Irish economic growth healthy but no longer hot


GDP growth slows to 3% in Q4 but still reaches 6.7% for 2018 as a whole

Multinational activities still cloud picture but we estimate underlying growth at 4-4.5% in 2018

Growth of 3.5% in prospect for 2019 on ‘soft but not smooth’ Brexit

Consumer spending grows at slightly slower pace in late ‘2018

Construction shows unexpected pull-back as year ends

Export, import and investment data emphasise Ireland’s role as global hub for multinationals 

Irish GDP growth eased further to a solid but not spectacular pace of 3.0% in the final quarter of last year. As a result, for 2018 as a whole GDP growth came to 6.7%, an outturn that is reasonably similar to a 7.2% Increase in 2017.

We continue to envisage GDP growth of around 3.5% in 2019 on our working assumption of a ‘soft but not smooth’ Brexit. The latter would entail a short delay to the scheduled withdrawal date, a transition period to the end of 2020 and ongoing uncertainty through this time-frame as to the eventual relationship between UK and the EU. Such conditions would weigh on export growth and could also prompt greater caution thereby dampening growth in consumer spending and investment. In brief, our Brexit scenario constitutes a slow puncture rather than a blow-out to the Irish economy in the coming year.

The broad picture emerging from today’s data for the 4th quarter is of an economy that is seeing an ongoing if marginally slower improvement in domestic spending and a multinational sector that is growing in a manner that makes headline Irish growth data increasingly difficult to relate to the conditions facing most businesses and households. 

  • Consumer spending increased by 0.5% Q/q in the final three months of 2018 and was modestly boosted by a fractional decline in prices. However, this growth rate was clearly lower than that of the previous quarter (+0.9%) . As a result, household spending was 2.6% higher than at the end of 2017. As consumer spending for 2018 as a whole rose by 3.0%, this suggests a slight easing in the pace of increase in consumer spending of late that is consistent with slower jobs growth and notably weaker consumer sentiment in the latter stages of the year.
  • Public spending on current goods and services increased a modest 0.4% in the final quarter but strong (over?) spending growth earlier in 2018 meant that for the year as a whole this measure which excludes public capital spending increased a larger than expected 6.4%. This suggests day to day public spending is now rising a good deal faster than the underlying growth rate of the Irish economy (see below) in volume terms. As the divergence in money terms is even greater given the relatively fast increase in public sector inflation, this should prompt serious debate about the sustainability of the current fiscal path.
  • Investment increased 10.1% q/q in the final three months of 2018 but this is largely a reflection of an outsized increase in intellectual property (IP) assets moved to Ireland from abroad.  Associated imports jumped from €3.7bn in Q3 to €10.9bn in Q4 2018.
  • Surprisingly, construction related investment fell 2.2% between the third and fourth quarters of 2018. While the CSO doesn’t seasonally adjust  the elements within this total, we estimate new construction rose modestly (+2.1%) while spending on improvements dropped an exceptional 11.7% q/q. The slowing in construction may reflect some seasonal influence but we think some combination of capacity constraints and uncertainty related curbs on demand may also have played a part.       
  • Irish export growth increased a robust 5.3% q/q in the final quarter which meant that for the year as a whole exports were 8.9% higher than in 2017. In circumstances, where global demand conditions weakened and Brexit issues posed a particular threat this represent a very strong outturn. However, it is almost impossible to properly disentangle in these numbers the performance of smaller exporters from the large multinationals whose output is more closely related to firm specific developments than the broader sweep of ‘macro’ developments. Regardless of this caveat, the sustained strength of aggregate exports points to the continuing health of Ireland as platform in global supply chains. Some sense of the scale of this sector’s impact on these data is hinted at in the difference between the headlines Balance of Payments surplus of just under €30bn in 2018 and the CSO’s estimate that this would shrink to under €10bn if the ‘globalisation’ driven activities are excluded.     
  • Consistent with such developments, a 9.0% q/q rise in imports in the final three months of 2018 is also first and foremost a reflection of Ireland’s role as a global hub for activities of multinationals. The most notable element was the sharp rise in IP imports mentioned above but there was also a significant increase in imports of aircraft related to leasing.
  • A final if less significant development was a smaller drop in stock-building than in the previous quarter that marginally boosted domestic spending. Unusually, this comprised a very large fall in the value of stocks (-€779mn) and an altogether smaller drop in (-€48mn) in the volume of stocks. In circumstances where some Brexit-related build-up of stocks might have been expected, this hints at an uncertainty related scaling back in activity. More significantly, the dramatic difference between the value and volume figures might be more consistent with a firm specific development such as a product becoming ‘generic’ rather than broader ‘macro’ changes.

Reflecting longstanding complications stemming from the operation of globally scaled companies in a small economy, headline GDP data don’t  provide an adequate summary measure of  developments across the Irish economy as a whole (although the information content of elements such as household and public spending as well as construction is critically important).

As alternative measures such as GNI* are  not (as yet) produced on a quarterly basis and their annual estimates don’t distinguish between changes in prices and ‘real’ activity, more attention has been focussed on measures such as modified domestic demand. However, this does not take account of non-globalised’ exports and imports, it may not give an adequate picture of  economy-wide developments, particularly in circumstances such as Brexit where the trade channel is so crucial to economic outcomes.

In the absence of entirely satisfactory spending or output measures, we continue to rely on labour market data as our primary barometer of Irish economic conditions. We combine movements employment (on a full-time equivalent basis) with an estimate of historic productivity trends (derived by deflating annual GNI* by the broader GNI deflator) to arrive at an estimate of underlying economy-wide activity growth. Our estimates shown in the diagram below suggest the underlying pace of growth slowed to just under 4% in the final quarter of 2018 and averaged about 4-4.5% for 2018 as a whole.

This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.