Preliminary estimates for the year 2010 indicate annual declines of 1.0% in Irish GDP (gross domestic product) and 2.1% in GNP (gross national product). While 2010 is the third year of falling output the annual rate of decline in both GDP and GNP has moderated compared with the 2008 and 2009 results. The Central Statistics Office said that on a seasonally adjusted basis, constant price GDP for the fourth quarter of 2010 fell by 1.6% compared with the previous quarter while the corresponding quarterly change for GNP was an increase of 2.0%.
Since the onset of the recession, GNP growth has
lagged GDP growth because the former is dependent on the domestic economy in
particular and excludes the profits of the multinational sector.
The fourth quarter has seen a reversal because of foreign earnings by Irish
companies such as building materials giant CRH.
Industry the only growth sector in 2010
Industry (excluding Building and Construction) grew by 13.2% between 2009 and 2010. However, this growth was not sufficient to counterbalance the declines that took place in the remaining sectors of the economy. Building and Construction fell by 31.8%, similar to the decline experienced in 2009.
Activity in the Agriculture, Forestry and Fishing sector contracted by 6.4% in 2010 while Public Administration and Defence and Other Services both experienced volume declines of 2.7% between 2009 and 2010. Activity in Distribution, Transport and Communications declined by 1.5% in the year.
Strong export growth but imports also rising
On the expenditure side of the accounts although exports performed strongly in 2010, imports have also been increasing, particularly in the third and fourth quarters.
Overall, the growth in net exports of €5.7 billion at constant prices (24.5%) did not provide a sufficient counter weight to the decline of €7.9 billion (-5.6%) in the combined total of the components of domestic demand. Personal consumption, which accounts for nearly two thirds of domestic demand, fell by 1.2% while Government expenditure was 2.2% down on 2009. Capital formation registered the largest percentage decline (-27.8%) reflecting the weakness of the construction sector. While stocks continued to decline in 2010 the extent of the fall was not as pronounced as in 2009.
GNP result impacted by Foreign Earnings of Irish Resident PLCs
Net factor income outflows increased by some €1.1 billion between 2009 and 2010 transforming an annual GDP decline of 1.0% into a 2.1% decline in GNP. These increased outflows over the year were the result of higher net profit outflows and increased interest payments on Government debt.
However, the impact of inflows of profits earned abroad by Irish based Public Limited Companies, highlighted last quarter, offset to some extent the negative impact of these outflows.
Quarterly decline in GDP and increase in GNP in Q4 2010
Initial estimates for the fourth quarter of 2010 indicate a seasonally adjusted decline of 1.6% in GDP at constant prices and an increase of 2.0% in GNP compared with Q3 2010. On the output side Industry ( excluding Building and Construction) increased by 2.5%. There were quarterly seasonally adjusted declines in Building and Construction, Distribution, Transport and Communication and Other Services.
On the Expenditure side the decline in net exports of multinational companies compared with the third quarter resulted in a substantial decrease in profits thereby reducing the overall net factor outflows and feeding in to the quarterly GNP increase of 2.0%.
Patrick Koucheravy, property economist at
commerical property agents, CB Richard Ellis,
commented: “Given that economic activity was restrained at the end of 2010 by
bad weather and given that confidence was certainly affected by the announcement
of the EU/IMF intervention and another tough budget, the Q4 2010 Quarterly
National Accounts results as they pertain to personal consumption component are
not surprising. With disposable income further squeezed in January as part of
the latest budget, we do not expect to see too strong a recovery in consumer
spending in 2011.
Austin Hughes, chief economist of KBC Ireland, commented:
The broad picture emerging from Irish growth data for the 4th quarter of 2010 is in line with most assessments of the current health of the Irish economy. Activity remains weak and is particularly weak in those areas focussed on domestic demand. In their preliminary estimate for 2010, the CSO suggest GDP fell by 1%. Within this aggregate, domestic demand fell by 5.6% while Irish exports grew by 9.4%. So, different parts of the economy are experiencing hugely different fortunes. The expectation remains that a slower pace of contraction in domestic spending through the coming year in combination with sustained strength in exports will see GDP register a marginal increase – probably in the region of 0.5% while GNP will register a marginal decline in 2011.
If the broad picture emerging from today’s growth data appears reasonable, a number of important technical issues imply a need to be very careful not to attach a spurious precision to the numbers. Among the more important considerations are:
(1) Changes in the relationship between GDP and GNP
Marked differences in the performance of the externally focussed multinational sector and businesses focussed on domestic sectors led to a substantial widening in the gap between GDP and GNP in the past couple of years as net factor income outflows increased. In the second half of 2010 changes in the domicile of a number of companies have resulted in an increase in factor inflows that have tended to reverse the widening trend. An apparent shift towards greater payments for imports of services relative to profit outflows has also worked in the. As a result, GDP was 0.7% lower in the final quarter of 2010 than a year earlier while GNP was 2.8% higher. Seasonally adjusted changes between the third and fourth quarters revealed a similar divergence; GDP declined by 1.6% while GNP grew by 2.0% over the three months. On balance, it seems that the recent trend in GNP paints an overly positive picture of underlying position trends the GDP data may be slightly too negative.
(2) The ‘Big Freeze’ in Q4 2010
UK data for the fourth quarter revealed an unexpected 0.5% decline in GDP. The UK Office for National Statistics (ONS) suggested this decline owed a considerable amount to severe weather in December. According to the ONS, weather related disruptions to activity could have subtracted 0.5% from UK GDP in the final three months of 2010. Ireland’s CSO haven’t attempted any similar exercise in the light of similarly severe weather in Ireland but we know that there was an abnormally large decline in Irish related sales in December followed by a strong rebound in January. Together with anecdotal evidence of widespread disruptions to a range of economic activities during December, it would not seem unreasonable to suggest that today’s Irish data were adversely affected by a couple of bouts of unusually severe weather during December. It is impossible to be certain how much weather effects subtracted from GDP but, in view of the extreme volatility evident in retail sales, much of the decline in GDP in the final three months of 2010 may be due to severe weather. If this is the case, we should see some bounce back in data for the first quarter of 2011. Of course, there was also some ‘freezing’ of domestic sentiment and spending as a result of the deterioration in financial conditions that led to the EU/IMF deal in late November. So, it is not entirely surprising that there was some pull-back in domestic spending in the fourth quarter.
(3) Technical issues in the measurement process
As usual the CSO presents two breakdowns of GDP based on production and expenditure data. As is the international norm, the results arising from the two measures are adjusted to give one consistent figure for GDP. A summation of the individual elements of the production side points to a fractional increase in GDP in the final three months of the year compared to a year earlier (and seasonally adjusted data also result in a positive quarterly change). In marked contrast, a summation of the expenditure elements points to a decline of just under 2.5% both in year-on-year terms and on a quarterly basis. It is not unusual for differences to occur between production and expenditure side measures but these are pretty large and, critically, in terms of perceptions, there is a considerable difference between a marginal increase in activity and a significant fall. As a result, it is important not to over-interpret the message coming from these data beyond the general conclusion that Irish economic activity remained fairly weak in late 2010.
Neil Gibson Economic advisor to the
Ernst & Young Economic Eye, comments on Ireland's Q4 GDP decline
Lynsey Clemenger, economist at Ulster Bank, commented:
Renewed weakness in GDP in Q4, as net
trade failed to provide the kicker evident in previous quarters…
Indeed, the breakdown of the headline numbers reveals that the export sector remains a key determinant of the overall growth performance of the Irish economy. Unfortunately, this was for the wrong reasons in Q4. Total exports fell by 1.4% q/q, at odds with the signs from the monthly trade figures for goods which had pointed to an increase on the quarter. There are a couple of points to note here. Firstly, the fall in exports in Q4, as disappointing as it was, follows three quarters of solid expansion. And while there was some moderation in the annual rate of growth in both goods and services exports in Q4, the y/y rate in each remains strong, at 9.3% and 11.9% respectively.
On the imports side, while the rate of growth
moderated, it did not do so by as much as we had been expecting. Following four
consecutive quarterly gains, the decline in Q4 was a modest 0.1%. While a
smaller than anticipated decline in imports is a positive in the sense of what
it implies about the willingness of Irish consumers to spend, for GDP purposes a
less steep than expected decline subtracts more from growth. And when better
than expected imports are combined with weaker exports, the contribution to
growth from net trade is lower still. Such dynamics resulted in a weaker GDP
reading than the modest rise we had been factoring in in Q4.
There is no denying that exports didn’t end 2010
as well as we had been expecting. However, given the strength that went before,
exports still rose by an extremely strong 9.4% overall in 2010, outperforming
most advanced economies and the largest rise since 2000. Furthermore, harsh
weather conditions potentially played a role in the weaker Q4 export
performance, so there is a possibility that we may see some payback when the Q1
national accounts figures are released at the end of June.
Going forward, while we continue to expect exports will provide a platform on
which the Irish recovery process can build, overall prospects for the economy
are importantly affected by the ongoing fiscal retrenchment. The requirement of
additional fiscal tightening this year and for the multi-year period to 2015 has
a major bearing on the outlook for domestic demand, which is set to fall for a
fourth consecutive year in 2011 reflecting further weakness in consumer,
business & construction and government spending. But despite the ongoing
declines in these areas, the anticipated strength of net trade is such that we
still expect overall economic growth will return to modest positive territory.
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