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News : Irish Economy Last Updated: Sep 24, 2010 - 7:16:30 AM


Irish GDP and GNP both fell in second quarter of 2010
By Finfacts Team
Sep 23, 2010 - 3:56:33 PM

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Source: CSO

Initial estimates for the second quarter of 2010 show a fall on a seasonally adjusted basis, of 1.2% in GDP (gross domestic product) and a fall of 0.3% in GNP (gross national product) compared with the previous quarter. In quarter 1 there was an increase of 2.2% in GDP and a decrease of 1.2% in GNP compared to Quarter 4 ‘09. In comparison with the corresponding quarter of last year, GDP in constant prices was 1.8% lower while GNP was 4.1% lower.

The Central Statistics Office (CSO) said some of the main features of the results in comparison with Q2 09 are:

Consumer spending (personal consumption of goods and services) in volume terms was 1.7% lower in Q2 2010 compared with the same period of the previous year.

Capital investment, in constant prices, declined by 19.9% in Q2 2010 compared with Q2 2009.

Net Exports (exports minus imports) in constant prices were €884 million higher in Q2 2010 compared with Q2 2009.

The volume of output of Industry (incl. Construction) increased by 1.7% in Q2 2010 compared with Q2 2009. Within this the output of the Construction sector fell by 28.8% over the same period. Output of distribution, Transport and Communications was down 0.7%. The Public administration and defence sector was 3.2% lower while output of Other Services fell 2.0% in the second quarter of 2010 compared with the same period of last year.

GNP

The CSO said the estimate of GNP is derived by adjusting GDP for income flows between residents and non-residents. The timing of these flows can be variable. They include, in particular, the profits of foreign owned enterprises which increased by €737m between Q2 2009 and Q2 2010. The increase, in this quarter, in the net factor income flows is also affected by increased interest payments on government debt. As a result, the annual decline in GNP was more severe than that in GDP.

Source: CSO

Lower current account deficit of 1.1bn in 2nd Quarter

The Balance of Payments current account deficit in the 2nd quarter of 2010 was €1.14bn - - down almost €500m on that for the previous quarter and down €337m on the 2nd quarter of 2009. This was due to an increase in the merchandise surplus which grew from €9.03bn in the 2nd quarter of 2009 to €9.79bn in the 2nd quarter of 2010. While the services deficit at €2.40bn was down over €100m on the same quarter last year, net income outflows at €7.98bn were up almost €600m. A reduction in net portfolio investment income accounted for this increase.

Other points of note are:

Current account

Compared to the 2nd quarter 2009, merchandise exports at €21,756m were up €1.4bn; imports at €11.96bn were up over €600m.

Services exports at €18.25bn were up over €1.4bn largely due to increased computer services exports. Service imports increased by over €1.3bn to €20.65bn  due to higher royalty payments (€7.64bn) and trade related imports (€3.07bn).

Investment income earned abroad (€13.55bn)was down almost €600m compared to one year earlier. Payments to foreign investors at €21.46bn were unchanged.

Financial account

Outward direct investment from non-IFSC sources amounted to €2.75bn. This was offset by a decrease of €2.87bn by IFSC enterprises. On the inward side, reinvested earnings (€6.19bn) of foreign-owned enterprises in Ireland were offset by other capital outflows of €5.93bn (mostly loans from IFSC enterprises to affiliates abroad).

Portfolio investment assets at €5.14bn reflect significant investment in foreign securities by IFSC enterprises. Liabilities (€268m) showed little movement.

The Minister  for Finance Brian Lenihan said today: "The figures for exports are strong and I am encouraged by this - - the necessary competitiveness improvements are working. We must export our way out of our current difficulties, there is simply no other way. The pace of decline in consumption and investment is easing and is broadly in line with projections. The second quarter figures are affected by a spike in imports in part resulting from an increase in royalty payments that depressed the overall GDP figure.”

The Minister also commented on other data published recently:  “Today’s figures must be seen in conjunction with other data published recently. For instance, labour market data published earlier this week while remaining weak point towards stabilisation, while the public finances to end-August are on target.”

The Department of Finance said it is currently assessing all of the economic data and will publish revised fiscal numbers in early October and updated forecasts in the Pre-Budget Outlook in the second half of October, taking on board all relevant information.

Davy economist, Aidan Corcoran, commented:

Failure of GDP to rise quarter-on-quarter is a disappointment

  • We had been expecting a positive GDP quarterly growth rate to confirm the end of Ireland's recession; instead, GDP in seasonally adjusted volume terms fell 1.2% quarter-on-quarter.
  • According to the usual definition of two consecutive quarters of positive growth, the recession has not yet ended.
  • Given the volatility of GDP and the strength of the Q1 growth (2.7%, revised down to 2.2%), the dip back into negative territory is not entirely surprising.

GNP falls 0.3%, but decline is slower than Q1

  • GNP, which strips out the net factor income paid abroad and is a better reflection of the domestic economy's performance, dropped 0.3% from Q1.
  • Although we had expected some growth, the decline is at a slower pace than that seen in Q1 – providing some encouragement.
  • The trend in GNP growth remains positive.

Consumption expenditure fell slightly, while imports rose

  • Personal consumption expenditure fell by a small amount in seasonally adjusted volume terms, showing that private sector concerns about the economic outlook continue to provide a drag on growth.
  • Imports rose by €1.4bn in seasonally adjusted volume terms from Q1, outstripping the increase in exports of just €0.6bn.
  • Much of the apparent increase in imports comes from a 15% (€0.97bn) rise in the royalties paid abroad, something which is not likely to be repeated.

Industrial output gave up some of its gains

  • The seasonally adjusted volume of industrial output fell 3.6% from Q1 having risen 10.7% in Q1.
  • As with the GDP figure, some retraction might have been expected given the strength of the Q1 growth
Commenting on the data, IBEC director general Danny McCoy said:“The slowdown in Q2 exports and industrial output is not that surprising given the very strong performance in Q1, and there were tentative indications that the domestic economy is stabilising. Building and construction may have turned a corner and there was a marked slowdown in the pace of decline in consumer spending and consequently in GNP. This tallies with recent labour market figures, which showed that employment losses slowed significantly in Q2. However, this trend needs to be built on.

“Government has an important role in stabilising sentiment and perceptions about the economy. The banking crisis has eroded public confidence in recent months. Government has an opportunity to give consumers and businesses some certainty about the outlook for 2011 by giving a definitive indication on the nature and scale of the fiscal adjustment in the forthcoming Budget,” concluded McCoy.

Bank of Ireland chief economist, Dr. Dan McLaughlin, commented:

GDP contracted in second quarter…Irish GDP, as measured in real terms on a seasonally adjusted basis, declined by 1.2% in the second quarter, following a revised 2.2% increase in Q1. The latter had signalled a formal end to the recession and GDP is still 1% up from the cycle low, but the Q2 reading was disappointing and well below the consensus, which envisaged a 0.5% rise. The data left real GDP 1.8% below the corresponding quarter in 2009, against an annual fall of 0.9% in Q1, and as a result may well result in a downward revision to the consensus forecast for 2010 as a whole, which currently envisages a 0.7% increase.

…despite rise in domestic demand…The upturn in activity in the first quarter was driven by exports and domestic demand had continued the fall which began in the first quarter of 2008. This pattern reversed in the second quarter, however, with domestic demand rising for the first time in 27 months, increasing by 1.5%. The driver was capital spending which rose by 11.5% in the quarter. This is a very volatile component of the national accounts and a breakdown is only provided on an unadjusted basis, which showed that spending on machinery and equipment rose by 16% in the quarter resulting in a positive annual reading of 1.5%. The annual pace of decline in building and construction slowed, to 31% from 38%, and the CSO believes that the quarter saw an increase in nonresidential construction.

…although consumption still fell marginally…Retail sales rose by 6.7% in the second quarter and this persuaded most analysts, including ourselves, that consumer spending as a whole had picked up. Consequently, it was a surprise to see the CSO estimate of a 0.2% fall, following a revised 0.5% decline in Q1, implying a substantial fall in consumer outlays on services. Government spending also fell, by 0.8%, although the Q1 data was revised to show a marginal rise, again a surprise.

…despite rise in domestic demand…The upturn in activity in the first quarter was driven by exports and domestic demand had continued the fall which began in the first quarter of 2008. This pattern reversed in the second quarter, however, with domestic demand rising for the first time in 27 months, increasing by 1.5%. The driver was capital spending which rose by 11.5% in the quarter. This is a very volatile component of the national accounts and a breakdown is only provided on an unadjusted basis, which showed that spending on machinery and equipment rose by 16% in the quarter resulting in a positive annual reading of 1.5%. The annual pace of decline in building and construction slowed, to 31% from 38%, and the CSO believes that the quarter saw an increase in nonresidential construction.

…although consumption still fell marginally…Retail sales rose by 6.7% in the second quarter and this persuaded most analysts, including ourselves, that consumer spending as a whole had picked up. Consequently, it was a surprise to see the CSO estimate of a 0.2% fall, following a revised 0.5% decline in Q1, implying a substantial fall in consumer outlays on services. Government spending also fell, by 0.8%, although the Q1 data was revised to show a marginal rise, again a surprise.

…overall, disappointing albeit with some caveats…In summary, the fall in second quarter GDP is disappointing and a surprise given the strength of retail sales and the positive PMI readings. The fact that it is primarily due to a fall in inventories and a jump in imports, in turn reflecting a pick up in domestic demand, may give some positives, but the data still leaves GDP 1.8% down on its level a year ago.

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