Q2 data suggest Irish economy still on strong growth path
13 September 2019
- Irish GDP growth in first half of 2019 an impressive 6.6%
- Q2 details show growth is broadly balanced
- Household and business spending surprisingly resilient given Brexit fears
- Large Intellectual Property transactions by Multinationals distort headline import and investment numbers but don’t affect GDP
- Even allowing for Brexit effects, we continue to expect GDP growth of around 5% in 2019
While fears about the risks posed by Brexit understandably dominate economic commentary, new data suggest that the economy has significant capacity to withstand such difficulties. GDP data for the second quarter suggest the Irish economy reached the mid-point of 2019 with strong positive momentum as suggested by a 6.6% growth rate for the first half of the year.
Equally encouraging was the breakdown of the figures that showed growth was broadly based with healthy increases in consumer spending, construction and capital spending by businesses of late as well as a continuing influx of multinational investments.
While Brexit concerns are likely to materially slow the pace of growth as the year progresses, these data highlight the positive nature of the underlying trend in activity. Even allowing for a materially softer trajectory in the second half of the year, we continue to expect the Irish economy to post robust GDP growth of about 5% for 2019 as a whole.
Irish GDP increased by 0.7% quarter on quarter in the second three months of 2019. While this headline figure was markedly slower than the upwardly revised quarterly increase of 2.7% for the previous three months, the difference is more than accounted for by a partial reversal of a big build up in Stocks in the early months of the year (possibly influenced at the margin by stock-building ahead of the initial March 31st Brexit deadline). So, the underlying trend in growth remains very robust.
Consumer spending showed a quarterly gain of 0.8% in Q2, prompting a somewhat surprising pick-up in the year on year increase to 3.1% from 2.5% in the first quarter. At a time when employment growth slowed and sentiment weakened, this suggests a notable impetus to consumption from a growing population and rising real spending power. However, it also seems to significantly reflect an unusual and temporary increase in car sales in the second quarter (that more than outweighed a weaker trend in other retail spending). Consequently, we would envisage slower but still clearly positive growth in household spending for the remainder of 2019.
Investment excluding multinational related activity (see below) increased by 3.6% between the first and second quarters of 2019. This largely reflected a 9.3% rise in capital spending by businesses that may reflect some catch-up after earlier weakness. These numbers stand in stark contrast to an exceptionally weak trend in UK business capital spending which has been markedly weakened by Brexit uncertainty. This divergence underlines the continuing positive underlying trend in the Irish economy.
Construction spending increased just 0.3% between the first and second quarters but was 5.6% higher than a year earlier with new dwelling activity up 11.4%. These data encompass both projects completed and work in progress and hint at a somewhat softer trend in new construction activity as 2019 progresses that may reflect Brexit-related concerns as well as broader uncertainty about the pace of demand growth.
Export growth picked up in the second quarter, posting a 2.6% gain Q/Q compared to 1.5% previously. The Central Statistics Office highlighted the role of ICT in export growth through the past year but also noted positive trends in indigenous firms output of late.
Imports were a staggering 43% higher in the second quarter of 2019 than three months earlier. In large part, this growth appears to largely reflect the onshoring of a specific and substantial tranche of Intellectual property to Ireland that appears to be in the region of €30BN (or equivalent to about 10% of annual GDP). It seems that this may reflect an example of the scale of transactions occurring in response to changes in tax law. These have had outsized effects on Irish economic data repeatedly if irregularly in recent years and may continue to do so for the next year or so. Importantly, from a statistical perspective, these numbers ‘wash out’ in terms of any GDP impact as the growth in imports (which subtracts from GDP) is offset by a sharp growth in the headline investment number (up 182% Q/Q).Of greater significance to the economy, the activities that flow from the location of this IP in Ireland generate tax revenues in this country.
Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland