Irish Economy
Irish Economy 2011: GDP up 1.3% in Q1 on exports boost; GNP down 4.3% in quarter as domestic demand dipped
By Finfacts Team
Jun 23, 2011 - 10:55 AM

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Source: CSO

Irish Economy 2011: Initial estimates for the first quarter of 2011 show an increase, on a seasonally adjusted basis, of 1.3% in GDP (gross domestic product)  and a decline of 4.3% in GNP (gross national product) compared with the previous quarter. In comparison with the corresponding quarter of 2010, GDP at constant prices was marginally up (+0.1%) while GNP was 0.9% lower.

GDP includes the profits made by foreign multinationals in Ireland. The foreign-owned sector is more significant in Ireland than in any other developed economy. For an explanation of the difference between GDP and GNP click here.

Strong net exports: The Central Statistics Office reports that net exports (exports minus imports) grew by €1.56bn (20.6%) at constant 2009 prices between the first quarter of 2010 and the first quarter of 2011. Domestic demand, on the other hand, declined by €990m (-3.1%) over the same period with personal consumption down by 2.9%.

On the output side of the accounts Agriculture, Forestry and Fishing (+3.9%) and Industry excluding Building and Construction (+1.1%) were the only sectors to record annual growth. However, the Other Services sector, which accounted for almost a half of GDP at factor cost in Q1 2011, declined at a more moderate rate than in previous quarters.

Seasonally adjusted series: Personal consumption and Government expenditure both fell by 1.9% on a constant price seasonally adjusted basis between the final quarter of 2010 and the first quarter of 2011. Capital formation (+1.1%) and Exports (+3.8%) were both up while Imports fell by 0.3%.

On the Output side of the accounts there were seasonally adjusted increases in Distribution (+1.3%) and Other services (+0.7%) with all other sectors recording declines.

Net factor outflows increased by close on €2 billion seasonally adjusted between Q4 2010 and Q1 2011. Increased profit outflows from Ireland and a decline in the overseas profits earned by foreign Public Limited Companies headquartered in Ireland were the major contributors to this

Latest 2010 data shows GNP rose in 2010:

The CSO also said today that detailed annual national accounts show that GDP fell by 0.4 per cent in constant prices between 2009 and 2010. This confirms the trend in the previously published quarterly estimates of GDP. Meanwhile GNP, on the other hand increased by 0.3 per cent between 2009 and 2010 compared with a previously signaled 2.1 per cent decline.

Industry the main contributor to growth in 2010: Industry (excluding Building and Construction) grew by 11.2 per cent between 2009 and 2010 while Agriculture, Forestry and Fishing increased marginally by 0.7 per cent. However, these increases were not sufficient to counteract the declines which took place in the remaining sectors of the economy. Building and Construction activity (-30.1%) continued to decline in 2010. Public Administration and Defence (-2.7%), Other Services (-2.3%) and Distribution, Transport and Communication (-2.0%) all recorded volume declines between 2009 and 2010.

Strong export growth: On the expenditure side of the accounts exports performed strongly in 2010. However, the growth in net exports of €5.9 billion at constant prices (23.8%) was outweighed by a decline of €6.7 billion (-4.9%) in the combined total of the components of domestic demand. Personal consumption, which accounts for nearly two thirds of domestic demand, fell by 0.8 per cent while Government expenditure was 3.8 per cent down on 2009. Capital formation (-24.9%) registered the largest percentage decline, reflecting the continued weakness of the construction sector.

Source: CSO

Current account deficit of over €1 billion in Q1 2011

The CSO reported that the Balance of Payments current account deficit for Q1 2011 was €1.03bn - - down from a deficit of €1.47bn in Q1 2010. The first quarter merchandise surplus of €9.12bn was almost unchanged on the same quarter of 2010.

Compared with the results for the first quarter of 2010 the services deficit (€1.44bn) decreased by over €300m while the income deficit (€8.03bn) was broadly similar.

Total service exports at €18.28bn increased by €1.6bn largely due to computer services (+€900m) and business services (+€400m). Total service imports at €19,722m were up almost €1.3bn with increases for business services (+€1.2bn) and royalties/licences (+€200m) and a decrease for tourism and travel (-€160m).

In the current account the direct investment income abroad of Irish-resident businesses increased to €3.2bn while the corresponding outflows of foreign-owned enterprises in Ireland were largely unchanged between Q1 2010 and Q1 2011. Portfolio investment income outflows increased by €651m to €7.16bn.

In the financial account, direct investment in Ireland increased by €15.9bn while direct investment abroad increased by €5.4bn. Portfolio investment assets decreased by €1.3bn while liabilities increased by €3bn. Other investment assets decreased by €24bn and liabilities decreased by €33bn.

The CSO says the current account balance for 2010 has changed from a deficit of €1.11bn to a credit of €761m while the change in the 2009 deficit has been less pronounced.

Dermot O'Leary, Goodbody's chief economist, says due to the volatility of Irish data there is something for everything in today’s GNP/GDP release. However, the key takeaway for us is that the economy has effectively been stable over recent quarters after the heavy declines of 2008 and 2009:

Economy flatlining... - As measured by either GDP or GNP, is flatlining, with strong exports offsetting the continued contraction in domestic demand. On first glance, the data today do little to alter our forecasts for a flat outturn for the full-year in 2011, before growth returns in 2012. 
  
...despite quarterly volatility - For the record, GDP increased by 1.3% qoq (seasonally-adjusted) in Q1 2011, but GNP contracted by 4.3% qoq. The reason for unusually large fall in GNP is a large increase in net factor income outflows relative to Q4 2010. This, in turn, is due to the large multinational presence in Ireland and is a key theme throughout the volatility and revisions. A better gauge is the annual rate of change, where GDP was effectively flat (-0.1%), while GNP fell by 0.9%. Annual growth in GDP has been trending close to zero over the past three quarters. 
  
Strong exports/weak domestic demand trend continues - The reasons behind this flat performance are familiar ones. Export growth continues to be strong - up 7% yoy in Q1 - while domestic demand continues to contract - down 4.1% in Q1. One glimmer of hope, however, can be found in the performance of investment. Investment did fall by 9.1% yoy but this was the slowest rate of decline since Q3 2008. More importantly, a more detailed look at the drivers revealed that  business investment (excluding planes) grew by 2% yoy in Q1, representing the first growth since the end of 2007. 

Current a/c now in surplus - Two other positive elements today’s data are worth pointing out. Firstly, the CSO upwardly revised previous years estimates for GDP based on new data. Secondly, it was confirmed that Ireland recorded a balance of payments current account surplus in 2010 for the first time (in a calendar year) since 1999 (since 2004 on a rolling four-quarter basis). This indicates that a significant private sector surplus is offsetting the large public sector deficit.

Source: Goodbody

Austin Hughes, KBC Ireland chief economist, said: "Irish economic growth data for the first quarter of 2011 show that the Irish economy remains weak but perhaps not quite as weak as feared. For a variety of reasons, Irish macroeconomic data are quite volatile. So, it would be unwise to over-interpret the precise numbers. That said, today’s figures point in a broadly encouraging direction. The outturn for the full year 2010 was revised up from a drop in GDP of 1% to a fall of 0.4% and GDP figures for the first three months of 2011 show increases both on the comparable quarter of 2010 (+0.1%) and on the preceding three months (+1.3%). The quarterly rise in the first three months in 2011 was notably faster than the Eurozone average (+0.8%) and only Estonia managed a faster pace of growth in early 2011.

Today’s national accounts data provide a reasonable picture of the divergences in economic conditions that remain a key feature of the Irish economy. A further fall in consumer spending (-1.9% quarter on quarter) was the main driver of a continuing weakness in domestic spending. However, strong growth in exports (+3.8% quarter on quarter) resulted in a solid increase in GDP. Building and Construction output fell a further 15% but overall investment increased reflecting a pick-up in capital spending or machinery and equipment. So, the first quarter data underline the multispeed nature of the Irish economy at present. As a result, the overall picture is one in which markedly different circumstances across companies and households mean the economy is undergoing a protracted and uneven bottoming out process. In this regard, the inherent statistical volatility of the data shouldn’t distract from what seems a reasonable depiction of a fragile and patchy economy that appears to have put the worst behind it but is struggling to build any broadly based forward momentum.

The broad picture emerging form the first quarter date is one of a tentative and modest improvement but the significance of a sharp drop in real GNP between the final quarter of 2010 and the first quarter of 2011 needs to be assessed. GNP fell by a dramatic 4.3% to reverse the four conservative quarterly gains seen in this measure through 2010. The fall in the first quarter was the result of a sharp jump in net factor income outflows from an unusually low level in the final three months of last year to a record high in early 2011. This reflected both a significant fall in profits earned by Irish or Irish domiciled firms and a large rebound in profits earned by multinational companies operating in Ireland. These numbers have become increasingly volatile of late and this may persist through 2011 because of increased uncertainty regarding the profits earned by a number of UK multinationals that have become Irish domiciled in recent years.

Today’s data should inform forecasts for the remainder of 2011 even if the volatility of the data argues against taking definitive views. It is notable that the first quarter data for GDP are some 0.3% above the average for 2010. This implies that even in the absence of growth in the remainder of 2011, growth would be marginally positive for this year. In turn, this suggests that the somewhat higher GDP forecasts of the Dept of Finance and Central Bank than those of the EU/IMF may be close to the eventual outturn. While it would not be difficult to extrapolate from today’s numbers to GDP growth forecasts somewhat above 1% for 2011, precedent might suggest a more cautious approach. In view of recent signs of some softening in global growth of late we will stick to our forecasts of a 0.6% rise in GDP for 2011 for the moment. On the same basis, it might be premature to extrapolate the weakness in GNP through the remainder of the year. So, we hold to a forecast of -0.5% for this measure."

Patrick Koucheravy, Property Economist at CB Richard Ellis said: “Yet again this quarter we see a large divergence between quarterly GDP and GNP figures as net profit outflows surged back following a surprising dip at the end of 2010.  While the upward revisions to the 2010 figures are very welcome, the general story remains largely the same in 2011 with regards to the domestic economy.  Personal consumption of goods and services fell by 2.9% in Q1 2011, the largest year-on-year decline since 2009.   Additionally, gross fixed capital formation continues to shrink, albeit at the slowest rate (9.1%) since 2008 and at more than half the rate of decline seen in 2010.  We can expect little change to this picture over the course of 2011, as the continued fiscal tightening is pursued by Government and ongoing problems in financial markets do not bode well for a strong domestic recovery in the near future.”

Commenting on the first quarter national accounts, published today, IBEC chief economist Fergal O'Brien said: "The Irish economy performed a little stronger in the first quarter of the year than was generally expected. The export performance has remained incredibly strong and it is very encouraging to see companies are increasing their investment in machinery and equipment again. This investment by firms was 5% higher in the first quarter compared to same period last year and is real indication of the confidence which Irish business has in the prospects for the economy. 

"Despite the stellar export performance and the recovery in investment, overall economic growth remains fairly flat because consumers remain too frightened to spend. Government must do everything it can to give households clarity on the economic situation and in particular it must clearly spell out as early as possible the likely impact of the budgetary adjustments on household finances. If Irish consumers start spending again a solid period of economic growth could quickly emerge."

Source: Davy

Conall Mac Coille, Davy's chief economist, comments: GDP bounces back sharply in the first quarter:

  • GDP growth bounces back in Q1
  • Irish GDP rose by 1.3% in Q1 2011 following the 1.4% decline in Q4 2010, upwardly revised from the 1.6% fall in the previous national accounts release;
  • This means that there was a marginal rise in real GDP on the year, with growth at 0.1% in annual terms;
  • The bounce back is even more pronounced in nominal terms. Nominal GDP rose by 5.1% in the first quarter following a 5.9% decline in Q4 2010.

Net trade continues to drive Irish economic growth

  • Irish exports rose by 3.8% on the quarter with imports down 0.3%;
  • Consumer spending and government spending both fell by 1.9%, and investment spending rose by 1.1%.

Bounce back in nominal GDP pushes down on the government debt/GDP ratio

  • The revisions to nominal GDP mean that the government debt/GDP ratio in 2010 was 94.7% as opposed to 96% prior to today's national release;
  • The debt/GDP ratio rose to 100.2% in Q4; the bounce back means that the ratio is now 95.8%.

Today's data something of a relief for investors

  • Investors had harboured severe worries about the sharp contraction in nominal GDP in Q4;
  • Today's data confirm that the decline in Q4 was erratic as GDP bounced back in the first quarter.
More detailed Davy comment here (pdf).
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