Outsized Irish GDP growth continues but underlying improvement becoming more evident


Irish GDP up 9.0%y/y in Q2, we now see 7% rise for 2018 as a whole

Growth number flattered by multinationals but also reflects stronger consumer and construction

Details of GDP release confirm recovery is broadening rather than suggest boom is back

Irish GDP data remain a significantly compromised indicator of the economic conditions facing most Irish-based businesses and households. However, the broad message of preliminary GDP numbersthat show GDP increased by 9.0% y/y in Q2 2018— is consistent with a range of other data and points towards an Irish economy that is performing solidly and where an improvement even if uneven in pace is being more broadly felt. Significant increases in consumer spending and construction in Q2 are important developments in this regard. The reported rise in GDP y/y is notably stronger than the EU average or than the pace that might be inferred from the pace of Irish jobs growth as diagram 1 below suggests.

The reported quarterly change in GDP remains extremely erratic with a 2.5% increase in the second quarter representing the fastest increase in the EU while the first quarter drop of 0.4% (previously estimated at -0.6%) was the poorest outturn among EU 28 countries. These large swings contrast with the evidence of other indicators that point towards a steadier and strong but somewhat slower momentum in Irish economic activity.

The recorded improvement in domestic spending in today’s GDP release numbers as well as the particular strength of multinational activity mean we are raising our forecast of GDP growth for 2018 as a whole from 6% to 7%. Either outturn would mean that Ireland seems set to be the fastest growing economy in the EU for the fourth year in five.

Of course, this measured growth rate is materially boosted by the exceptional activities of a small number of multinationals based in Ireland. The transfer of substantial amounts of intellectual property to Ireland in recent years means that the share of their activity attributed to the Irish economy has increased markedly. In the absence of an acceleration in this process, this impact on the recorded growth rate should fade but for 2018 this factor looks to be more influential than we previously thought.

Importantly, the underlying picture as evidenced by employment data in particular as well as a range of surveys and other indicators, is one of an Irish economy delivering meaningful gains in activity and aggregate incomes, in large part because of significant increases in numbers working and living in Ireland. Drawing on these indicators, we estimate the underlying growth rate for Ireland for 2018 is in the region of 4.5-5.0%.   

Some notable features of the Q2 data are:

  • Consumer spending increased by 4.4% y/y, the fastest increase since Q1 2016, which also makes it the second strongest in more than ten years. We don’t think there has been an explosive acceleration in consumer spending of late (Q1 growth is put at 2.9% and the 2017 is still at 1.6%) but the latest estimate ismore consistent  with strong increases in the number of people living and working in Ireland in the second quarter of 2018.
  • Government spending on current goods and services rose 4.2% y/y, up from 3.6% in Q1. While not strictly comparable, exchequer returns show a notably faster pace of acceleration in the value of public spending—up 9.9% in the second quarter compared to +3.4% in Q1.
  • Construction investment is up 13.5% y/y, with spending on dwellings up 37.9%. As this reflects work in progress as well completions of new builds, this is entirely consistent with a reported 34% rise in new housing completions. Again, this highlights notable momentum in domestic activity but with notable variations across sectors.
  • Exports are up 11.3% y/y in Q2, a notable acceleration from the 6.2% increase in Q1. With output tables showing  ICT sector production increased by 37.4%, the strength in Irish exports is predominantly a reflection of multinational sector activity (trade statistics show a drop y/y of exports of food and live animals while today’s BOP tables show a 4.6% rise in the value of tourism exports). With new smartphone product launches being positively received, there appears scope for Irish export growth to continue to outpace the increase in world trade through the remainder of 2018.
  • Import growth has been negative y/y in each of the past six quarters (-5.6% in Q2). This is very much at odds with the picture of a rapidly growing open economy. It largely reflects negative base effects around a very large earlier inflow of Intellectual property. In time, this effect should fade but it is likely to remain a constraint on import growth in 2018.

Overall, today’s GDP data, for all the many caveats, appear consistent with an Irish economy that is performing well and growing solidly.  A notably encouraging feature is the pick-up in areas of domestic spending such as consumer spending and construction.

As the diagram above suggests, headline GDP data clearly proclaim the boom is back – Q2 2018 GDP is 56.6% higher than the pre-crisis peak. However, other indicators suggest recovery still has some distance to travel as numbers at work are just 1.6% higher, real spending power per household is till about 4% lower and while aggregate household wealth is marginally higher, population growth of around 11% means average wealth is still significantly down from the previous peak.

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.