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The Irish economy posted modest positive growth
Small rise in third quarter GDP and positive revisions suggest 2012 growth of close to 1%.
• All main demand elements with exception of Public Sector spending on goods and services post positive quarterly and annual growth rates.
• Data consistent with modest but clear improvement in Irish economic conditions in late 2012.
Data for the third quarter show the Irish economy posted modest positive growth for a second consecutive quarter. These data suggest that for 2012 as a whole, economic growth could be somewhat stronger than we had envisaged (though in line with Department of Finance forecasts) and is likely to be close to 1% this year.
Real GDP rose 0.2% in the third quarter compared to the previous three months and there were upward revisions to each of the previous three quarters. Growth in the second quarter is now put at +0.4% rather than flat, the decline in the first at -0.5% rather than -0.7% and growth in the final quarter of 2011 is now estimated at 0.7% rather than 0.6%.
The marginally positive growth recorded by Ireland in the third quarter of 2012 is somewhat better than the -0.1% decline in GDP across the Euro area as a whole. More significantly, it sets Ireland apart from other ‘troubled’ Euro area economies, as Italy (-0.2%), Spain (-0.3%), Portugal (-0.8%) and Greece (-0.5%, based on KBC seasonal adjustment of the raw data) all posted quarter-on-quarter declines. It now seems that Irish GDP growth is set to be above the Euro area average in both 2012 and 2013. While this largely reflects the particular weakness of the Euro area, it also points to some capacity for growth on the part of the Irish economy even against a backdrop of relatively unfavourable global conditions. As yesterday’s IMF press release on Ireland noted, ‘the outlook is subject to significant risks from any further weakening of growth in Ireland’s trading partners’. Today’s data suggest at least some limited ability to withstand such developments provided domestic demand doesn’t see a renewed downturn. In turn this emphasises the importance of confidence boosting measures such as obtaining meaningful assistance from our EU partners in regard to banking related debt.
Probably the most encouraging aspect of today’s data is that with the exception of Government spending on goods and services, all the main categories of demand posted increases (albeit marginal), both on a quarter-on-quarter basis and on a year-on-year basis. These results appear consistent with an array of survey evidence recently that suggests some improvement in activity of late. It should be emphasised that the scale of increase reported in today’s data and in recent surveys is relatively modest and suggests any turn in Irish economic conditions remains tentative. However, a broad range of recent economic evidence suggests that the Irish economy may have begun to edge forward in the second half of 2012. Importantly, as noted above, this marginal gain appears to be occurring across a range of sectors rather than concentrated in specific areas such as the high tech manufacturing sector. Indeed, two of the weaker components of today’s release were industry (down 3.1% quarter-on-quarter) and goods exports (down 3.9% year-on-year, no seasonally adjusted data available).
The improvement in domestic demand evident in these data is still fragile. Consumer spending was up just 0.5%, following a longstanding trend decline. An outsized 8.5% improvement in investment was apparently boosted by purchases of aircraft and other ‘lumpy’ equipment purchases. The latter could see some correction in the fourth quarter as the current global environment is unlikely to encourage companies to contemplate significant increases in capacity. However, with any pullback in spending on machinery also weighing on imports, the impact on the near term growth arithmetic shouldn’t be too worrisome.
Today’s data also suggest the money value of GDP in 2012 will be somewhat higher than the Department of Finance envisaged at Budget time, largely due to a faster increase in the prices of traded goods and services. Other things being equal, this would reduce the general Government deficit from 8.2% of GDP to 8.1% in 2012. While this is only a marginal change, it pushes the deficit/GDP ratio In the right direction and provides a slightly better starting point in terms of the budget arithmetic for 2013.
Resilience in Irish exports, as buoyant software exports more than offset weakness in pharmaceuticals, coupled with softness in imports is translating into a very strong balance of payments current account surplus. Third quarter data suggest the outturn for 2012 as a whole could be a surplus in the region of 4% this year, up from 1.1% of GDP in 2010 and a good deal stronger than expected. This outturn is likely to attract favourable international commentary. That said, the size of the surplus this year as well a likely sharp increase in GNP of 2.5-3.0% owe a significant amount to a largely technical impact from the redomiciling of a small number of major international PLC’s into Ireland. These companies have a very limited presence in Ireland. However, their profits earned outside Ireland represent a significant income inflow that reduces the negative net factor income flow traditionally associated with the profit outflows from multinationals operating in Ireland as well as interest payments on external debt. In turn, this recent development boosts Ireland’s current account surplus and GNP growth rate.