Irish Economy: Following a 5-week delay, the CSO on Thursday reported the Q1 2015 National Accounts data and there has been a fall in GNP (gross national product) and a rise in GDP (gross domestic product).
GDP data includes the tax-avoidance inflated profits of the foreign multinational sector and last year's estimate was revised up from 4.8% to 5.2% while GNP rose by 6.9%, revised up from 5.2%.
The levels of GDP and GNP are back to 2007 levels but on a per capita basis are still below this threshold.
Both GDP and GNP are distorted by tax avoidance — overseas contract manufacturing + Double Irish fake services exports — GNP is impacted by what are termed tax inversions where mainly American companies become Irish for tax purposes. The Balance of Payments data are also distorted.
There is a recovery but the headline data likely exaggerates the growth rise.
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The CSO said that the value added increased in the quarter for all business sectors other than agriculture. The distribution, transport, software and communications sector increased by 2.1% and the other services sector by 0.3%. There was an overall increase of 0.5% in industry, within which building and construction recorded a 3.2% increase in real terms. Public administration and defence recorded a quarterly decrease of 0.5%.
On the expenditure side of the accounts personal consumption, which accounts for approximately 60% of domestic demand, rose by 1.2% compared to the previous quarter, while government expenditure decreased by 0.4% over the same period. Capital formation decreased by 3.1% in the quarter.
Import growth during the quarter of 0.6% was outpaced by export growth of 2.3%. Overall net exports for the quarter increased by €991m, which when coupled with a small decline of 0.2% in total domestic demand resulted in an overall increase in real GDP in Q1 2015 of 1.4%.
The CSO said that the Balance of Payments current account, a measure of Ireland’s financial flows with the rest of the world, was €1,625m in surplus in the first quarter of 2015. The corresponding quarter of 2014 had a current account deficit of €613m. A goods (merchandise) surplus of €14,150m was partially offset by a services and income deficit of €12,526m in the quarter. This increase in the current account balance, largely driven by increased net goods exports, brings the surplus to 3.3% of gross domestic product.
Michael Noonan, finance minister, said: “Today’s figures are very positive. GDP grew by 1.4 per cent quarter-on-quarter and 6.5 per cent year-on-year. This follows growth of 5.2 per cent last year, the strongest in the EU.
Robust growth is being recorded across most sectors of the economy, both domestic-facing and exporting.
Exports were strong in the opening quarter, growing by 14.3 per cent year-on-year. The multinational sector is contributing but so too are Irish-owned firms. The competitiveness improvements we’ve seen in recent years are standing to us.
Domestic demand is also growing strongly, with consumer spending increasing by 3.8 per cent in the first quarter — the sacrifices made are now paying dividends.
We have laid the foundations for a solid recovery. The task now is to build upon the gains we have made in recent years. The Government will continue to work to support sustainable growth in order to improve living standards and reduce unemployment further.”
Dermot O'Leary, chief economist at Goodbody commented: "Although dated, today’s Q1 GDP is significant in a number of respects. At a minimum, it is likely to trigger further forecast upgrades for Ireland. See our note attached.
Another confirmation of economic momentum in Ireland
Today’s national accounts data for Ireland, while dated, are important in two respects. Firstly, the CSO has rewritten Ireland's recent economic history in a more favourable manner; upward revisions to historical data mean that Irish output (as measured by real GDP and GNP) actually rose above the pre-crisis peak in the third quarter of 2014. Secondly, the data confirms that Irish economic growth continues to exceed what is being seen in the rest of the euro area by a significant margin. Although the inclusion of the aircraft leasing industry has an impact on the data (gross imports and capital formation), it is largely a sideshow to the performance of the economy overall (as the two get netted off each other).
Ireland growing six times faster than the euro area aggregate
Starting with the performance in the first quarter of the year, GDP rose by 1.4% qoq on a seasonally adjusted basis, while GNP fell by 0.8%% qoq (due to an increase in net factor income flows). We prefer to assess these aggregates on an annual basis. In this regard, the performance in Q1 was pretty spectacular. GDP grew by 6.5% yoy, while GNP grew by 7.3% yoy. This compares to annual growth of 1% in the euro area in Q1.
Core domestic demand growing strongly
As we laid out in our preview note last week, it is important to look beyond the headline GDP/GNP data in an Irish context because of a variety of statistical issues. Our preference is domestic demand as a gauge of economic performance. In Q1, domestic demand grew by 4.2% yoy (7.5% yoy in Q4 2014). Excluding aircraft and R&D spending (which can be highly volatile), we estimate that core domestic demand grew by 4.9% yoy in Q1 (4.8% yoy in Q4 2014).
Upward revisions to forecasts now likely
An additional feature of the data release is that fact that the size of GDP has been revised upwards by €4bn (+2%), mainly due to upward revisions to consumption. This will help modestly in terms of the deficit and debt calculations as the denominator is now larger. Additionally, GDP grew by 12% yoy in Q1 in nominal terms, as the GDP deflator increased significantly. This will help in the deficit calculations in 2015 and beyond. The bottom line is that on first glance at the data, there will be upward revisions to our economic growth forecasts for Ireland."
Savills said that while today’s national accounts show that the Irish economy is powering ahead, they do show a significant slowdown in the rate of investment growth. Capital formation grew by 4% in Q1 – the first time investment growth has dropped to single digit levels since Q2 2013.
Commenting on the figures Dr. John McCartney, director of research at Savills said: “The slowdown in investment is not entirely surprising given the relatively sluggish 3.3% growth in construction output during the opening three months of the year. Indeed, this has been evident on the ground with very sluggish residential completions. However, while housing supply will remain a major issue we expect overall construction output to improve as the year goes on. The construction sector PMI has shown a significant pick between April – June and there is currently just under 130,000 sq m of new office development and refurbishment works ongoing.”