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Irish growth data show some improvement
Second quarter GDP improves but by less than expected.
• Growth data softer than jobs numbers would imply.
• Details more encouraging and suggest momentum can build in second half of 2013.
• We now expect GDP to grow just 0.2% in 2013.
• Prospect of significantly stronger 2014 growth remains intact.
• Growth data suggest slightly less room for manoeuvre on Budget 2014 but more reason to be careful with a fragile economy.
Irish growth data for the second quarter of 2013 show some improvement from the disappointing first quarter numbers and the details are somewhat better than the headline figure might imply. However, these numbers continue to suggest the Irish economy is on a weaker trajectory than that indicated by most other recent data, most notably the comparatively strong trend in employment seen of late.
Irish GDP data are quite volatile and are frequently subject to significant revisions. In the absence of future revisions, today’s data suggest our previous expectation of GDP growth of 0.7% for 2013 as a whole will not be realised—such an outturn would require growth to average around 2% per quarter in the second half of the year. For a range of reasons, we still think marginally positive growth of about 0.2% is achievable but a continuation of the lacklustre performance of the first half of the year could readily translate into a modest negative number for the full year.
We don’t think the disappointing outturn for the first half of 2013 should be extrapolated forward mechanically. That said, these data reduce room for manoeuvre on the Budget arithmetic. On the other hand, by emphasising the tentative nature of the economic trend, they also argue against being overly ambitious in regard to the degree of adjustment that is attempted. So, they are likely to add more heat than light to the current debate on this topic.
Headline Weaker But Details Stronger
As usual, the devil is in the details of today’s data but the overall increase in GDP of 0.4% in the second quarter was somewhat lower than might have been anticipated given a rise of 0.5% in employment through the same period and a notable improvement in a range of business surveys and output data through the spring months. While the aggregate number was disappointing, many of the key components of today’s release showed a somewhat stronger performance in the second quarter than might have been expected;
• Consumer spending posted an increase of 0.7% that was somewhat surprising given the small decline in retail sales.
• Investment fell but this was probably due to weaker imports of aircraft. Encouragingly, construction output recorded a strong 4.2% increase.
• Exports of goods and services posted an extremely strong 4.3% quarterly increase—the fastest pace since the first quarter of 2007.
• Stockbuilding pared some 1.3% off growth, largely reversing a significant build up in the previous quarter.
These elements of the second quarter release argue that a somewhat stronger momentum can develop in the second half of the year. In addition, prospects for the balance of 2013 should be further supported by recent signs of healthier conditions in key export markets and a range of domestic factors including the stronger trajectory of various business surveys of late, rising employment, particularly in full time jobs, a pick-up in housing transactions that should prompt a rise in related spending and the impact of the 13-2 registration on car sales. More generally, we would expect some build up of activity levels and stocks as business sentiment recovers. For these reasons, we continue to forecast positive growth albeit minimal in scale in 2013. Our assumption of a stronger trajectory through the second half of the year implies a more positive carryover into 2014 and underpins our expectation of a solid rise in GDP next year.
Budget Leeway Is Reduced
The combination of weaker than envisaged ‘real’ growth and lower inflation means the money value of GDP in 2013 is likely to be significantly lower than that envisaged in official forecasts. For the reasons outlined above, we continue to see marginally positive growth in 2013 and expect economy-wide prices to rise just under 1%. This means we see the money value of GDP at around €165.7bn in 2013 compared to €167.9bn envisaged in the Department of Finance’s April forecast. By extension our forecast for 2014 is €170.7bn compared to the official forecast of €174.3bn. Mechanically, to hit a given deficit (expressed as a % of GDP), the lower GDP number implies a somewhat larger Budget adjustment will be required - roughly €150-200mn larger if the shortfall in money GDP is along the lines suggested above. As noted above, this prospect will likely intensify the debate between those urging a comparatively large adjustment to provide some cushion against a possible Budget overshoot and those who emphasise the fragility of economic conditions and urge a consequent need to guard against unduly harming domestic spending power. At the margin, the unpleasant arithmetic that follows from these data is likely to suggest an adjustment closer to €3.1bn next year than some might favour.