Q1 data show Irish growth remained positive unlike most other economies

Data reflect underlying momentum and particular influence of multinational sector

GDP growth could be less negative than thought in 2020

We hold to our previous estimate of a 5% GDP drop in 2020 while emphasising downside risks in an uncertain and threatening environment

True barometer of severe downturn is rise in Irish unemployment to around 15% average in 2020 from 5% in 2019

Data emphasise need for fiscal action to restore Irish economy to healthy growth path

Analysis by Austin Hughes

In marked contrast to most other economies (see diagram below), preliminary data suggest Irish GDP growth remained positive in the first quarter of 2020. Ironically, Ireland might avoid a technical recession (on the shorthand definition of two quarters of negative growth) but still suffer a severe depression.

Notwithstanding these numbers, it remains the case that Ireland will suffer a severe downturn in economic activity this year but the scale of deterioration, at least in terms of the hit to GDP, may be less dramatic than some forecasts have suggested.

There are several reasons why the prospective decline in Irish GDP may be less than feared with varying implications for attempts to measure the underlying health of the Irish economy;

1. On an encouraging note, these data confirm that the Irish economy had notably stronger momentum coming into the Covid-19 crisis than most others as the removal of the immediate threat of a cliff-edge Brexit served to boost a growth trajectory already underpinned by solid growth in employment and earnings, a positive FDI pipeline and a step-up in construction activity.
   
   In this respect, today’s data are entirely consistent with a reported quarterly rise in employment of 1% through the same period and pockets of strength in some tax headings.  That pre-Covid momentum should serve to limit the reported fall in Irish GDP in 2020 but it doesn’t alter the fact that the Irish economy is currently experiencing an unprecedented deterioration in activity and employment. However, it does emphasise the need to avoid policy errors that don’t support the fullest recovery possible.
    
2. The structure of the Irish economy is exceptional because of the degree of influence from the activities of the multinational sector. With those multinationals significantly focussed on Pharmaceuticals, Medical devices and Information Technology, the impact of Covid-19 has in some instances been positive and in others, at very least, less sensitive to the broader fall in world trade than many macro models might imply. Importantly, GDP-neutral ‘onshoring’ of Intellectual Property in the first quarter implies a further increase in measured productive capacity that should enhance recorded GDP growth in the future.   
   
   Significantly, the contribution of the multinational sector to employment and tax revenues should serve to dampen the more generalised contraction in activity and, more cosmetically, restrain the recorded decline in GDP.  However, it is important to repeat the caveat we raise every time we discuss Irish National Accounts data that summary metrics such as GDP are often unrepresentative of the conditions facing the majority of Irish businesses and households. 
    
3. The measures introduced by the Irish government to support incomes through the Pandemic Unemployment Programme and the temporary wage subsidy scheme have limited the hit to spending power of households. In this context, today’s release shows that a 4.7 % quarterly drop in consumer spending comprised a 5.2% drop in spending on goods and a fall of just 0.8% on services. This disparity might suggest that ‘lockdown’ measures as opposed to income losses played a significant role in the weakness of consumer spending in the first quarter. By extension, the maintenance of a supportive fiscal stance and some further stimulus could restore the Irish economy to a significant positive trajectory through the second half of the year.

Today’s GDP data may be better than many expected but they are broadly in line with KBC forecasts. As the diagram below illustrates, if the Irish economy was to follow the quarterly path through the remainder of the year that the ECB envisages for the Euro area as a whole, Irish GDP would fall by just 2.2% for 2020 as a whole.

As we think the downturn in the second quarter could be marginally greater and the expected pull-back in the third quarter marginally weaker because of differences in the stringency of lockdown measures and speed of their removal, we think our existing forecast of a 5% drop in GDP in 2020 still appears reasonable. That said, the nature of the pandemic means there are still major risks to the downside.

More significantly, if the prospective scale of decline in Irish GDP may be less than might have been feared, the 10 percentage point rise in unemployment to an average rate of around 15% from 5% in 2019 gives a stronger sense of the extent of economic damage being experienced. As we have repeatedly argued, and the ECB indicated again yesterday ‘an ambitious..fiscal stance remains critical, urging ‘further strong and timely efforts to prepare and support the recovery’. Determined action from the Irish Government is needed to ensure elevated joblessness does not become a central feature of the Irish economy in coming years.