Source: CSO

Initial estimates of Irish Gross Domestic Product (GDP) and Gross National Product (GNP) for Q2 - - the second quarter - -  of 2009 show year on year declines in both measures. Compared with the corresponding quarter of 2008, GDP at constant prices was 7.4 per cent lower while GNP was 11.6 per cent lower. The CSO said today that on a quarterly basis the seasonally adjusted estimates show no change in GDP compared with the previous quarter while there was a small decline of 0.5% in GNP, signalling that the economy remained in recession.

Some of the main features of the results are:

Consumer spending (personal consumption of goods and services) in volume terms was 6.8 per cent lower in Q2 2009 compared with the same period of the previous year.

Capital investment, in constant prices, declined by 24.4 per cent in Q2 2009 compared with Q2 2008.

Net Exports (exports minus imports) in constant prices were €1,369 million higher in Q2 2009 compared with Q2 2008.

The volume of output of Industry (incl. Construction) decreased by 11.3per cent in Q2 2009 compared with Q2 2008. Within this the output of the Construction sector fell by 30.8 per cent over the same period. Output of Distribution, Transport and Communications was down 8.6 per cent while Output of Other Services was 2.8 per cent lower in the second quarter of 2009 compared with the same period of last year.

GNP

GNP adjusts for the the big impact the large multinational sector has on GDP.

The CSO says 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 €1,277m between Q2 2008 and Q2 2009. The increase, in this quarter, in the net factor income flows is also affected by (a) reduced credits (inward flows), compared to Q2 2008, to Irish outward direct investment enterprises and (b) increased interest payments on government debt. As a result, the decline in GNP was more severe than that in GDP.

Lower current account deficit of €1.2bn in 2nd Quarter

The Balance of Payments current account deficit in the 2nd quarter of 2009 was €1,204m and was down over €1.3bn on that for the previous quarter and €0.8bn on the 2nd quarter 2008 figure - see Table 1. Due largely to reduced imports, the highest merchandise surplus in the current series (€9,316m) was recorded in the latest quarter’s results. This was almost €3.5bn higher than the surplus of €5,855m in the 2nd quarter of 2008. While the services deficit at €2,128m was up over €1¼bn on the same quarter, net income outflows at €7,789m were up over €1.3bn. Higher profits of foreign-owned enterprises accounted for most of this increase .

Other points of note are:

Current account

Compared to 2nd quarter 2008, merchandise imports at €11,474m were almost €3.2bn down; exports at €20,790m were slightly up.

Services exports at €17,029m were down over €300m largely due to lower earnings from tourism, financial services, insurance and trade related services being partly offset by higher receipts from royalties/licences, operational leasing and miscellaneous services. Service imports increased by over €0.9bn to €19,156m due to higher royalty payments (€5,148m) and miscellaneous service imports (€5,205m).

Investment income earned abroad (€14,014m) was down €8bn compared to one year earlier. Payments to foreign investors at €21,803m were down over €6.6bn.

Lower receipts and payments of IFSC enterprises account for much of these reductions.

Financial account

Outward direct investment mostly, from IFSC sources, amounted to €5,738m. On the inward side, reinvested earnings (€4,770m) of foreign-owned enterprises in Ireland combined with other capital inflows (mostly inter-affiliate loans to IFSC enterprises) accounted for most of the €12,569m investment shown.

Portfolio investment assets at €16,435m reflect significant investment in foreign securities by IFSC enterprises. Additions to liabilities (€877m)were relatively small.

However, the question could equally be asked, is declaring victory premature on the basis of the performance of about 15 American companies in the pharma/medical  sector, while Irish political leaders are sending mixed signals on addressing the crisis in the public finances.

Devine said:

• Irish GDP was flat in Q2 on a q/q basis while GNP was down -0.5% q/q. The figures are still down on a y/y basis but the q/q figures give a better picture of momentum in the economy. The problem with the Irish figures is that they are insanely volatile and even in the good times of 2003-2007 there was always at least one negative q/q reading a year.
• The q/q increase was driven by consumption (+ 0.5% q/q) and investment (+5.7% q/q). Consumption was bolstered by retail sales picking up after they were battered in Q1. The pick up in retail sales was attributable to car sales improving on a seasonally adjusted basis from an awful start to the year.
• We do not receive a seasonally adjusted breakdown of the investment figures only a non-seasonally adjusted breakdown. Applying our own seasonal adjustment to the data it appears as if the large jump in investments was driven by a surge in investment in transport equipment (mainly planes) but also a modest increase in improvements (RMI) to houses. The q/q pick up in transport equipment also likely explains why imports (+1.0% q/q) grew at a greater rate than exports (+0.2% q/q).
• Last month we updated our GDP forecasts for 2009 (-7.6%) and 2010 (-2.0%) and expect others to now follow suit. The upgrade to forecasts reflects the cyclical improvement in the domestic and global economy - - there was always going to be an end to the cyclical downturn. Given the volatility in the Irish data we do not see a need to make further major adjustments to our figures as a result of today’s release.
• One thing which has made us more positive on Ireland over the last week or so has been the fact that both the Minister for Finance and the Taoiseach have stated, that with the exception of a carbon tax, there will be no other tax increases in Budget 2010. The fear had been that just as confidence filtered back into the Irish economy the consumer would be whacked by tax increases just prolonging the recovery. As such, our 2010 forecast is likely to increase further as we lower the drag from consumption and increase the fall in government spending as expenditure is likely to be cut more than had been outlined in the supplementary budget of April 2009.
• In short the cyclical recovery is underway and one structural threat to consumption (taxes) looks to have been removed all of which improve the outlook for the Irish economy. A number of other structural issues remain though- saturated commercial and residential property markets, unemployment, over indebtedness and a budget deficit. Ireland is climbing out of the depths but it is still some way to the summit.

Goodbody chief economist Dermot O'Leary commented:

Past the worst of the contraction - - Although the Irish economy is still contracting sharply on an annual basis, the Q2 National Accounts are not as bad as we would have feared. GDP fell by 7.4% yoy, but was flat on a quarter on quarter, seasonally-adjusted, basis. GNP, which excludes repatriated multi-national profits, fell by 11.6% yoy after a 0.5% qoq decline.

Too pessimistic on the consumer? -  - After falling by 10% yoy in Q1, consumer spending growth improved to -7% in Q2. The more timely retail sales data flagged that after a collapse in consumer spending in the final quarter of 2008 and first quarter of 2009, due to the heightened uncertainty about the economic outlook, spending actually increased in the second quarter on a seasonally-adjusted basis (which, we warn, can be highly volatile).

Investment will continue to be the major drag - - Investment spending did come in better than we would have thought at -24%, but this was solely due to an increase in investment in planes, which is notoriously difficult to forecast. Given that these are imported, there is no net addition to economic output in any case. Outside of this, investment fell by 34% yoy, with construction output falling by 31%, pretty much in line with the rate of decline seen in Q1. Given that we have more visibility on the likely path of construction output, we can be more certain that this component will continue to contract from GDP for a number of quarters.

Net exports still adding to growth - - Net exports continued to add to overall output in Q2. Total exports were down 3% yoy, following a 3% decline in Q1. Within this, merchandise exports declined by a relatively modest 4% yoy, with services exports only declining by 1% yoy. The rate of decline in imports did slow somewhat in Q2, mainly due to increased imports of aircraft. Overall, imports fell 7% yoy in Q2, compared to 11% yoy in Q1.

Scale of contraction may not be as bad as feared - - On balance, while the numbers still confirm that the economy has contracted by 10% and 14% in GDP and GNP terms, respectively, from the peak, it is highly likely that the worst of the contraction has already passed. This is not to say the recession has ended, as there will be obvious continued drags from further employment losses, cuts in government expenditure and further contraction in construction activity. It does say, however, that our forecast declines for 2009 (-8.6% GDP, -10.7% GNP) and 2010 (-4.5% GDP, -4.9% GNP) may now be looking too pessimistic.

Davy chief economist Rossa White commented:

GNP shrinks 0.5% in Q2, smallest decline since Q1 2008

• The Irish economy began to stabilise in the second quarter of the year. The best measure of Irish economic activity – GNP –  - slipped only 0.5% compared with the first three months of the year, its smallest drop for five quarters.
• GDP was actually unchanged compared with the first quarter. Its better relative performance (vis-à-vis GNP) was driven by the multinational export sector.

Exports and consumer spending return to growth

• Exports grew again, by 0.2% quarter-on-quarter (qoq). That followed five straight quarters of decline in volume, albeit totalling only 4.5%. Expansion in Irish exports in Q2 eclipsed the performance in the euro area, UK and US where exports continued to decline sequentially.
• Consumer spending also returned to growth, albeit after a shocking period of decline in the year to the end of Q1. Consumption rose 0.5%, having dropped 9.4% in the previous 12 months. Investment also increased, driven in part by a recovery in business investment. Yet it came from a low base: investment had plunged 29% in Q3 2008-Q1 2009.

Economy set to bottom in Q1 2010

• We still expect the economy to bottom in the first quarter of 2010. Consumer spending has probably found a floor, albeit that the value of spending may decline a touch further thanks to price discounting.
• But recovery in the global economy will mean that exports begin to expand at a faster pace.
• Although investment has already dropped back to 2002 levels, the decline in building will not end until 2011. Machinery and equipment investment is set for a bigger rebound, however, as funding becomes more attainable for creditworthy businesses.

Commenting on the data, IBEC Economist Reetta Suonperä said:“The pace of decline in the Irish economy was at its most rapid at the end of 2008 and in the first months of 2009. National Accounts, along with a number of other indicators, now show that the pace of deterioration is slowing substantially.

“The global economy is pulling out of recession. Ireland will feel the benefits of the international upturn with a lag of some months, but we should see the Irish economy pulling out of recession by the middle of next year.

“Though GDP continues to fall by 7.4% on an annual basis, there are some positives in the data. The multinational sector continues to perform well and as a result Irish exports are holding up relatively well in an international context. Consumer spending also seems to have stabilised, with a seasonally adjusted change of 0.5% over the first quarter."

Simon Barry, chief economist and Lynsey Clemenger economist at Ulster Bank commented:

The latest quarterly national accounts data released today by the CSO confirm that the Irish economy remains in very weak shape. However, the numbers do provide additional evidence that the situation is in the process of stabilising.

The Irish economy continues to experience a sharp contraction, with GNP and GDP down 7.4% and 11.6% respectively in the year to the second quarter…

Looking at where the economy was in the second quarter relative to where it was a year earlier, the broadest measures of growth continue to show sharp contraction. Real GNP fell by 11.6% y/y in Q2 while GDP was down 7.4%, as the gap between the two remained unusually wide, reflecting significant profit outflows of Irish-based multinationals. Not only is this the second most severe decline on record in Ireland (second only to Q1), but such a performance represents considerable underperformance compared to other advanced economies. US GDP contracted by 3.9% over the same period, while the corresponding estimates for the euro zone and UK stand at 4.7% and 5.5% respectively.

Ireland’s downturn has been twice as deep as the average seen in our main trading partners

In total in the current cycle, the level of economic output (measured by GDP) in Ireland has now fallen by 10.5% from its peak in Q1 ’07. For comparison, the total drop in US output has been 3.9% while that in the euro area is down 4.9% with the UK experiencing a 5.7% total decline. Thus, the recession which has hit the Irish economy has so far been more than twice as severe as the average experience of our main trading partners. Indeed, the drop in GNP terms (arguably a better measure of national income in Ireland as it strips out the profits earned here by multi-nationals) has been even more brutal. Activity on this measure is now down some 13.6% from peak.

Domestic demand still a major weak point, as housing investment contracts at a record pace

As has been clear for some time now, weakness in domestic demand lies at the heart of the overall weakness in the Irish economy at present. The enormous correction in home-building continues apace, with housing investment falling at a new record pace of 42% in the year to Q2. Consumer expenditure is another area of notable decline, with spending down 6.8% y/y. The latest numbers show that government cut backs are also weighing on the overall growth aggregates. Government spending has now also turned negative, with the estimated pull-back in expenditure at -0.9% in the year to the second quarter – the first such decline since quarterly records began in 1997.

But there are indications that the economy has entered a stabilisation phase…

As deep as the economic downturn has been over the past year, today’s numbers do, however, indicate that the pace of contraction is easing somewhat. This theme emerges in a couple of ways with the data released today by the CSO.

Firstly, as sharp as the annual decrease in activity was in the second quarter, the rates of decline are not quite as severe as they were in Q1. So the 7.4% y/y fall in GDP in Q2 wasn’t as bad as the 9.3% drop in Q1, while the 11.6% fall in GNP was less pronounced than the 13.1% plunge in the year to the first quarter. A similar pattern is evident across most categories of spending, including consumer spending and overall investment (which was boosted by a large increase in spending on new aircraft) both of which have seen some modest retreat from the horrendous outcomes posted in the first quarter.

The ongoing resilience of the export sector warrants special mention. At -3% y/y, total export growth was much better than expected in Q1 and the rate of decline eased further in the June quarter, to -2.5%. These numbers mask a wide range of experiences across the sector, with the multi-national dominated areas such as chemicals and pharma holding up, while firms in more traditional sectors such as food and drink continuing to struggle. Nonetheless, the aggregate picture is showing striking buoyancy in a relative sense. The 2.5% fall over the past year compares with declines of between 13% and 17% over the same period across the US, UK and euro zone. Ireland’s significant presence in less cyclically-sensitive sectors like chemicals and pharma, along with our comparatively small exposure to other sectors such as cars and capital goods which have been extremely weak globally, have contributed to Ireland’s outperformance.

…y/y growth rates have become less negative, while the level of GDP actually managed to avoid a decline in q/q terms in Q2

Second, the CSO also publishes national accounts data on a seasonally-adjusted basis. These numbers are notoriously volatile, so it is not wise to overplay the significance of a single quarter’s data. However, they do provide a basis for assessing the economy’s very recent performance, i.e. on a quarter-to-quarter basis rather than looking at the situation relative to a year earlier. Today’s numbers actually show that GDP was unchanged in Q2 relative to the Q1 level. Coming from a situation where the previous two quarterly readings had been -2.3% and -5.6%, this certainly represents a move in the right direction. In GNP terms, there was a 0.5 % decline recorded in Q2, but this was extremely modest by the standards of what had gone before, with the first quarter registering a staggering 5.6% fall, and the three quarters before that again all showing quarterly declines in excess of 2%. Tentative signs of recovery emerged in consumption, investment and exports, all of which posted quarterly gains in Q2, though a fall in government spending and a pick-up in imports (which detracts from growth) worked in the opposite direction.

Our overall take on the economy at present is that it is still weak, but stabilising; the outlook continues to become less negative

While the Irish economy remained in an extremely weak position in the second quarter of this year, today’s release has provided us with further conviction in our view that Q1 of this year represented the low-point for the economy. This is in line with the signals from other indicators, including the PMI and Live Register data. In y/y terms, we expect an ongoing moderation in the pace of decline in economic growth in coming quarters. Indeed, based on signs of resilience in the latest numbers it looks like the economy may return to positive y/y growth in the second half of next year, with the growing possibility of a positive q/q reading along the way.

Our latest set of forecasts included a modest upward revision to growth next year, to -2.8% on a GDP basis and -3.2% on GNP. The further signs of stabilisation in the Q2 national accounts data validate our revisions and suggest that we may well need to make further adjustments in this direction in the period ahead.