Third quarter Irish national accounts figures out today were a good deal better than generally expected. The reported 1.5% quarterly increase in real GDP was about double what the (Reuters) consensus had been anticipating as the upside risk we had flagged materialised. The quarterly pace of output growth in Q3 is the strongest since a similar outcome was recorded in the second quarter of 2011.
Today’s release also incorporates some modest revisions to historic quarterly growth figures. One point of note in this respect is that, while the level of real GDP in Q2 is unchanged, the Q2 growth rate has been revised up to now stand at 1%q/q up from the initially-reported 0.4% indicating stronger momentum behind the pick-up in output since the beginning of the year. Helped by a supportive base effect (GDP fell by 1.7% in Q3 2012) this has resulted in a strong acceleration in annual GDP growth which now stands at +1.7%, up from -1.8% and -1.6% in quarters one and two respectively.
Net factor flows were broadly unchanged on the quarter meaning there was very little difference between the reported rates of quarterly growth in GDP and GNP. The latter rose by 1.6% q/q to leave the annual rate of GNP growth running at 3.9%. Its stronger annual growth rate relative to GDP is explained by smaller factor outflows in Q3 this year relative to 2012, partly reflecting smaller profit repatriations among multinationals – in turn likely reflecting some impact of patent expiries on the profitability of the pharma sector.
Domestic demand was the driver of growth in Q3 as overall domestic demand posted its strongest annual increase in five years; strong gains in investment were a major factor, while more modest growth in consumer and government spending were also recorded
The details of the report show that the driver of third quarter growth was domestic demand. Total domestic demand rose by 1.9% q/q to bring its annual growth rate to +0.5% - its strongest reading in five years. Most notable was a significant expansion of investment spending which jumped by almost 11% q/q and is up 8.3%y/y. Quarterly investment figures are notoriously volatile (even by the standards of the Irish national accounts) but a look at a breakdown of the investment figures reveals a continuation of some very encouraging trends. Annual growth in new housing remains negative, but other key investment metrics are showing notable strength. Investment in home improvements slowed somewhat relative to Q2, but is still expanding at an annual rate of over 15%, while ‘other building and construction’ is performing even more strongly at 22.7%y/y – the fastest rate of expansion in over five years - underpinned by the construction requirements of inward investment and the emergence of more favourable trends in non-residential activity more generally. Growth in overall machinery and equipment expenditure continues to be held back by weakness in aircraft spend, but outside of this segment, growth in underlying business capital spending accelerated to a punchy 16.8% y/y.
Elsewhere, consumer spending rose by 0.9% q/q following on from a 0.7% rise in Q2. However, the Q3 outturn was flattered somewhat by the temporary impact of car sales linked to the new registration system: spending was flat if this effect is stripped out. Government spending also managed a 1.1% quarterly rise. While sustained rises in government spending from here are not likely given the ongoing fiscal correction, it does look from a national accounts perspective that the drag from this source is in the process of easing relative to recent years. Today’s figures show government spending down 0.8% in real terms over the first nine months of this year relative to the same period in 2012, which compares with an annual decline of 3.7% in 2012 and a near-7% fall in 2010.
While domestic demand provided an uplift to the Q3 figures, external demand was a source of weakness. Total exports gave back some of their Q2 bounce (when they rose by 4.6%) in recording a 0.8% quarterly decline. After a very weak start to the year, annual growth in exports has been modestly positive in the past two quarters. But while the pick-up relative to earlier in the year is important it is still the case that exports over the first three quarters are running about 0.8% lower than 2012 levels reflecting the combined impact of a weak euro zone economy and the patent cliff on the performance of goods exports.
Overall, today’s figures offer a good deal of encouragement in relation to both the momentum behind and composition of Irish economic growth.
Overall, today’s figures offer a good deal of encouragement in relation to both the momentum behind and composition of Irish economic growth. Without wishing to overplay the signal from what are volatile quarterly data series, the 2.5% expansion of real GDP since the first quarter of this year and the annual growth of 3.9% in GNP point to an economy experiencing a strengthening in its recovery dynamic. And the fact that domestic demand is now beginning to support the recovery is a welcome indication that growth is becoming more broadly based, consistent with the signal coming from the latest labour market figures showing a return to relatively healthy rates of growth in employment.
The sign of improved trends in several areas of investment is a particularly welcome development: it suggests that after a peak-to-trough collapse of over 60%, the process of replenishing the country’s capital stock is now underway. The sluggish performance of exports is far from ideal from the perspective of a small, highly open economy such as Ireland. And weakness in export trends is one reason why, even after today’s solid figures, the economy’s annual average GDP growth rate will struggle to do much better than the 0.2% recorded in 2012. But incoming news on the international economy points to the likelihood of a growth pick-up in several of Ireland’s key trading partners next year. In turn, that should facilitate a further strengthening of Ireland’s recovery in 2014 as domestic and external demand combine to deliver GDP growth of around 2% or more.
Chief Economist Republic of Ireland
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