Preliminary estimates for the year 2010 indicate annual declines of 1.0% in
Irish GDP (gross domestic product) and 2.1% in GNP (gross national product).
While 2010 is the third year of falling output the annual rate of decline in
both GDP and GNP has moderated compared with the 2008 and 2009 results. The
Central Statistics Office said that on a seasonally adjusted basis, constant
price GDP for the fourth quarter of 2010 fell by 1.6% compared with the previous
quarter while the corresponding quarterly change for GNP was an increase of
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.
The fourth quarter has seen a reversal because of foreign earnings by Irish
companies such as building materials giant CRH.
Industry the only growth sector in 2010
Industry (excluding Building and Construction) grew by 13.2% between 2009 and
2010. However, this growth was not sufficient to counterbalance the declines
that took place in the remaining sectors of the economy. Building and
Construction fell by 31.8%, similar to the decline experienced in 2009.
Activity in the Agriculture, Forestry and Fishing sector contracted by 6.4%
in 2010 while Public Administration and Defence and Other Services both
experienced volume declines of 2.7% between 2009 and 2010. Activity in
Distribution, Transport and Communications declined by 1.5% in the year.
Strong export growth but imports also rising
On the expenditure side of the accounts although exports performed strongly
in 2010, imports have also been increasing, particularly in the third and fourth
Overall, the growth in net exports of €5.7 billion at constant prices (24.5%)
did not provide a sufficient counter weight to the decline of €7.9 billion
(-5.6%) in the combined total of the components of domestic demand. Personal
consumption, which accounts for nearly two thirds of domestic demand, fell by
1.2% while Government expenditure was 2.2% down on 2009. Capital formation
registered the largest percentage decline (-27.8%) reflecting the weakness of
the construction sector. While stocks continued to decline in 2010 the extent of
the fall was not as pronounced as in 2009.
GNP result impacted by Foreign Earnings of Irish Resident PLCs
Net factor income outflows increased by some €1.1 billion between 2009 and
2010 transforming an annual GDP decline of 1.0% into a 2.1% decline in GNP.
These increased outflows over the year were the result of higher net profit
outflows and increased interest payments on Government debt.
However, the impact of inflows of profits earned abroad by Irish based Public
Limited Companies, highlighted last quarter, offset to some extent the negative
impact of these outflows.
Quarterly decline in GDP and increase in GNP in Q4 2010
Initial estimates for the fourth quarter of 2010 indicate a seasonally
adjusted decline of 1.6% in GDP at constant prices and an increase of 2.0% in
GNP compared with Q3 2010. On the output side Industry ( excluding Building and
Construction) increased by 2.5%. There were quarterly seasonally adjusted
declines in Building and Construction, Distribution, Transport and Communication
and Other Services.
On the Expenditure side the decline in net exports of multinational companies
compared with the third quarter resulted in a substantial decrease in profits
thereby reducing the overall net factor outflows and feeding in to the quarterly GNP increase of 2.0%.
Patrick Koucheravy, property economist at
commerical property agents, CB Richard Ellis,
commented: “Given that economic activity was restrained at the end of 2010 by
bad weather and given that confidence was certainly affected by the announcement
of the EU/IMF intervention and another tough budget, the Q4 2010 Quarterly
National Accounts results as they pertain to personal consumption component are
not surprising. With disposable income further squeezed in January as part of
the latest budget, we do not expect to see too strong a recovery in consumer
spending in 2011.
“We continue to see healthy activity on the part of commercial occupiers,
however, despite the weakness of the domestic economy and so we remain
optimistic about the medium-term. Recent announcements of entry into the Irish
market by Abercrombie & Fitch and Hollister as well as ambitious expansion plans
on the part of retailers like Centra are encouraging, as are recent office
lettings to ESB, Tullow Oil and the sale of Montevetro to Google.
“The continued rapid rate of decline in gross fixed capital formation is
due in part to the fact that, while the occupier markets continue to operate at
a healthy level of activity, commercial property development effectively reached
the end of the development cycle in 2010. This is born out elsewhere in today’s
release which shows a second annual 31% contraction in annual output from the
building and construction sector. Until such a time as vacant commercial stock
has been absorbed by occupiers and rental values begin to rise again, this
sector will not contribute positively to economic output figures.”
IBEC's chief economist Fergal O'Brien, said:
"While the overall economy remained weak last year, the performance of exports
was exceptionally strong. Exports of goods and services were up almost 10%, the
strongest growth in over a decade, while the net trade position strengthened by
a massive 24%. We know that Ireland has become more competitive as an exporting
country and the strong trading performance is set to continue in 2011. This will
result in economic growth returning.
"The non-export sectors clearly remain very fragile, but the full-year
declines in consumer spending and investment were largely in line with
expectations. The Irish consumer if set to remain very cautious in 2011, but the
construction sector will not have such a large negative impact on growth. The
pace of decline in construction activity is slowing and the sector now
constitutes a substantially smaller share of the total economy. Businesses are
also increasing their investment in machinery and equipment again and that
should help the macro situation this year."
Austin Hughes, chief economist of KBC
The broad picture emerging
from Irish growth data for the 4th quarter of 2010 is in line
with most assessments of the current health of the Irish economy. Activity
remains weak and is particularly weak in those areas focussed on domestic
demand. In their preliminary estimate for 2010, the CSO suggest GDP fell by
1%. Within this aggregate, domestic demand fell by 5.6% while Irish exports
grew by 9.4%. So, different parts of the economy are experiencing hugely
different fortunes. The expectation remains that a slower pace of
contraction in domestic spending through the coming year in combination with
sustained strength in exports will see GDP register a marginal increase –
probably in the region of 0.5% while GNP will register a marginal decline in
If the broad picture
emerging from today’s growth data appears reasonable, a number of important
technical issues imply a need to be very careful not to attach a spurious
precision to the numbers.
Among the more important considerations are:
Changes in the
relationship between GDP and GNP
Marked differences in the
performance of the externally focussed multinational sector and businesses
focussed on domestic sectors led to a substantial widening in the gap
between GDP and GNP in the past couple of years as net factor income
outflows increased. In the second half of 2010 changes in the domicile of a
number of companies have resulted in an increase in factor inflows that have
tended to reverse the widening trend. An apparent shift towards greater
payments for imports of services relative to profit outflows has also worked
in the. As a result, GDP was 0.7% lower in the final quarter of 2010
than a year earlier while GNP was 2.8% higher. Seasonally adjusted
changes between the third and fourth quarters revealed a similar divergence;
GDP declined by 1.6% while GNP grew by 2.0% over the three months.
On balance, it seems that the recent trend in GNP paints
an overly positive picture of underlying position trends the GDP data may be
slightly too negative.
Freeze’ in Q4 2010
UK data for the fourth
quarter revealed an unexpected 0.5% decline in GDP. The UK Office for
National Statistics (ONS) suggested this decline owed a considerable amount
to severe weather in December. According to the ONS, weather related
disruptions to activity could have subtracted 0.5% from UK GDP in the final
three months of 2010. Ireland’s CSO haven’t attempted any similar exercise
in the light of similarly severe weather in Ireland but we know that there
was an abnormally large decline in Irish related sales in December followed
by a strong rebound in January. Together with anecdotal evidence of
widespread disruptions to a range of economic activities during December,
it would not seem unreasonable to suggest that today’s Irish data were
adversely affected by a couple of bouts of unusually severe weather during
December. It is impossible to be certain how much weather effects
subtracted from GDP but, in view of the extreme volatility evident in retail
sales, much of the decline in GDP in the final three months of 2010 may be
due to severe weather. If this is the case, we should see some bounce back
in data for the first quarter of 2011. Of course,
there was also some ‘freezing’ of domestic sentiment and spending as a
result of the deterioration in financial conditions that led to the EU/IMF
deal in late November. So, it is not entirely surprising that there was
some pull-back in domestic spending in the fourth quarter.
issues in the measurement process
As usual the CSO presents
two breakdowns of GDP based on production and expenditure data. As is the
international norm, the results arising from the two measures are adjusted
to give one consistent figure for GDP. A summation of the individual
elements of the production side points to a fractional increase in GDP in
the final three months of the year compared to a year earlier (and
seasonally adjusted data also result in a positive quarterly change). In
marked contrast, a summation of the expenditure elements points to a decline
of just under 2.5% both in year-on-year terms and on a quarterly basis.
It is not unusual for differences to occur between production and
expenditure side measures but these are pretty large and, critically, in
terms of perceptions, there is a considerable difference between a marginal
increase in activity and a significant fall. As a result, it is important
not to over-interpret the message coming from these data beyond the general
conclusion that Irish economic activity remained fairly weak in late 2010.
Neil Gibson Economic advisor to the
Ernst & Young Economic Eye, comments on Ireland's Q4 GDP decline
Q3 Background - role of stock build up
Following contractions in 9 of the previous 10 quarters, the Irish economy,
against expectation, posted positive GDP growth of 0.6% in Q3 2010.
While there was some genuine good news in the Q3 data from continued strong
export performance, much of the turnaround in headline GDP was explained by a
sharp reversal in de-stocking of goods produced; in other words, servicing the
demand for goods with stocks which had already been in storage rather than
engaging in any new production.
The Irish economy had been de-stocking each quarter since the end of 2008 and
while this could not continue indefinitely, its impact on GDP in Q3 was
significant, contributing +1.8% to overall GDP growth, enough to make overall
Irish GDP growth positive. Thus Q4 GDP performance was always expected to be
sensitive to whether stocks of goods had been built up or built down.
Domestic Demand – ‘bottoming out’?
The Ernst & Young Economic Eye forecast predicted that - on the basis of a lower
level of stock build up and continued pressures on domestic demand - GDP would
decline again in Q4. Today’s CSO preliminary figures, confirm this prediction
with GDP falling by 1.6% on Q3, domestic demand contracting by 0.5% and stocks
reversing sharply from a net build up to large net run down. Although it is
noteworthy that the rate of decline in domestic demand eased significantly,
perhaps suggesting that a ‘bottoming out’ of domestic demand is imminent.
But of some concern, given how they have helped to prop up the economy, exports
fell by almost 1½% in Q4 following strong growth in the previous four quarters.
Adverse December weather may however be part of the explanation.
Growth in GNP, which is typically the preferred indicator for economic growth in
Ireland, has actually been positive in Q3 (1.5%) and Q4 (2.0%). But this has
been driven largely by a reduction in expatriated profits from multinational
exporters, which is hardly a sign of strength.
In summary, the headline GDP and GNP figures have been somewhat volatile in the
last two quarters and have presented conflicting messages. But focusing on the
underlying detail of the figures still gives little comfort and indicates that a
firm recovery is not yet in place.
|Source: Ulster Bank|
Lynsey Clemenger, economist at Ulster Bank,
Renewed weakness in GDP in Q4, as net
trade failed to provide the kicker evident in previous quarters…
Today’s fourth quarter national accounts data indicate that the road to recovery
for the Irish economy is set to be a bumpy one. Real GDP fell by 1.6% q/q in Q4,
taking its level to a fresh low for the current cycle. This leaves the fall in
GDP from the peak in the final quarter of 2007 at 14.6% - a substantial decline
in both an absolute sense and relative to our main trading partners. The signs
from Real GNP – the measure which adjusts GDP for net factor flows including
multi-national profit outflows – are better. It rose by 2.0% q/q, marking the
third consecutive quarterly expansion and taking the annual rate into positive
territory for the first time since Q1 2008 at 2.8%. Lower profit outflows from
multi-nationals played a role here, which ties in to some degree with the weaker
export performance in Q4.
Indeed, the breakdown of the headline numbers
reveals that the export sector remains a key determinant of the overall growth
performance of the Irish economy. Unfortunately, this was for the wrong reasons
in Q4. Total exports fell by 1.4% q/q, at odds with the signs from the monthly
trade figures for goods which had pointed to an increase on the quarter. There
are a couple of points to note here. Firstly, the fall in exports in Q4, as
disappointing as it was, follows three quarters of solid expansion. And while
there was some moderation in the annual rate of growth in both goods and
services exports in Q4, the y/y rate in each remains strong, at 9.3% and 11.9%
On the imports side, while the rate of growth
moderated, it did not do so by as much as we had been expecting. Following four
consecutive quarterly gains, the decline in Q4 was a modest 0.1%. While a
smaller than anticipated decline in imports is a positive in the sense of what
it implies about the willingness of Irish consumers to spend, for GDP purposes a
less steep than expected decline subtracts more from growth. And when better
than expected imports are combined with weaker exports, the contribution to
growth from net trade is lower still. Such dynamics resulted in a weaker GDP
reading than the modest rise we had been factoring in in Q4.
The quarterly decline in domestic demand moderated, but ongoing fiscal
retrenchment means any real improvement here is unlikely in 2011…
Making a change from previous quarters, signs from elsewhere in the report were
a bit better than expected. While consumer spending fell again, the rate of
decline moderated slightly to 0.4%. Given the unseasonably cold weather
conditions in December, there was a risk of a notable acceleration in the rate
of decline, so there is some (cold!) comfort to be taken from the fact that this
did not materialise. While there are generally large swings in the quarterly
rate of change in investment, here too the rate of decline moderated, to 2.3%
from 21.7% in Q3. Somewhat oddly given the fiscal retrenchment underway,
government spending rose by 0.3% from Q3, albeit that the CSO attributes the
modest gain here to seasonal adjustment problems.
In total, domestic demand fell by 0.5% q/q in Q4, compared with 4.2% drop in Q3.
So while this area remains very weak and down 5.7% in y/y terms, the rate of
decline here continues to look as though it is easing off relative to the huge
declines (of the order of 14%) seen during the height of the recession.
While the 1% GDP decline in 2010 was larger than expected, it is important
not to overlook the change in the growth trajectory underway…
For 2010 as a whole, the Irish economy contracted by 1%, larger than the 0.3%
decline we had been expecting. However, it is also important to look at the big
picture in that this follows a 7.6% collapse in 2009, with the sharp change in
trajectory indicating that relative stability returned to the economy last year
following the plunge at the height of the recession. GNP continues to
under-perform - in part reflecting profit outflows from a buoyant multi-national
sector - and is estimated to have fallen by 2.1% last year, but again this
represents a much slower pace of decline than the 10.7% fall in 2009.
There is no denying that exports didn’t end 2010
as well as we had been expecting. However, given the strength that went before,
exports still rose by an extremely strong 9.4% overall in 2010, outperforming
most advanced economies and the largest rise since 2000. Furthermore, harsh
weather conditions potentially played a role in the weaker Q4 export
performance, so there is a possibility that we may see some payback when the Q1
national accounts figures are released at the end of June.
|Source: Ulster Bank|
Going forward, while we continue to expect exports will provide a platform on
which the Irish recovery process can build, overall prospects for the economy
are importantly affected by the ongoing fiscal retrenchment. The requirement of
additional fiscal tightening this year and for the multi-year period to 2015 has
a major bearing on the outlook for domestic demand, which is set to fall for a
fourth consecutive year in 2011 reflecting further weakness in consumer,
business & construction and government spending. But despite the ongoing
declines in these areas, the anticipated strength of net trade is such that we
still expect overall economic growth will return to modest positive territory.