|Source: CSO |
The Irish economy is in recession following contractions of GDP (Gross Domestic Product) in both the first and second quarters of 2008. The last full year recession in Ireland was in 1983 and the remaining two quarters of the year are also expected to show contractions.
Irish GDP increased by 6% in 2007.
In the second quarter of 2008 GDP decreased by 0.8 per cent at constant prices compared with the same period in 2007 while GNP decreased by 2.1 per cent in volume over the same period. This is the second successive quarter in which GDP showed a decrease compared with the same quarter of the previous year. The profits of foreign owned enterprises are excluded from GNP. These profits were relatively high in the second quarter of 2008 resulting in a significant decrease in GNP. GNP is also affected by other income flows between residents and non-residents and the timing of these flows can be variable.
Some of the main features of the results are:
Consumer spending (personal consumption of goods and services) in volume terms was 1.4 per cent lower in Q2 2008 compared with the same period of the previous year.
Capital investment, in constant prices, was 18.8 per cent lower in Q2 2008 than in Q2 2007. There were significant declines in house building as well as in the acquisition of transport equipment and machinery and equipment compared to the same period of last year.
Net Exports (exports minus imports) in constant prices were €1,242 million higher in Q2 2008 compared with Q2 2007.
The volume of output of Industry (incl. Construction) increased by 1 per cent in Q2 2008 compared with Q2 2007. Within this the output of the Construction sector fell by 12.2 per cent over the same period.
Output of Distribution, Transport and Communications was down 4.3 per cent while Output of Other Services was 2.5 per cent higher in the second quarter of 2008 compared with the same period of last year.
Dr. Ronnie O'Toole, Chief Economist, National Irish Bank commented: "In the first few months of the year the weakness in residential construction was the main culprit, with investment activity down almost 20 per cent. This has now been joined by much weaker consumer spending, which contracted in the second quarter. Consumers went on strike around Easter, and this drop off in sales is evident in the figures released today. While there has been a moderation in the price pressures facing consumers over the last two months, consumer spending will remain weak this year and next. Wage growth is going to fall from 4-5 per cent of recent years to around 2% in 2009 based on the National Pay deal. On top of that, employment growth has ground to a halt, putting further pressure on households' finances.
The figures for exports for the first half of the year also show a rapid deceleration in the growth rate Ireland has experienced in recent years. The slowdown this year is because of two factors - one short-term, another long-term. The short-term element relates to the weakness of exports of financial services, which have been hit by the global financial market turmoil. The long-term element relates to the fall in exports of computer hardware. Ireland benefited in the 1990's as production in the more advanced European countries shifted to cheaper, peripheral countries such as Ireland. Since the turn of the millennium some of this production has migrated to Eastern Europe, a process which has accelerated in 2008, dragging Ireland's aggregate export figures down."
Rossa White, economist at Davy says: Economy shrinks in second quarter; more of the same to come in second half of year:
National income falls 3.1% in Q2
GNP fell 3.1% quarter-on-quarter (qoq) in the second quarter. That follows +0.8% in Q1. The question of whether Ireland was in recession or not in Q2 is nitpicking and almost inconsequential because we are there now in Q3. Yet it remains an open question. The best measure of economic activity in Ireland and our preferred measure – GNP – says no (i.e. we didn’t get two quarters of contraction in a row).
But GDP – the international standard but not as appropriate in the Irish case due to our large foreign owned sector – says yes. GDP fell 0.5% qoq after a 0.3% sequential decline in Q1.
Domestically-owned economy the problem
The domestic-owned economy is performing a lot worse than the multinational sector. Note that GNP was only 0.6% higher in Q2 2008 than two years ago. The output tables show that industry expanded, but agriculture, construction and services were in decline.
Consumer spending fell 3% qoq; government spending rose slightly (+1.1%); investment fell 4.3%; exports rose 1.3%; and imports fell 2.4% (due to lower business investment and consumer spending).
Broad range of indicators show economy is in recession
Either way, the numbers are awful and there is no doubting that the economy is in recession this quarter (Q3). Looking more broadly at employment, production, output and household incomes, the economy is clearly sliding. But the worst of the impact from the decline in house completions is yet to come in H2 and H1 2009.
Commenting on the CSO figures, IBEC Director of Policy Danny McCoy said: “The only small silver lining in today’s figures is that the traded sector is holding up relatively well in a turbulent global economy, with goods exports growing by 3% in the second quarter. However, services exports, seen as Ireland’s future growth engine, only increased by 1.5%. As the domestic sector of the economy is shrinking, it is vital that Ireland restores its waning competitiveness.
McCoy continued: “The downturn in the construction sector has now spilled over into the rest of the economy, as consumer spending contracted by 1.4%. It is clear that the Irish economy is heading for difficult times and the realities of Ireland’s economic circumstances must be addressed in the Budget and other Government policies.”