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News : Irish Last Updated: Jul 1, 2010 - 7:45:44 AM

Irish Economy: No exit from recession in Q1 2010 as GNP fell in quarter while GDP rose 2.7%; Current account deficit was €1.62bn
By Finfacts Team
Jun 30, 2010 - 11:24:07 AM

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Source: CSO

Irish Economy: No exit from recession in Q1 2010 as GNP fell in quarter while GDP rose 2.7%. Initial estimates for the first quarter of 2010 show an increase, on a seasonally adjusted basis, of 2.7 per cent in GDP and a decline of 0.5 per cent in GNP compared with the previous quarter. In comparison with the corresponding quarter of 2009, GDP at constant prices was 0.7 per cent lower while GNP was 4.2 per cent lower.

GNP (gross national product) which is about 18% below GDP in an economy that is more dominated by multinationals than any other, is a better measure of economic output than GDP and Finfacts accordingly says the economy we were still in recession in Q1 2010. The estimate of GNP is derived by adjusting GDP for income flows between residents and non-residents. The CSO says the timing of these flows can be variable. They include, in particular, the profits of foreign owned enterprises which increased by €2.01bn between Q1 2009 and Q1 2010. As a result, the decline in GNP was more severe than that in GDP (gross domestic product).

The Central Statistics Office reported that some of the main features of the results in comparison with Q1 09 are: Consumer spending (personal consumption of goods and services) in volume terms was 0.8 per cent lower in Q1 2010 compared with the same period of the previous year. Capital investment, in constant prices, declined by 30 per cent in Q1 2010 compared with Q1 2009.

Net Exports (exports minus imports) in constant prices were €2.61bn higher in Q1 2010 compared with Q1 2009. The volume of output of Industry (incl. Construction) increased by 7.7 per cent in Q1 2010 compared with Q1 2009. Within this the output of the Construction sector fell by 35.0 per cent over the same period.

Output of Distribution, Transport and Communications was down 1.4 per cent, while Output of Other Services was 3.3 per cent lower in the first quarter of 2010 compared with the same period of last year.

First Quarter current account deficit of 1.6bn

The CSO said the Balance of Payments current account deficit for the 1st Quarter 2010 was €1.62bn, over €1.1bn lower than that of €2.74bn for the same period in 2009. The first quarter merchandise surplus of €9.38bn was almost €1.3bn higher year on year, due to lower imports. The decrease of €800m in the services deficit (€2.06bn) was more than offset by the €1bn increase in the income deficit resulting in the invisibles deficit increase of €171m to €11,004m .

Total service exports at €16.630bn increased by €1.1bn largely due to computer services, up €555m, business services, up €300m, and insurance services, up €200m. With increases for royalties/licences (€220m) and insurance services (€106m) and decreases for tourism and travel (€73m), total service imports at €18.67bn were up almost €280m.

The higher income deficit is a result of increased direct and other investment income outflows. Profits and interest earnings of Irish-owned businesses abroad increased to €2.48m while profit outflows of foreign-owned enterprises increased to €10,527m .

In the financial account, direct investment abroad showed acquisitions of €5bn with inward investment of almost €4.3bn. Irish residents acquired €3bn of foreign portfolio assets while additions to liabilities were €24.7bn.

Source: CSO

Davy chief economist, Rossa White, says Ireland is a two-speed economy:

GDP back to growth, powered by exports, but GNP down

  • Real GDP increased by 2.7% quarter-on-quarter (qoq) in Q1. That was the first quarter of expansion since Q4 2007. It was led by a 6.9% surge in exports.

  • But GNP (or national income) disappointed, slipping by 0.5% compared with Q4 2009. That was the eighth straight quarter of decline, although there was some consolation in the fact that it was the smallest drop in that period. That trend continues to reflect contraction in the domestic-influenced economy.

  • Consumer spending was down slightly (-0.2%), albeit that "core" retail sales rose in the quarter. This seems to suggest that spending on services was down as car sales also rose sequentially. That looks bizarre to us.

  • Government spending (-0.9%) and investment (-13.8%) both declined qoq as expected. Imports rose the most since Q3 2007, in line with better exports.

Foreign-owned part of the economy has recovered while the rest of the economy lags behind

  • Both the sectoral split of the economy and the nominal data illuminate underlying trends in the economy. In Q1, nominal GDP jumped 2.9% but nominal GNP fell 3.2%. The cash value of GNP has been declining for three years and is now 25% below peak. It highlights the (necessary) deflation across domestic-focused parts of the economy.

  • The improvement is concentrated in export sectors, also benefitting from a weaker euro. Agriculture (generally firmer milk prices); industry (improving external demand); and distribution/transport/communication (global demand) all exited recession. The rest of the private service sector was exactly flat: the internationally traded part grew while domestic-focused activity may have declined. Construction and the public sector continued to shrink.

GDP set to rise for full year, but GNP will fall

  • These numbers suggest that our forecast for real GDP growth of 1% (the highest in the market) is on track. GNP is still set for a slight full-year volume decline (we expect -0.6%), but nominal GNP will fall by more.

The Minister for Finance, Brian Lenihan, commented:“These economic figures show that Ireland is out of recession with GDP expanding by 2.7% between the final quarter of last year and the first quarter of this year, which is the fastest growth rate in the OECD. This provides concrete evidence that the coordinated measures taken by Government to address competitiveness, the public finances, and the banking system are paying off with improved confidence and clear evidence of a return to economic growth. Economic growth is an essential driver of jobs growth.

“In the December budget, my Department projected a GDP decline of 1¼ per cent. Today’s figures suggest the prospects for growth this year are somewhat better than previously assumed. Today’s figures also show that exports are performing strongly, while consumer spending has stabilised. This, coupled with the figures for consumer confidence since April, bode well for the remainder of the year.”

The Minister said that although there continues to be additions to the Live Register, we know that employment growth inevitably follows with some time lag growth in economic activity. “Of course, unemployment is unacceptably high. But the best way to create and protect jobs is to return to economic growth. Every measure the government has taken over the last two years is aimed at getting those who have lost their jobs back to work. The Government has introduced targeted measures to assist job creation in different sectors of the economy. Continued economic growth is the best way to grow employment. Today’s figures show that the policies we have been pursuing are the right ones and that we must continue with our plan.”

Commenting on the data, IBEC economist Reetta Suonperä said: “In the first quarter of the year, GDP expanded by a solid 2.7% relative to the final quarter of 2009, but, disappointingly, GNP slipped back by a further 0.5%.  The trading sector benefitted from the international recovery and export growth in the first quarter at 6.9% was very strong. While net exports made a positive contribution in 2009, it was mainly because of falling imports. The solid start to the year is therefore very welcome and bodes well for a sustained export-led recovery.

“Technically, with positive quarterly GDP growth, Ireland exited recession in the first quarter of the year, but the domestic economy continues to lag the traded sectors. The quarterly decline in consumer spending at 0.2% was only marginal, but investment, construction in particular, continues to be a significant drag on output.

“The weakness in the domestic sector was further highlighted by the disappointing increase of 5800 in the June Live Register figures. Men accounted for over 80% of the increase, indicating that job losses in the male-dominated construction sector continue.

“The weakness in the domestic sectors further highlights the need for well-targeted public capital investment in projects that represent good value for money, thereby boosting Ireland’s long-term growth potential and providing temporary stimulus for jobs and activity the domestic economy."

Ulster Bank chief economist, Simon Barry, comments:

End of recession heralded by multi-national driven bounce in Q1 GDP…

"The much anticipated release of first quarter national accounts (QNA) data confirmed what had been increasingly evident from other indicators in recent months; namely that the output of the Irish economy has returned to positive growth, in other words that recession has ended.

Today’s numbers showed a 2.7% jump in real GDP in the first three months of this year compared with the final quarter of last year. This brings to an end a run of eight consecutive quarters of economic contraction, as the Q1 expansion was the first since Q4 2007

Previously released monthly data on industrial production and exports had been signalling that the internationally traded sectors of the economy had enjoyed a solid opening few months of the year and this came through very clearly in the GDP numbers. Total exports jumped by 6.9% q/q in Q1 – the strongest quarter in three years.

The CSO doesn’t release estimates of quarterly changes in goods/services exports but it does present estimates of the annual changes. These highlight the increasingly important role of the service sector as a driver of export performance. While growth in the volume of goods exports has returned to positive territory in Q1 (2.4%y/y), the acceleration in services has been considerably more pronounced, with annual growth reaching 9.5% in the March quarter. Services now account for 46% of total exports, up from 40% five years ago.

The CSO notes that much, though not all, of the export strength was related to the particular buoyancy of multinational driven sectors such as pharma and software.  Such buoyancy does have a counterpart, which is very strong profits on such activity.  And higher profit outflows contributed to a record level of (negative) net factor income from abroad.  his reached €7.9bn in Q1, up from €7.1 in Q4, the result of which is an increasingly large wedge between GDP and GNP.  In fact, the extent of the gap in Q1 was such that there was a quarterly decline (of 0.5%) in GNP. 
This was something of a disappointment given the strength in the GDP measure and highlights ongoing weakness in domestically-focused areas of the economy.  Investment was again a major weak spot, with capital formation down almost 14% on the quarter, and 30% over the past year, with a 50% annual plunge in housing the major drag.  Government spending was down for the fifth quarter in a row, though the 0.9% quarterly drop was the smallest over this period. 
Meanwhile, total consumer spending also fell, by a modest 0.2%, though we wouldn’t have been surprised to have seen a weaker number here given that total retail sales fell by over 6% in Q1.  The relatively small decline in total spending implies that spending on services must have been pretty robust in the early months of the year, perhaps linked to higher consumption of energy over the cold snap at the beginning of the year.
The diverging signals between the competing measures of GNP and GDP leaves something for bulls and bears alike.  The ongoing, if diminishing, weakness of GNP serves to act as something of a restraint on the considerably more upbeat messages from the GDP data.  But it would be wrong in our view to dismiss the GDP measure.  Multinationals are an important component of the Irish economy, even if their relative contribution to exports and output is greater than their contribution to employment.  And GDP does arguably provide a better measure of the tax base, as multinationals do pay tax on their profits. 
While GNP fell by 0.5% q/q, the bottom line is the economy has assumed a more favourable trajectory
It is worth noting that today’s data are subject to a considerable lag given that their coverage doesn’t extend beyond the first quarter.  However, we do have a number of other indicators which are released on a more timely basis and which give us a more up-to-date snapshot.  One of our favoured summary indicators is the composite PMI which combines the information from the PMI surveys on services, manufacturing and construction into one pan-economy indicator.

Its well-established upward trend has been clearly signalling the nascent recovery in Irish activity given its strong correlation to y/y GDP growth.  Moreover, the April and May results indicate further underlying improvement in the period since Q1.  In addition, consumer confidence continues to recover and April retail sales data point to the likelihood of an increase in Q2 consumer spending, while April export numbers are also running higher than the Q1 average.  Labour market developments are still very weak of course, with today’s increase in the Live Register estimate of the unemployment rate to a new cycle high of 13.4% acting as a reminder of the inevitable lag between rising activity and an improving jobs picture.

The bottom line is that, leaving aside the GDP/GNP debate, the Irish economy has assumed a more favourable trajectory in recent months. The freefall in activity is over and Irish output and confidence is benefitting from the turnaround in the global economic environment over the past year. That turnaround isn’t without risks of course, and it will be critically important from an Irish perspective that a global double-dip is avoided if the domestic economy is to continue along the recovery path."

Finfacts: It should be noted that employment in the multinational sector is back to 1998 levels and a 26% rise in pharma/medical device exports in the five years to 2009, coincided with hardly any change in the employment of about 40,000 in the sector.

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