Leprechaun Economics: Irish GDP surges 4% in third quarter 2016
Leprechaun Economics: Irish GDP (gross domestic product) surged 4% in the three months to September 2016 as the impact of foreign multinational distortions dominated again.
The Central Statistics Office (CSO) said that net exports increased by €6.4bn in Q3 2016, "however this is largely explained by lower imports of intellectual property products and a consequent fall in capital formation of 17.8%." Overall total domestic demand fell by 1.8% in Q3 2016 compared with Q2 2016. Personal consumption — which accounts for approximately 53% of domestic demand - increased by 0.7%.and Government consumption increased by 0.8%.
GNP grew by 3.2% in the quarter and on an annual basis GDP was 6.9% higher compared to the same quarter in 2015. Factor income outflows were 5.6% lower year on year, resulting in an overall annual rise in GNP of 10.2%.
The CSO said last July that Irish GDP grew by 26.3% in 2015 compared with the 7.8% estimated in March. The reclassification related to a distortions related to the relocation of aircraft leasing assets, corporate inversion deals where US companies had become Irish for tax purposes and the transfer of international patents.
The CSO said today that services exports at €34.7bn were up €3.5bn due to increased computer services exports and miscellaneous business services exports (Double Irish tax dodge transactions), increasing by €1.6bn and €1.5bn respectively. Service imports fell by €36bn to €35.2bn mainly due to falls in research and development payments (intellectual property transfers by multinationals).
Irish headline data continues to be unreliable as a measure of real economic activity.
David McNamara of Davy commented: "GDP data for Q3 show a massive 4% bounce-back in the third quarter. This follows a 2.1% contraction in Q1 and a 0.7% rise in Q2. GDP is now up by 6.9% in the year to Q3 2016. This reflects volatile measurement problems that depressed the GDP figures in H1 unwinding in Q3. Overall, these data leave us on track for 5% calendar year GDP growth in 2016. We had been concerned that we would have to revise our forecast down towards 3% following a weak H1 and mixed signals in industry surveys. However, these temporary factors have now unwound and growth should be in line with the strong gains seen in the labour market this year.
GDP up 4% in Q3 2016, on track for 5% growth in 2016
GDP data for Q3 show a massive 4% bounce-back in the third quarter. This follows a 2.1% contraction in Q1 and a 0.7% rise in Q2. GDP is now up by 6.9% in the year to Q3 2016. As we set out in our note this morning, the bounce-back reflects volatile measurement problems that depressed the GDP figures in H1 unwinding in Q3. Overall, these data leave us on track for 5% calendar year GDP growth in 2016. We had been concerned that we would have to revise down our forecast towards 3% following a weak H1 and mixed signals in industry surveys. However, these temporary factors have now unwound and growth should be in line with the strong gains seen in the labour market this year.
Volatility in expenditure breakdown remains
The expenditure breakdown shows consumer spending was up 0.7% quarter-on-quarter (qoq) and 2.1% year-on-year (yoy), broadly in line with the trend in retail sales, and government spending was up 0.8% qoq (+5.4% yoy). After this, the data are unreliable due to movements in the multinational sector. For example, investment was down a massive 17.8% qoq (-7.2% yoy) due to a fall in onshoring of intellectual property by multinational companies (MNCs). However this decline nets off in the overall GDP number through a related fall in imports, down 8.6% qoq (-6% yoy). A 1.7% rise in exports (+0.6%) suggests that export growth has slowed sharply – but much of this relates to a €4bn fall in goods exports on the year related to contract manufacturing. The monthly trade data suggest that export volumes continue to grow at a decent pace, albeit slowing from an exceptional 2015.
Output side more reliable snapshot of activity
The output side of the national accounts provide a more useful snapshot of the economy at present (Figure 2). Much of the surge in GDP growth relates to onshoring of assets by MNCs in the industry sector where ‘measured’ output has doubled since Q3 2014. However, this hides a strong recovery in the more domestic-focused sectors. Construction (+21%) distribution, transport, software & communication (+21%) public admin (+10%) and other services (+13%) have all experienced strong growth over the same two-year period – reflected in the sharp fall in unemployment to the current 7.3%."
This is not a representation of reliable data
Dermot O'Leary of Goodbody commented: "Focus on core domestic demand: Irish economy growing by 3% yoy: The Irish GDP/GNP data contains volatile trends related to the large multinational presence in Ireland. A more meaningful gauge in our view is core domestic demand (domestic demand excluding aircraft and R&D). On this basis, the Irish economy grew by 3.2% yoy in Q2, a modest acceleration on the growth rate achieved in Q2 (2.5% yoy).
Mixed performances from domestic demand components: Consumer spending growth remained surprisingly muted in Q3 (2.1% yoy), while government spending grew strongly in Q3 (+5%) and will also be likely to contribute to growth in Q4. Core investment grew by 5% yoy in Q3. Strong growth in construction spending (+18% yoy) is the explanation for this expansion, and will remain an important driver in the coming years. Core business investment, on the other hand, remained weak for the third consecutive quarter (-15% yoy). This mainly reflects the ending of some large projects in 2015 rather than the underlying trend in Irish SME investment.
Growth data having dramatic impacts on gauges of debt sustainability: The distortions have important implications for the analysis of macro aggregates for the purposes of European rules. On the fiscal front, the debt/GDP ratio has fallen rapidly over the past three years on the back of a 43% increase in nominal GDP. Assuming that GDP growth was closer to the trends in core domestic demand, the debt/GDP ratio would be c.24 percentage points higher than is estimated at the end of this year (94% versus 70%). Given the relatively high probability of US corporate tax reform in the coming years, it is highly likely that these distortions will remain a feature. In this regard, the CSO has set up an expert group to recommend alternative growth indicators for the Irish economy. In the meantime, core domestic demand provides the most realistic picture in our view. The latest trends are modestly behind our expectations, but are unlikely to change our views materially."