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News : Irish Economy Last Updated: Sep 20, 2013 - 11:16 AM

Irish Economy 2013: Return to growth in Q2 with help of tax-related services exports
By Michael Hennigan, Finfacts founder and editor
Sep 19, 2013 - 1:54 PM

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Source: CSO
Irish Economy 2013: Preliminary estimates for the second quarter of 2013 indicate that GDP (gross domestic product) increased by 0.4% in volume terms on a seasonally adjusted basis compared with the first quarter of 2013. GNP (gross national product), on the other hand, declined by 0.4% in real terms over this period, according to the CSO today. However, on an annual basis, GDP fell by -1.2%, a similar outturn to Q1 (-1.0% yoy). The results have been impacted by rising tax-related computer services exports of companies such as Google and Microsoft. See here
: Irish Innovation: EU indicator rating based on fake computer services exports

In recent years the GNP data which mainly is net of the profits of foreign multinationals, has been impacted by foreign companies opening headquarters in Ireland with little if any operational activity. These firms are treated as Irish companies and their performance overseas has an impact on Irish data.

Ireland: GDP or GNP? Which is the better measure of economic performance?

Value added changes in business sectors: On the output side of the accounts Building and construction grew by 4.2% while distribution, transport, software and communication increased by 1.4% in volume terms between Q1 2013 and Q2 2013. On the other hand industry (including building and construction) declined by 0.3%, public administration decreased by 1% and Other services contracted by 0.1% in volume terms on a seasonally adjusted basis between Q1 2013 and Q2 of 2013.

Personal expenditure and net exports increase: On the expenditure side of the accounts personal expenditure increased by 0.7% while net exports rose by €1.52bn in volume terms on a seasonally adjusted basis between Q1 2013 and Q2 2013. Capital investment declined by 3.4% while net expenditure by Government fell by 1.3% between Q1 2013 and Q2 2013.

Comparisons with Q2 2012: On the output side of the accounts Industry (including building and construction) declined by 7.1% in Q2 2013 compared with Q2 2012. Public administration and defence decreased by 3.4% over this period while agriculture, forestry and fishing contracted by 1.6% in Q2 2013 compared with Q2 2012. On the other hand distribution, transport, software and communications grew by 5.3% in the Q2 2013 compared with Q2 2012 while the other services sector increased by 2.8% over this period.

On the expenditure side personal expenditure fell by 1.3% and Government expenditure declined by 1.7% compared with Q2 2012. Capital investment increased by 1% while net exports fell by €389m in Q2 2013 compared with Q2 2012.

Factor income outflows were €455m lower in Q2 2013 compared with Q2 2012 resulting in the 1.2% fall in GDP being converted to a 0.1% decrease in GNP over the same period.

The Balance of Payments current account surplus in the second quarter of 2013 was €2.90bn was the same as surplus in the second quarter of 2012. A surplus of €9.79bn on merchandise was offset by a deficit of €6.890bn on invisibles in the quarter.

Source: CSO
Other points of note are:

Current account: Compared with the second quarter of 2012, merchandise exports at €21.734bn were down €224m while merchandise imports at €11.95bn were almost unchanged.

Services exports at €24.07bn,  up €1.07bn mainly due to increased computer services exports. Service imports increased by €1.09bn to €22.56bn driven by increases in royalties/licences payments and imports of miscellaneous business services.

Investment income earned abroad of €13.99bn fell by €899m compared with one year earlier while investment income payable to foreign investors at €21.65bn dropped by €1.29bn.

Financial account: Direct investment in Ireland increased by €5.89bn in the second quarter of 2013, due largely to an increase in reinvested earnings of €4.51bn.

Within Portfolio investment, increased investment in overseas equity of €9.86bn was partly offset by increased investment in Irish equity of €5.20bn in the quarter.

Other investment assets fell by €16.49bn in the second quarter of 2013 mainly due to a decrease in loans, currency and deposits of €18,245m. Other investment liabilities fell by €16.52bn in the quarter.

Source: Goodbody

Dermot O'Leary of Goodbody commented: Underlying positives in Q2 numbers; "First sequential growth in four quarters After three consecutive quarterly declines, GDP returned to modest growth in Q2, helped by a welcome rebound in exports. On a seasonally-adjusted basis, GDP grew by 0.4% qoq, following a 0.6% qoq contraction in Q1. However, on an annual basis, GDP fell by -1.2%, a similar outturn to Q1 (-1.0% yoy). While the Government is likely to be reducing its GDP growth forecast ahead of Budget 2013, we are unlikely to be making any meaningful changes to our own 0.7% GDP growth forecast in 2013.

Stable domestic demand trends continue…Our preferred indicator continues to be domestic demand. While this can also have its drawbacks, it gives a truer picture of underlying domestic activity, in our view. In Q2, domestic demand declined by -1.1%, relative to -4.3% yoy in Q1. However, planes continued to have a large impact on this outturn. While investment in planes has no net impact on GDP, as the planes are imported, they do lead to significant volatility in domestic demand numbers. Excluding planes, domestic demand is estimated to have grown by 0.2%. As the chart shows, underlying domestic demand growth has been stable for four quarters.

…but investment continues to improve: On the domestic front, the most positive element of today’s numbers is the continuing improvement in core investment trends. In Q2, while total investment grew by 1% yoy, core investment (i.e. excluding planes) grew by 12% yoy, its fastest rate of growth since Q1 2006. Within this, construction activity increased by 10% yoy, while core machinery and equipment investment grew by 13% yoy.

These trends confirm our view that investment growth will be an important contributor to the return to growth in domestic demand over the coming years. Weak consumer in Q2, but Q3 is likely to be better Among the other components of domestic demand, consumption continued to contract on an annual basis, falling by 1.3% yoy (-1.1% yoy in Q1). Given the better retail sales numbers for July, Q3 may see an improvement in consumption overall. Unsurprisingly, government current spending continued to decline at a similar pace, falling by 1.7% yoy (-1.8% yoy).

Bounce back in services trade is welcomed: Given the weakness in Q1, the return of export growth in the second quarter is to be welcomed. While goods exports (-1.7% yoy) continue to be impacted by the “patent cliff”, services exports recovered in Q2 (+3.6% yoy versus +1.3% yoy in Q1), helping exports overall to grow by 1%. Given the improving trends in developed economies recently, we would anticipate a further improvement in this trend in H2."

Source: Goodbody

Conall Mac Coille, chief economist  at Davy, commented  --  "Today’s Irish GDP data show a welcome 0.4% rise in Q2 2013 following the 0.6% contraction in Q1 2013. GDP is still down 1.2% on the year. The rebound in Q2 was driven by consumer spending up 0.7% and exports up 4.5%. Investment spending fell by 3.4% in Q2 2013 following a 6.4% contraction in Q1. However, excluding the volatile aircraft leasing sector, investment spending is up by 11.8%, with building and construction rising by 11.3%. Although we will probably revise our forecasts for calendar year GDP growth in 2013 below 1%, we still believe that activity will rebound in H2. Hence, we are unlikely to substantially revise our forecast 2.1% GDP growth in 2014.
 Irish GDP rebounds in Q2 2013
 Irish GDP rose 0.4% quarter-on-quarter (qoq) in Q2 2013 after a 0.6% decline in Q1 2013. GDP is down 1.2% year-on-year (yoy). But the rebound in Q2 2013 is welcome, indicating that the economy has emerged from its ‘double-dip’ recession through H2 2012 and Q1 2013. We believe this rebound will continue into H2 2013 as volatile factors and statistical measurement issues artificially pushed down on the GDP data in H1.
 These factors include the pattern of car sales, helping to push up retail sales by 6% in July, and the erratic aircraft leasing sector which has depressed investment spending temporarily. In contrast, building and construction spending is now up 11.3% on the year, and machinery and equipment excluding planes by 11.8%. The underlying trends are clearly improving.
 Today’s data also showed that the worst is probably over for the export sector. Exports rebounded sharply in Q2, up 4.3% after a 3.5% contraction in Q1. Services export growth accelerated in Q2, and goods exports rebounded after an especially poor performance at the start of the year. The firming global economy will help demand for Irish exports going forward.
 So the recovery evident in Q2 2013 will probably continue into the second half of 2013. Hence, although we may revise down our forecast for calendar year GDP growth in 2013 – to reflect the weak H1 out-turn, we are unlikely to substantially revise our forecast for 2.1% GDP growth in 2014.
 Despite the weak H1 GDP performance, the exchequer returns to August suggest that Ireland will beat its 7.4% deficit target in 2014. However, this over-performance largely reflects surprisingly buoyant corporate taxes and conservative assumptions on non-tax revenues. The weakness of VAT receipts and excise duties urges caution, suggesting that the government has little room to deviate from its planned €3.1bn budgetary adjustment for next year."

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