Recession
Growth Data Suggests Irish Economy is Bottoming Out
By KBC
Sep 29, 2009 - 9:02:16 AM

Growth Data Suggest Irish Economy is Bottoming Out

•  Second quarter data shows smaller fall compared to a year ago and broadly flat trend in the past 3 months
  
• Irish experience not uniquely awful by international standard
  
•  Economy likely to ‘bounce along the bottom’ for some time as budget tightening and poor sentiment likely to restrain spending
  
•  Encouraging signs of stabilisation in household spending suggest worst may be over but little prospect of a early improvement

Growth data for the second quarter of 2009 lend further support to the view that the Irish economy is probably past the worst in terms of the scale of decline in activity.  A period of broadly stable if uncomfortably weak conditions rather than a marked improvement seems to lie ahead for the remainder of this year and well into next. 

The year on year rate of decline in economic activity in Ireland (whether measured in terms of GDP or GNP, see final paragraph) remained substantial in the second quarter of the year but was not as poor as seen in the first quarter.  GDP fell 7.4% rather than 9.3% while GNP shrank 11.6% rather than 13.1%.  More encouragingly the seasonally adjusted change between the first and second quarters was broadly flat, the best performance since the first three months of 2008.

While economic strains have been most severe in the emerging Baltic countries, the GDP experience of a number of smaller Eurozone countries such as Finland and Slovenia has been slightly poorer than that of Ireland of late.  Indeed, the scale of contraction seen in major economies such as Germany and the UK is not radically better than reported today for Ireland.  Although the headline data may suggest similarities, the details show very different trends within the economy.  Today’s Irish data show exports of goods and services were just 2.5% lower than a year earlier, while the comparable figure for the Eurozone as a whole is a decline of 17.1%.  In contrast, Irish consumer spending was 6.8% weaker than a year earlier whereas the corresponding Eurozone fall was just 0.8%.

These contrasts in the detailed data imply that Irish exports have been far more resilient to the global downturn than might have been feared, in part this is because areas such as healthcare and pharmaceuticals may be less cyclically sensitive.  On the other hand a far faster pace of job loss and the striking divergence between fiscal stimulus measures abroad and Budget tightening in Ireland mean there has been a far greater pull-back in Irish household spending.  Investment spending has also been markedly weaker in Ireland than elsewhere; down 24.4% compared to the Eurozone average of 10.9%.  To a considerable extent this reflects the particular weakness of Construction activity in Ireland.  Construction output has fallen a further 30.8 per cent in the past twelve months to bring the level of building activity here back to levels last seen in 1999.  In contrast, Eurozone construction activity is just 4.1% lower than a year ago.

The most encouraging aspect of the data is a broadly flat seasonally adjusted trend between the first and second quarters of 2009.  In part this reflects how dramatic the deterioration had been between the Autumn, of last year and this Spring.  However, consumer spending and exports were both marginally higher than in the first three months of the year, suggesting the Irish economy is beginning to stabilize, albeit at fairly weak levels.  Again, these numbers confirm the evidence of a tentative stabilisation coming both from ‘hard’ data (such as exports) and softer data (such as the KBC/ESRI Consumer Sentiment Index and the KBC/Chartered Accountants Business Sentiment Index).

Today’s data confirm the scale of decline in Irish GDP in 2009 and 2010 is set to be somewhat less than seemed likely three months ago.  That said, Irish GDP is still expected to weaken fairly sharply in 2009 and looks set to decline modestly in 2010. We now expect real GDP will contract by about 7% in 2009 and by about 2.5% next year.  The corresponding figures for GNP will be somewhat larger (for reasons set out below) at -9.5% in 2009 and 3.2% in 2010.  Probably the key feature distinguishing Ireland is the intensity of decline in construction activity which will reduce Irish GDP by 5 percentage points in 2009 and by about 2 percentage points next year.  An improvement in global conditions, a stabilisation of construction activity and a steadier trend in consumer spending should prompt a meaningful improvement in Irish economic growth in 2011.

As is frequently the case, today’s data continue to throw up significant variations between the growth rates of GDP and GNP.  As Table 1 illustrates, GDP tends to be the international standard by which economic activity is measured.  Unfortunately, GDP relates to activity within a country rather than the incomes generated for that economy’s residents.  In Ireland, analysts tend to favour GNP as a measure of activity because it takes into account the fact that economic activity in Ireland generates significant incomes for non-residents (and Irish businesses generate comparatively small amounts abroad).  The most significant element in this factor income outflow is the profits earned by multinationals in Ireland.  Because their activities have been fairly resilient to the downturn, their profitability means the gap between GDP and GNP has been rising of late and this might be expected to continue.  In addition, the build-up in external Government debt also implies the likelihood that GNP growth will fall further short of GDP growth in the future.

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