after 26% growth last year. The rebound in capital expenditure helped the construction sector to grow again in Q2, with output up 5% on the quarter and 12.2% on the year.