Irish Economy
Irish Economy: Flat growth in Q3 maybe noise?; "Spectacular" recovery continues says Ibec
By Michael Hennigan, Finfacts founder and editor
Dec 11, 2014 - 2:27 PM

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Industrial production jumped by 38.5% in the year to October while jobs industry fell in the 12 months to September 2014. The Irish Fiscal Advisory has said that a substantial jump in overseas contract manufacturing - which is tax-avoidance related - has distorted the data.

Irish Economic Recovery: Following the rush for superlatives in September when second quarter growth results showed the economy expanded year-on-year by 7.7%, flat growth in the third quarter has Ibec, the business lobby, still declaring growth is "spectacular" with no recognition of distortions that a non-vested interest body such as the Irish Fiscal Advisory Council highlights - see box below for some reality.

The Central Statistics Office reported Thursday that Irish gross domestic product (GDP) was effectively flat in the third quarter, growing by just 0.1% while gross national product (GNP), which mainly strips out the profits of foreign multinational companies, grew by 0.5%.

Annual growth rate in the third quarter slowed to 3.5%, in contrast with a blistering rate of 7.7% in the second quarter and 5.5% in the first half of 2014.

Simon Nixon of The Wall Street Journal had commented in September that Ireland was teaching Europe a lesson: "Ireland’s blowout second-quarter growth figures are more than just a domestic achievement. The wider political significance of this result shouldn’t be overlooked."

Ibec today acknowledged growth figures for Q3, were a little disappointing in terms of momentum, the  economy continues to experience a strong recovery. Despite downward revisions to growth figures for the first half of the year and weaker than expected Q3 figures, GDP growth for the first nine months of the year is still substantial at 4.9%."Taken in a European context this growth remains spectacular" -

Reacting to the latest CSO figures, Fergal O'Brien, Ibec head of policy and chief economist, said: "The Q3 numbers are weaker than most had expected given strong leading indicators, with the flat-lining of domestic consumption a particular surprise. Although this was driven by non-retail items, such as utilities and insurance, it  does seem at odds with continuing improvement in consumer fundamentals.

"Taking the first nine months of the year together, however, the recovery is still by far the strongest in Europe, and we continue to see a revival of the domestic economy. Investment in the first nine months of the year is up 11% while personal consumption is up 0.7%. Employment growth, retail sales and industrial production continue to perform strongly, which augurs well for the remainder of the year.

"Falling oil prices and a gradual recovery in the construction sector have the potential to further boost the economy this year and next. There are still risks in the global environment, however, particularly from a weak eurozone. We must renew our focus on competitiveness in order to continue this strong economic performance."

Michael Noonan, finance minister, said: “Budget 2015 is built upon GDP growth of 4.7% in 2014 and 3.9% in 2015. Today’s figures from the CSO show that the Irish economy has grown by 0.1% in Q3 and 3.5% over the year. As the CSO has pointed out GDP rose by 4.9% in the first 9 months of the year and therefore we are on target to meet our 2015 Budget forecasts.

The economy continued to grow in Q3, albeit at a slower rate than the exceptional growth rates seen in Q2, and most importantly this growth is translating into jobs.

The strong income tax and the VAT figures seen in the exchequer returns, coupled with the positive high frequency data, highlight the ongoing recovery in the Irish economy.

However, the recovery should not be taken for granted and there are risks. That is why Budget 2015 was designed to strengthen and broaden this recovery and targeted measures were introduced to boost key sectors of the economy including tourism, agriculture, construction and FDI.

Budget 2015 was also the first year of this Governments strategy to reduce income tax and USC, and every worker paying tax or USC will start to see an increase in their take home pay in 2015. This is designed to boost consumer confidence and demand and will further improve Ireland’s competiveness and attractiveness as a destination for investment and job creation.”

Conall Mac Coille, chief economist of Davy, commented: "Today's GDP data show just a marginal 0.1% expansion in Q3, with GDP up 3.6% on the year. This is slower than the downwardly revised 7.3% annual growth in Q2. Despite a downward revision to growth in Q2, Ireland still looks set to be the fastest-growing economy in Europe this year. We expect to revise our forecasts to slightly below 5% in 2014 and towards 4% in 2015. GNP, which excludes multinational sector profits, should grow by around 4.25% in 2014. The flat growth in Q3 should not be taken as a signal that the Irish recovery is faltering as it almost certainly reflects volatility. Ireland's PMI surveys have remained close to 60, and the unemployment rate has continued to decline to 10.7% in November.

Although broadly in line with our expectations, today’s data may disappoint some commentators expecting GDP growth in excess of 6% in 2014 – placing too much weight on the Q2 figures. The exceptional 7.3% annual growth in Q2 was always likely to have reflected volatility in the data. Similarly, the flat growth in Q3 2014 is not too concerning. Exports continued to perform well but were offset by a 3.5% rise in imports, so that net trade detracted from growth. There was also a 0.8% fall in extremely volatile investment spending, but that follows an 8.0% rise in Q2.

The bigger picture is that Ireland's trade performance has improved markedly in 2014. Exports rose by 2.7% in Q3, up 15.5% on the year. We know part of this exceptional growth reflects volatile factors relating to the pharmaceutical sector. Nonetheless, Ireland's exposure to the UK is probably protecting exporters from weak euro area demand. Services exports dominated by the IT sector continue to perform well – up 12.5% in the year to Q3. Given the healthy flow of FDI in the IT services sector, there is little reason not to expect services exports to perform well again in 2015.

The rebound in Irish GDP growth has also reflected domestic demand. Investment spending is up 7.8% in the year to Q3. Puzzlingly, the Irish national accounts suggest that consumer spending remains weak – down 0.2% in Q2, flat in Q3 both on the quarter and on the year and in contrast to buoyant retail sales and VAT receipts. We are concerned that the CSO's measurement of consumption of services may be artificially weak. At face value, the national accounts data suggest that consumer spending will grow by only 0.5% in 2014. Part of the recovery in Irish GDP also reflects hard-hit, domestic facing sectors bouncing back from a low base. Construction sector output was up 7.3% in the year to Q3 and other services by 3.7%."

Dermot O'Leary, chief economist of Goodbody, commented: "Away from the noise in the Irish growth data, the underlying trends contained in today’s GDP data remain impressive in a European context. See note attached.

Ireland remains the fastest growing economy in the euro area
On a headline basis, the Irish economy stagnated (+0.1% qoq, seasonally-adjusted) in GDP terms in Q3 2014. However, we would once again warn against focusing on quarterly Irish GDP data, due to its volatility. Following two quarters of very strong growth (2.8% and 1.1% in Q1 and Q2, respectively), this is, in fact, a respectable outturn. On a more meaningful annual comparison, GDP grew by 3.5% yoy. Although this is down from the 7.3% annual growth achieved in Q2, Ireland remained the fastest growing economy in the euro area in Q3 2014, and compares to the 0.8% yoy performance for the bloc as a whole.

Core domestic demand up strongly in 2014
In Q3, domestic demand grew by 1.2% yoy, down from 5.4% yoy in Q2. Stripping out the volatile aircraft sector and R&D expenditure, core domestic demand grew by 2.3% yoy (4.2% yoy in Q2). This resulted in core domestic demand growing by an impressive 3.6% in the first nine months of 2014.

Investment continues to lead the recovery in domestic demand. Investment grew by 8% yoy (19% yoy in Q2). Consumer spending growth continues to disappoint relative to the developments seen in the labour market over the past eight quarters. Consumer spending stagnated on an annual basis in Q3, with services spending down and goods spending up. Government spending fell by 1.4%, dragging on growth in Q3.

Net trade makes a big contribution, but questions remain on some issues
Net exports made another very large contribution to growth in Q3, adding 3 ½ percentage points to the annual performance (stocks subtracted one percentage point). Both exports and imports grew by 16%, but exports are c.30% bigger than imports. However, we have some outstanding questions about the source and extent of this growth, given that some of it appears to be coming from a phenomenon known as “contract” manufacturing and merchanting, which has had a larger role to play on the data this year.

5% growth rate now likely in 2014
Having grown by 4.9% in the first nine months, the latest data suggests that our current forecast of 5.3% for the full-year outturn may be modestly too high. Nevertheless, today’s data does not alter the view that the Irish recovery still has significant momentum that will mean it will continue to grow at a 4%+ clip in 2015 and 2016."

A jump in goods exports in recent times mainly reflects manufacturing overseas not activity in Ireland.

Which is better GDP or GNP?

Tax avoidance-related 'contract manufacturing' overseas (e.g Dell booking the output of its Polish plant in Ireland) and Double Dutch Irish Sandwich schemes which provide virtual services exports of about €45bn, impacts both GDP and GNP while tax inversion companies distort both GNP and the Balance of Payments.

In 2013 a Balance of Payments surplus would have been a deficit but for the tax inversions - legally they are Irish but they may have a few employees at an Irish headquarters or no employees.

Financial Times: Tax deals raise questions over Ireland’s growth spurt

43% of rise in H1 2014 GDP from manufacturing overseas - Irish Fiscal Council

The idiot/ eejit's guide to distorted Irish national economic data

US-Ireland Tax Inversions 600,000+ staff: Kenny, Noonan met with top US corporate lawyers

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