Irish GDP growth even stronger than expected in 2015 and suggests some upside risks for this year


Irish economic activity strengthens and spreads as growth hits 15 year peak

Ten things about Irish GDP that say how exceptional this upswing is;

1. Very strong Irish GDP data for the fourth quarter mean that for 2015 as a whole Irish GDP grew by a staggering 7.8%, the fastest pace since the year 2000 (+10.2%).

2. For 2015, Irish GDP growth was more than three times as fast as that recorded in either the US (+2.4%) or the UK (+2.2%) and nearly five times as fast as the Euro area (+1.6%).  Of course these numbers partly reflect the severity of the crisis that it follows but today’s data emphasise how far the Irish economy has come. The strength of the recovery in GDP means that in the final quarter of 2015, Irish GDP was 10.9% above its pre-crisis peak whereas for the Euro areas as a whole GDP has just reached its pre-crisis level in spite of a markedly smaller decline through the crisis.  

3. The strong momentum in activity continued through late 2015, with GDP growth of 2.5% quarter on quarter. This translated into a year on year increase of 9.2%, the strongest pace since the first quarter of 2001 and notably faster than the 6% rate seen in the final quarter of 2014. So, the economic upswing gathered speed through the course of last year.

4. While improved domestic spending was a notable feature of the Irish growth story for 2015, there was also an exceptional increase in exports of goods and services which grew by 13.8%, again the fastest increase since the year 2000 (+19.8%). Last year’s export growth reflects a range of supportive influences including notably increased export capacity, solid domestic demand in key trading partners such as the US and UK and improved competitiveness reflecting a weaker Euro exchange rate as well as significant adjustments in domestic costs. In this context, Irish consumer price data also released today show that over the 7 1/2 year period since the global crisis intensified in the summer of 2008, Irish consumer prices have fallen by about 1% while Euro area prices have risen a cumulative 7.5% and UK prices by 16%. 

5. Domestic demand also moved onto a notably stronger trajectory in 2015 with consumer spending growing 3.5%, the fastest rate since 2007 but with employment up around 2.5%, this still implies a relatively cautious Irish consumer. There is little sense in these numbers that pent-up demand caused by retrenchment through the downturn has materialised to any marked degree, presumably because pressure on many households’ finances continues.

6. Investment in construction was up a solid 9.4%, driven by a 15% rise in new dwellings. This still leaves new supply some distance below prospective demand but it is difficult to envisage construction growing notably faster without the risk of broader imbalances emerging. More generally, the upswing in domestic spending puts the recovery on a notably more balanced footing that should become more widely felt.

7. The scale of improvement in Irish macroeconomic conditions is partly a reflection of very favourable terms of trade developments. The money value of Irish GDP increased by 13.5% in 2015, implying a rise in economy wide prices as measured by the GDP deflator of around 5.3%. This owes much to a rise in export prices of 6.5% that likely reflects translation effects of dollar pricing rather than any worrisome trend in domestic costs. The 0.3% rise in the deflator for consumer spending and the 0.9% rise in the deflator for investment offer some comfort in this regard as does the scale of the rise in the volume of exports in 2015.

8.  The sharp rise in economic activity last year obviously strengthens Ireland’s public finances through its impact on tax revenues and cyclical elements of public spending. Today’s data also boost the size of the denominator in the ratios of the public deficit and debt to GDP. We now estimate the General Government balance at 1.5% of GDP in 2015 and Public debt at 94% of GDP at end year.      

9.  Although we were above consensus in our previous forecast for 2015 GDP (+7.2%), the strength of today’s numbers coupled with strong and broadly based momentum in the final quarter mean we feel we should increase our forecast for Irish GDP growth in 2016 (previously +4.5%). Even if GDP simply remained at its end 2015 level, a positive carry-over effect would imply growth of 3.3% this year. An increasingly uncertain global climate means we feel it prudent to err on the side of caution in respect of the likely 2016 outturn but even taking a conservative approach implies GDP growth of about 5% should be readily achieved this year.  

10. As ever, the details of the Irish national accounts are heavily influenced by the activities of the multinational sector. This implies these GDP numbers likely overstate the change in the economic well-being of the average person. The most closely used alternative of GNP showed a somewhat smaller increase of 5.7% in 2015. Recent complications in terms of the impact of contract manufacturing, company inversions, the measurement of intellectual property and the inclusion of Ireland’s large aircraft leasing sector muddy the waters even more, particularly terms of the elements of expenditure as many of these items have significant offsets when it comes to their impact on GDP or GNP. While we caution against over emphasis on the precise point estimates of Irish economic activity, we don’t think the broad trend of a substantial improvement in Irish economic conditions can be dispute.

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.