Davy chief economist, Rossa White commented:

Pace of recession moderates slightly; bottom likely in early 2010

GNP -1.4% in Q3: slowest pace of decline since Q1 2008

• The Irish economy remained in recession in Q3, but the pace of decline moderated further. We still expect the economy to emerge from recession in Q1 2010.
• GNP fell 1.4% in real terms compared with Q2, following -1.7% sequentially in Q2 and -5.2% in Q1. The economy entered recession from Q1 2008. Since that point, GNP is down 15.4% in volume. The economy will slide only moderately in Q4, by about 0.5%. By Q1, we may see slight quarter-on-quarter (qoq) growth in volume.
• GDP rose 0.3% in Q3 qoq, helped by the ongoing strong performance of foreign-owned multinational companies with operations here.

Consumer spending down again in Q3; investment shakeout continues, back to 2000 level

• Consumer spending fell 0.7% in Q3 following the 0.9% gain in Q2. Data so far from Q4 suggest that spending is probably down again.
• Investment is still in marked decline. It fell 9.9% in Q3 compared with Q2. Government spending dropped 0.9%. In nominal terms, it was back to less than €6bn in Q3 - - a level last seen in 2000.
• In the year to Q3, new housing declined 55% in volume; residential RMI (repair and maintenance) was down 21%; non-residential building fell 29%; and machinery and equipment investment dropped by 25%.
• Note that the massive shedding of stock continues. Stocks of goods and services declined by €393m in Q3. This makes it four straight quarters in which companies have cut stock on hand, bringing the total drag on the economy to €2bn (1.5% of GNP) in that period.

Exports resilient throughout the year

• Exports have been flat pretty much all year. In Q3, exports slipped 0.6% in volume, having increased 0.1% in Q2 and nudged 0.8% lower in Q1. But there is a story here: indigenous manufacturing is struggling, whereas sectors exposed to the global recovery are seeing expansion. The good news is that service exports seem to have bottomed. Imports slid 4.5% on lower consumer spending and especially soft investment.

Commenting on the figures, IBEC senior economist Fergal O’Brien said:"The latest numbers on the state of the economy show that activity is now beginning to stabilise, albeit at substantially lower levels than this time last year. Taking account of seasonal variations, output in the Irish economy actually increased marginally in the third quarter. Unfortunately, the small rise in GDP was largely due to a substantial fall in imports, which in itself is a reflection of continued weak domestic demand.

"Following something of an improvement in the second quarter, consumer spending fell by 0.7% in the third quarter – this is fairly consistent with what we saw in retail sales trends as well. GNP, which strips out the contributions of multinational companies, continued to contract in the third quarter, it is therefore far too early to herald an exit from recession.

"In terms of the pace of contraction in the Irish economy, the worst is now clearly behind us. Most sectors of activity are showing signs of stabilisation, with the exception of the construction sector, which continued to lurch downwards in the third quarter. Today’s numbers do not change our view that GDP will fall by about 7.5% this year and will drop on an annual basis again in 2010. We can now see some light at the end of the tunnel, however, and the economy should begin to grow again around the middle of next year. Feedback received from businesses suggests that last week's Budget will support rather than hinder confidence as we enter 2010."

Goodbody economist Deirdre Ryan commented: "GDP up 0.3% qoq in Q3 - On a technical level, today’s Quarterly National Accounts indicate an end to the recession in the third quarter. Seasonally adjusted, there was a modest increase of 0.3% qoq in GDP, following a flat outturn in Q2. However, GNP continued to contract sharply, with a further 1.4% quarterly output decline on this measure (-0.5% qoq in Q2). Despite the first quarterly growth in GDP in 4 quarters, we would be very reluctant to suggest that the recession is over just yet. Both GDP and GNP remain at very depressed levels, with GDP down 7.4% from its level a year ago, while GNP is down 11.3% on an annual basis. What today’s data clearly indicate is that a better than expected performance from the external sector is masking a very weak domestic environment, where there is still further weakness to come.

Damned statistics - The technical ending of the recession might give some much-needed cheer, but the devil is in the detail in today’s Q3 data. Continued growth in foreign multinational output is the sole area of strength, while domestic consumption, investment and Government spending continues to contract. We cannot see that changing in 2010 either, with consumption being the major swing variable in this regard. For this reason, we have always maintained that domestic demand is a better gauge of how the domestic Irish economy is performing."

NCB economist Brian Devine commented:"GDP increased by 0.3% q/q in Q3 on the back of a large contribution from net exports. GNP in contrast, declined by -1.4% q/q. There were also large downward revisions to the Q2 figures. GDP was revised from flat to -0.6% q/q and GNP was revised down by a full 1.2% from -0.5% to -1.7%.

Growth has returned thanks to net exports, but shrinking imports outpacing shrinking exports is not a sustainable way for an economy to boost employment, which is ultimately needed for a sustainable recovery.

The value of GNP has now declined by 20% from the peak; this is an enormous adjustment. Much of the personal debt is from the years 2005-2007, whereas the economy is now operating at a 2004 level. It is likely to be 2014 at the earliest before we see the peak again .

We have maintained that the GDP figures will not be as bad as consensus believes next year given global reflation, still expecting -0.3%y/y, but we have also believe that because of further fiscal consolidation, indebtedness and meek employment gains that economic growth will not reach the 4-5% expected by some post-2010. Growth of 2-3% seems more plausible."

Austin Hughes, chief economist of KBC Ireland, who was one of the cheerleaders of the boom, comments: "Irish economic growth data for the third quarter of 2009 confirm the picture seen in yesterday’s jobs report of an economy that is still weakening albeit at a markedly less traumatic pace than seen around the turn of the year.  In that regard they support the view that the worst is over for the Irish economy but they also hint at a possibly protracted bottoming out process that means it may be some significant time before a palpable sense of an upturn becomes established. 

Unlike most other countries, two measures of economic activity warrant attention.  On the most commonly used international measure – GDP – activity improved in the third quarter, rising 0.3%, and according to the conventional shorthand, this suggests the Irish economy has exited recession.  However, three important caveats should be mentioned.  First of all, any strict definition of economic turning points, which follows the approach of the National Bureau for Economic Research in the US, will assess conditions in terms of trends in incomes and employment rather than GDP. 

On this approach, it would be more accurate to suggest the recession in Ireland eased rather than ended in the third quarter. The second caveat is not entirely unrelated.  GDP measures activity in Ireland rather than the incomes this generates for Irish residents which is better captured by GNP.  The primary difference between the performance of GDP and GNP in the third quarter is sharp changes in profit flows into and out of Ireland.  On the GNP measure, activity continued to weaken in the although the 1.4% decline was the smallest drop since the first quarter of 2008.  One final statistical caveat of caution is that preliminary estimates can be revised sharply.  GDP is now estimated to have fallen by 0.6% in the second quarter of 2009 whereas initially it was estimated as a flat outturn.  A similar to the third quarter revision would more than wipe out today’s reported gain in third quarter GDP. 

We think the Irish economy has begun a bottoming out process that is notably more encouraging than the traumatic decline seen earlier in the year.  However, we would be hesitant to proclaim the end of recession because the details of today’s figures are less encouraging than the headline GDP figure.  Today’s GDP gain largely reflects the astonishing strength of some multinational companies operating in Ireland and the particular weakness of the broader domestic economy which resulted in a sharp fall in imports.  In the third quarter of 2009, consumer spending (-0.7%) and investment (-9.9%) both posted quarterly declines having risen in the second quarter.  However, because imports fell (-4.6%) more sharply than exports (-0.6%) and stock building was less negative than in the previous quarter, this resulted in GDP rising marginally (+0.3%).  Unfortunately, a sharp increase in net factor flows abroad mean GNP fell significantly (-1.4%) even if this was a notably smaller decline than the average 3.5% drop seen in the three preceding quarters.

Diagram 1 puts Irish economic performance in an international context.  If we use annual rather than quarterly rates of change we see that very weak Irish economic activity may be extreme but it is by no means unique.  Indeed, comparing year on year growth rates in Irish GNP and GDP with GDP data for other countries we see that Irish economic performance is not quite as weak as seen in Finland or Latvia but is notably weaker than the US, Germany or the UK.  (The table shows that Irish GNP and GDP data reveal similar trends but GDP shows a far more favourable comparison with other countries.)  Encouragingly, Irish economic activity in common with most other countries is showing a notably less frightening trajectory of late.

On balance, today’s economic growth data confirm that the Irish economy is still weakening but current circumstances are altogether less awful than those experienced around the turn of the year.  Reflecting stronger conditions abroad, Ireland’s export sector is beginning to turn but uncertainty and income losses still weigh on the spending plans of domestic households and businesses.  We reckon increased signs of stabilisation will emerge in upcoming data.  So, the final quarter of 2009 should show a further modest improvement and a more clearly improving environment should become established by the middle of next year. 

We agree with the broad tenor of the comments and arithmetic of the Minister for Finance’s budget day forecasts.  At the margin, the drop in GDP in 2009 as a whole may be marginally smaller than envisaged by Mr Lenihan at around 7% whereas the fall in GNP could be slightly larger at just under 11%.  For 2010, we think a further contraction in economic activity of around 1½% is in prospect but we think the most notable aspect of Ireland’s economic performance in 2010 will be clear if uneven progress towards an improvement in incomes and employment as the year develops."