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News : Irish Economy Last Updated: Mar 22, 2013 - 9:07 AM


Irish Economy: GDP up 0.9% in 2012; US MNC tax moves raised computer services exports by 15%
By Finfacts Team
Mar 21, 2013 - 1:34 PM

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Irish Economy: Preliminary estimates indicate that GDP (gross domestic product) in volume terms increased by 0.9% for the year 2012, according to the CSO. This is the second year in succession in which GDP showed an increase over the previous year following three years of declines in GDP during 2008 to 2010. GNP (gross national product) showed an increase of 3.4% in 2012 over 2011 - - this data is distorted by foreign firm activity. Net exports rose and benefited from a 15% rise in 'Computer services' exports mainly reflecting the tax strategies of US multinationals (MNCs). A downward revision to a 0.4% contraction in Q3 and marginally negative GDP growth in Q4 mean that the economy is technically back in recession.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2012 showed almost no change compared with the previous quarter while GNP declined by 0.8% over the same period.

GNP, which is regarded as a better measure than GDP of the overall economic performance, has been distorted since 2012 by transactions involving foreign companies that have relocated their headquarters to Ireland. The overseas profits of such a firm that is headquartered in Ireland are included even if all of the shareholders are foreign. In relation to portfolio shareholders (ie holding less than 10% stake), GNP is then reduced when dividend payments are made to shareholders. So, GNP can be temporarily boosted if such a firm chooses to retain earnings rather than pass along earnings to shareholders through dividend payments.

Services exports in 2012 were valued at constant prices at €88.2bn up from €81bn in 2011 while merchandise exports fell from  €84.8bn to €82.4bn. Net exports were at €4.4bn.

'Computer services' are dominated by the big US high tech companies: Google, Microsoft, Oracle and Facebook. Apple's profitshifting and charges come under 'Business services.'

Finfacts estimates that at least a third of the value of Irish services exports reflect tax-related shifts of revenues from other countries and it may well be as high as 40%.

Distribution, Transport, Software and Communications sector the main contributor to growth in 2012

The value added of the Distribution, Transport, Software and Communications sector increased by 3.1% in volume terms in 2012 compared to 2011 while the Other Services sector registered an increase of 0.2% over the same period. Industry (including building and construction) also registered a small increase of 0.3% in real terms in 2012 compared to 2011. Agriculture, Forestry and Fisheries declined by 10% while Public administration and defence decreased by 4.2% over this period.

The calculation methods for quarterly accounts are similar to those used in the annual National Income and Expenditure. As some of the available sources are of lesser reliability than those used for the annual national accounts, the quarterly estimates are subject to a greater margin of error than the annual figures. These preliminary estimates will therefore be revised when the next detailed annual results are published.

Positive export growth according to headline data

On the Expenditure side of the accounts it can be seen that exports performed positively in 2012 for the third successive year while imports remained at much the same level as in 2011. The combined effect resulted in overall growth of €4.4bn in net exports. This growth more than offset the declines which took place in the final domestic demand components of expenditure (see note above).

Personal consumption in 2012, which accounts for approximately two thirds of domestic demand, fell by 0.9% while Government expenditure was 3.7% down on 2011. Capital formation increased by 1.2% over the same period.

No change in GDP (seasonally adjusted) in Quarter 4

Initial estimates for the fourth quarter of 2012 indicate that there was almost no change in GDP in real terms in Q4 2012 compared to the previous quarter. There was a decline of 0.8% in GNP in constant prices over this period. On the Output side  the Distribution, Transport. Software and Communications sector increased by 3.3% in Q4 compared to the previous quarter while Public administration and defence showed a 0.9% growth in Q4 over Q3.

Industry declined by 5.9% while Agriculture, Forestry and Fisheries decreased by 8.6% and Other Services were 0.4% lower in Q4 2012 compared with Q3 2012.

On the Expenditure side there were small declines in Government expenditure, in Capital Investment and in Net Exports compared with the third quarter while Personal Consumption Expenditure increased by 1% in Q4 compared to Q3.

Factor income outflows were 3.8% higher than in the previous quarter leading to an overall decline in GNP of 0.8% in Q4 2012 compared with Q3 2012.

 

Current account surplus of €2.9bn in 4th quarter

The 4th Quarter 2012 Balance of Payments current account surplus was €2,851m. The surplus for the year 2012 was €8,090m compared to a surplus of €1,785m for 2011. While the annual 2012 merchandise surplus decreased by €204m the total invisibles deficit decreased by €6,509m. Within the invisibles deficit the services balance for 2012 moved to a surplus of €2,961m from a deficit of €1,810m for 2011. Other points of note in Quarter 4 2012 are:

Current account: Merchandise exports (€20,846m) decreased by €208m while imports (€12,214m) increased by just €39m compared to the same quarter of 2011.

Services exports (€23,754m) were up €2,142m compared to one year earlier largely due to increased computer services exports. Service imports (€23,747m) increased by €1,696m due to increased royalties/licences and business services imports.

Investment income earned abroad (€13,965m) decreased by €195m compared to one year earlier. Investment income payable to foreign investors (€20,399m) decreased by €1,014m.

Financial account: Direct investment abroad showed an increase of €3,812m in the 4th quarter. Direct investment in Ireland showed a small disinvestment of €334m in the quarter due to a decrease in other capital of €5,310m offset by an increase in reinvested earnings of €4,562m.

Portfolio investment in foreign assets increased by €22,112m in the quarter.

Foreign portfolio investors invested €27,266m in the quarter due to increased investment in funds based in the IFSC.

Other investment assets decreased by €30,919m in the quarter while the corresponding liabilities decreased by €31,578m.

IBEC chief economist Fergal O'Brien said: "The Irish economy performed relatively well in 2012, despite external headwinds. GDP growth of 0.9% was the second highest in the Eurozone (see note above on tax strategies. Besides GDP also includes the profits of MNCs). It's particularly positive to see some rebalancing of the economy, with domestic demand making a contribution to growth in the second half of last year. 

"It was very much a year of two halves with exports performing strongly in the first half, but slowing somewhat as the eurozone crisis re-emerged after the summer. Both consumer spending and investment contributed to growth in the second half of the year, however, and this bodes well for the domestic economy. 

'Business investment grew by 5% in 2012 as many firms purchased new machinery and equipment for both replacement and additional capacity needs. While the construction sector remains weak, it was positive to see that it was no longer dragging on growth in the final quarter of the year. 

'Today's numbers reinforce our view that the domestic economy is regaining momentum. A pick-up in the eurozone economy and overall external demand in the second half of this year should result in 2013 GDP growth of 1.5% to 2.0%."

Conall Mac Coille, chief economist of Davy comments:

"Today's GDP data gave a mixed picture. Calendar year GDP growth of 0.9% in 2012 was stronger than our forecast. But a downwardly revised 0.4% contraction in Q3 and marginally negative GDP growth in Q4 mean that the economy is technically back in recession. The underlying picture is that the export sector is slowing sharply as the domestic economy continues to stabilise. Domestic demand rose by 0.5% in the year to Q4 2012, the first annual expansion since 2008.

Irish Q4 GDP data paint a mixed picture

Today's Irish GDP data gave a mixed picture. Calendar year GDP growth in 2012 was 0.9%. However, two consecutive quarters of negative growth in H2 2012 mean that the economy is technically back in recession. Annual GDP growth to Q4 2012 was zero, the slowest pace since Q1 2011. Nonetheless, the 0.9% GDP growth recorded in 2012 compares favourably with most euro area countries. Similarly, Ireland recorded an exceptionally large current account surplus of 4.9% of nominal GDP in 2012.

Consumer spending fell by 0.9% in 2012 with tax increases hitting households' income. Investment rose by 1.1% in 2012, the first positive year since 2007. Building and construction contracted by 6.6% and machinery and equipment spending rose by 9.6%, driven by the multinational sector. Export growth fell to 2% in the year to Q4 2012, down from 5.1% in 2011, hurt by the euro area recession. GDP growth is increasingly reliant on services exports, up 7.5% in the year to Q4 2012. In contrast, goods exports fell 3.8% in the year to Q4, commensurate with an enormous 7.4% decline in industrial output in Q4, offset by more robust growth in traded services.

Clearly, the pattern of growth within the Irish economy is changing. As exports have slowed, the positive contribution to growth from net trade has now almost completely disappeared. In contrast, domestic demand expanded by 0.5% in the year to Q4 2012, the first annual rise since 2008. Both employment and domestic demand have now expanded for two consecutive quarters through H2 2012.

But overall, Irish GDP growth has slowed sharply. The upward revisions to activity in H1 2012 and downward revisions to H2 mean that the annual growth of GDP was zero in Q4 2012, its weakest rate of expansion since 2011. Irish GDP contracted in three of the four quarters of 2012. Downward revisions indicate that GDP fell by 0.4% in Q3 2012 and a little below zero in Q4 2012. Technically, the economy is back in recession.

The balance of more robust domestic demand and the extent of the slowdown in exports will determine the outlook for Irish GDP growth in 2013. Overall, today's release is broadly neutral for our 1.3% forecast for GDP growth this year, albeit with growth in 2012 of 0.9% a little stronger than we had forecast."

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