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News : Irish Economy Last Updated: Dec 17, 2010 - 5:32 AM


Irish Economy: Exports powered growth in both GDP and GNP in third quarter of 2010; Domestic demand fell
By Finfacts Team
Dec 16, 2010 - 10:51 AM

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Source: CSO

Irish Economy: Exports powered growth in both GDP (gross domestic product)  and GNP (gross national product) in the third quarter of 2010. Domestic demand fell

Initial estimates for the third quarter of 2010 indicate real growth rates of 0.5% for GDP (gross domestic product)  and 1.1% for GNP (gross national product) compared with the previous quarter. The fourth quarter of 2007 was the last quarter to register a seasonally adjusted quarterly increase for both measures. Compared with the third quarter of 2009, GDP at constant prices decreased by 0.5% while constant price GNP fell by 1.6%.

Since the onset of the recession, GNP growth has lagged GDP growth because the former is dependent on the domestic economy  in particular and excludes the profits of the multinational; sector (see separate section below)

Industry the main contributor to growth

The Central Statistics Office reported that seasonally adjusted, the Industry sector (including Building and Construction) grew by 1.4% at constant prices compared with the previous quarter despite the 8.2% decline experienced in Building and Construction. Agriculture was the only other sector which grew on a quarterly seasonally adjusted basis . Of the remaining sectors Distribution, Transport and Communication (-2.5%) and the Services sector (-1.6%) experienced the greatest quarterly declines.

Net export growth outweighs decline in domestic demand

The CSO said all components of domestic demand recorded seasonally adjusted quarterly declines at constant prices compared with the previous quarter.

Capital formation registered the largest decline (-18.1%) reflecting the continued weakness of construction sector activity and low imports of transport equipment.

Government expenditure fell by 1.7% while consumer spending declined by 0.5%. The external Trade flows both increased at constant prices in the quarter with Exports up 3.6% and Imports up 1.4%. The growth in net exports outweighed the fall in domestic demand leading to the recorded quarterly increase in GDP of 0.5%.

GDP and GNP

In most countries there is little difference between GDP and GNP (gross national product) but in Ireland the dominance of the multinational sector means that profits, in the GDP calculation, which are due to overseas residents, account for total GNP being smaller than GDP by about 20%. The contrasting growth rate of the of the two indicators of course can be greater or less than a 20% margin.

Eurostat, the EU's statistics agency said on Wednesday that while GDP per inhabitant is often used as an indicator of countries' level of welfare, it is not necessarily a suitable indicator for households' actual standard of living. For the latter purpose, a better indicator may be Actual Individual Consumption (AIC) per inhabitant.

Generally, GDP and AIC per inhabitant are highly correlated, because a country with a high level of welfare as measured by GDP will also have a high potential for consumption. However, in some cases, this correlation is not so obvious.

For example, while the GDP per inhabitant in the United Kingdom was 12% above the EU average in 2009, its AIC per inhabitant was 25% above the average, and thus the second highest in the EU. Conversely, Ireland's GDP per inhabitant was 27%t higher than the average in data published yesterday, while its AIC per inhabitant was only marginally above the average EU level.

Source: CSO

Current account surplus of €255m in 3rd Quarter

The CSO also reports that there was a surplus of €255m on the current account of the Balance of Payments in the third quarter of 2010. This compares with deficits of €1.14bn in the previous quarter and €653m in the same quarter last year. This was due to an  increase in the merchandise surplus which grew from €8.09bn in the third quarter of 2009 to €10.06bn in the third quarter of 2010. The invisibles deficit increased by over €1bn compared to the same period last year. Other points of note are:

Current account

Compared to the third quarter of 2009, merchandise exports at €21.59bn were up €3.2bn; imports at €11,530m were up over €1.2bn.

Services exports at €18.71bn were up €2.1bn on the same quarter last year largely due to increased computer services (+€965m) and business services (+€846m).

Service imports increased by €2.6bn to €20.28bn due to higher royalty payments (+€1.1bn) and miscellaneous business services imports (+€1.1bn).

Investment income earned abroad at €15.19bn was up almost €2.6bn compared to one year earlier. Payments to foreign investors at €22.74bn were up €2.9bn.

Financial account

Outward direct investment amounted to €2.35bn mainly from non-IFSC (Dublin's offshore finance centre) sources.

On the inward side, equity investment (€822m) and reinvested earnings (€6.13bn) of foreign-owned enterprises in Ireland were largely offset by other capital outflows of €5.91bn (mostly loans from IFSC enterprises to affiliates abroad).

Transactions in portfolio investment assets at €40.22bn reflect significant investment in foreign securities by IFSC enterprises. On the liabilities side transactions of €22.16bn included significant investment of €40.91bn in IFSC entities (mainly investment funds), partially offset by a disinvestment of €18.75bn in non-IFSC entities.

Other investment transactions of €27,171m on the liabilities side were almost entirely due to non-IFSC entities.

Source: Goodbody

Goodbody's chief economist, Dermot O'Leary commented :

While domestic demand remains exceptionally weak, exports are contributing strongly to Irish GDP. Today's GDP & GNP data confirm Ireland's two-speed economy. See attached note for more detail.

GDP & GNP grow in Q3 2010... - In Q3 2010, both GDP (0.5%) and GNP (1.1%) increased for the first time since Q4 2007. As with most Irish statistics though, the devil is in the detail. The Q3 National Accounts reconfirm the fact that there is a two-speed economy in Ireland at the present time. Domestic demand continues to contract while the export sectors contribute strongly to growth.

...but domestic demand remained weak... - Taking domestic demand first, all components - consumption, investment and government spending - saw a decline on both a quarterly (seasonally-adjusted) basis and an annual basis. Domestic demand fell by 8% yoy in Q3, relative to 6% yoy in Q2. The biggest falls continue to be seen in investment activity, which fell 31% yoy.

...and exports powering ahead - The export sectors continue to be the bright spot for the Irish economy. In Q3, export growth accelerated to 13% yoy (8% yoy in Q2), with similar rates of growth for both services and goods. Import growth also accelerated to 11% yoy (6% yoy in Q2), mainly due to services. On an annual basis, we estimate that net exports added 4% to GDP growth in Q3 2010.

Pressure remains on consumers -
Unsurprisingly, consumer spending remained under pressure in Q3; on a seasonally adjusted basis it fell by 0.5% qoq versus a 0.1% qoq fall in Q2. On a annual basis, consumption fell 1.3% (1.7% yoy in Q2) with the contraction in expenditure equally split between goods and services. Along with hits to disposable income from higher taxes and lower wages, persistent employment declines continue to have an impact on consumer spending.

Slight GDP decline in prospect - From a forecast perspective, the Q3 data are slightly disappointing, but marginally so. Where we had been expecting a slight increase in GDP 2010 as a whole, it may now come in at a slight negative. Restoration of growth in domestic demand depends on a return to confidence and a fully-functioning banking sector.

Export sector is proving that economy will recover - IBEC

Commenting on the latest Quarterly National Accounts IBEC chief economist Fergal O'Brien said: "The export sector has performed exceptionally strongly so far this year and the third quarter numbers provide further evidence of this. After the second quarter economic data we cautioned that Irish economic quarterly trends can be incredibly volatile. However, looking at the first three quarters of 2010 together, it is clear that Ireland's competitive position has been greatly strengthened and the 9% annual growth in exports is really encouraging.

"Crucially, the net trade position so far this year has been very strong and has made a substantial positive contribution to growth. Business remains confident about the outlook for exports in 2011 and with other sectors of the economy stabilising, we believe that the economy will grow by close to 2% in 2011.

"It was positive to see both GDP and GNP return to positive growth in the third quarter, although it is clear that domestic demand still remains fairly fragile. The third quarter contraction in personal consumption was largely consistent with the weakness in the retail sales numbers over this period, but the early indications for Q4 are somewhat more promising. Investment was weak again in Q3 but this was heavily influenced by the very volatile investment in airplanes.

"Overall, the picture is of a weak but stabilising domestic economy and a buoyant export sector. On balance, the numbers will give a positive message to the international markets on Ireland's ability to recover from the crisis,"
concluded O'Brien.

CSO figures confirm export-led growth strategy is the right one

So says State agency Forfás chief executive, Martin Shanahan. who claims Balance of Payments figures are further confirmation that an export-led growth strategy is the right strategy to drive recovery in the domestic economy - - more than 90% of these exports come from foreign-owned firms.

“The fact that goods and services exports have increased by 15.1% compared to the third quarter of 2009 and that overall good and services exports have now consistently recorded strong annual increases from 2009 indicates that an export focused approach to economic growth is the key driver to ensure Ireland’s economic recovery. This trade performance was the key to recording positive GDP and GNP growth in Q3 2010, the first positive economic growth recorded since the end of 2007, as increased industrial output and net export growth compensated for declines in domestic demand,” he commented.

“A continued increase in export growth will lead to sustainable direct job opportunities above those provided by serving the domestic market, growth in revenues for firms beyond what the domestic economy can provide and increased opportunities for locally trading businesses, creating additional employment and enhancing tax yields for government.

“Supporting this export growth is essential to Ireland’s recovery and return to prosperity. Improvements in cost competitiveness and productivity growth are key first steps and recent reductions in prices need to be sustained. Actions such as implementing the sector-specific measures to assist an increase in exports from key sectors such as business services, agri-food, ICT and tourism and transforming the Business Expansion Scheme are important first steps to further help export growth and improve Ireland’s attractiveness for investment.

“The enterprise agencies are working with SMEs to assist in developing exports in new and existing markets. In addition, we need to proactively develop Ireland’s trading relationships with new and emerging high-growth markets and put partnership agreements in place with such countries to facilitate trade, tourism and investment growth” Shanahan concluded.

Finfacts says exports increased by 50% in current money terms in the period 2000-2009 but employment in the sector was static.

Source: Ulster Bank

Ulster Bank chief economist, Simon Barry,  commented:

GDP and GNP both rise in Q3, as export strength more than compensates for weak domestic demand…Today’s third quarter national accounts data confirm that the Irish economy is beginning to emerge from recession. Real GDP expanded by 0.5% q/q in Q3 taking its level to 1.7% higher than the low point which was the final quarter of 2009. Real GNP – the measure which adjusts GDP for net factor flows including multi-national profit outlflows – was also up on the quarter. It rose by 1.1% q/q, marking a second consecutive quarterly expansion following a small increase of 0.1% in Q2; the cycle low on the GNP measure was the first quarter of this year.

The breakdown of the headline numbers reveals that the return to positive economic growth is being driven by a robust performance of the export sector. Total exports grew by 3.6% q/q, building on the strong gains recorded earlier in the year. Exports have now expanded solidly for each of the three quarters of this year such that the annual rate of increase has surged to 13.2%, a dramatic turnaround from the 3.7% annual decline posted in the same period last year. This is the strongest pace of export growth since early 2001, a performance made possible by the combination of gradual recovery in Ireland’s main trading partners and ongoing improvements in competitiveness. Both the goods and services sectors are contributing to the strength, with the annual rate of growth in each now in double-digits, at 12.9% and 13.6% respectively.

Another bright spot within the report was the pick-up in the output of the Agriculture, Forestry and Fishing sector. While small in the context of the overall economy (at just over 2% of GDP), output here is over 12% higher than year ago levels, validating anecdotal reports of buoyancy in this area of the economy.

Elsewhere in the report, consumer spending fell again, with a 0.5% quarterly drop marking the biggest quarterly fall since early 2009. Government spending and investment also recorded further declines; in total, domestic demand fell by 1.7% q/q and is down 5.1% on year ago levels. About the best that can be said about domestic demand is that the rate of decline does look to be easing off relative to the huge declines seen during the height of the recession; the weakest quarter for domestic demand in y/y terms was the 16.4% plunge in the year to Q1 2009.

The strength of the traded sectors of the economy is both extremely welcome and encouraging as it provides a platform on which the recovery process can build. However, today’s data contain no evidence that the recovery is yet finding its way into domestic demand. This means that while aggregates such as GDP and GNP are now beginning to edge higher, the early stages of this recovery have no feel-good factor.

Brian Devine, economist at NCB Stockbrokers commented:

Irish GNP expanded by 1.1% q/q in Q3 after an upwardly revised +0.1% q/q in Q2 (previously -0.3% q/q). GDP expanded by 0.5% q/q after -1.0% in Q2.

  • Net exports were the main driver of the performance of both GNP and GDP with exports up 3.6% q/q and imports increasing by just 1.4% q/q.

  • Domestic demand continued to remain weak with consumption down -0.5% q/q, government expenditure down -1.7% q/q and investment -18.1% q/q.

  • Domestic demand is likely to remain weak in Q4 on the back of the drop in confidence as a result of the bailout and budget uncertainty, but the evidence from the PMIs suggest that exports continue to perform robustly. With weak domestic demand and decent exports this suggests that there will be a further positive contribution from net exports in Q4.

  • Ireland’s ability to cut wages may be leading to pain in the domestic part of the economy, but it is the best option for a small open economy like Ireland. It is this flexibility which is helping Ireland regain competitiveness. Job creation, however, is likely to remain muted with domestic demand remaining so weak. The positive feedback loop between domestic demand and employment is unlikely to be meaningful until 2012, but in the meantime Ireland must rely on exports to drive the economy and employment.

  • The Government’s growth forecast for next year is GNP +1.0% and GDP +1.7%. We believe that those targets are achievable and well within the bounds of a plausible outcome. The government expect the domestic part of the economy to remain desperately weak and contract next year. As such, they expect employment to contract in 2011. The main driver of growth is the gap between exports and imports. NCB expect domestic demand to contract by more than the Government next year but we are also expecting a positive contribution from net exports, as such we see GNP at 0.3% and GDP at 1.0% in 2011.

Davy Research economist Conall MacCoille commented: 

Irish national accounts and balance of payments for Q3; GDP +0.5% and GNP +1.1%

  • The national accounts for Q3 issued today indicate that GDP and GNP grew by 0.5% and 1.1% respectively on the quarter in Q3. However, despite growth of 0.5% in Q3, the level of Irish GDP was 0.5% below that in Q1, following the -1.0% growth rate for GDP in Q2 over Q1.

Export growth improving while domestic demand continues to contract

  • Perhaps more striking than the overall GDP and GNP numbers is the composition of growth, indicating that export growth is improving while domestic demand continues to contract

  • Only agriculture and industry expanded in Q3 (by 5.3% and 1.4% respectively) with all other sectors continuing to contract. The expansion in industrial output came despite an 8.2% decline in the building and construction sector.

  • Within the expenditure components, consumer spending, government spending and investment all continued to decline: by 0.5%, 1.7% and 18.1% respectively on the quarter.

  • In contrast, exports of goods and services grew by 3.6% and imports by 1.4%.

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