15 Dec 2017

Irish Economy: GDP looks set to increase by 7% this year

Quarterly National Accounts (QNA) data released by the CSO show extraordinarily strong growth at a headline level, with GDP +4.2% q/q and +10.5% y/y.

For the first three quarters of the year annual growth has averaged 7.3%, so even if quarterly growth were flat in Q417 (unlikely, given the buoyant conditions indicated by high frequency indicators such as the Investec Manufacturing PMI) this would imply a full-year GDP increase of 6.5% y/y, well ahead of our current 4.8% forecast. Sure, these data are flattered by the multinational sector (yet again!), but a deep dive confirms a strong underlying growth profile.

Looking at the expenditure side of the accounts, we see that personal consumption was +2.7% y/y; government consumption +2.1% y/y; gross fixed capital formation -44.7% y/y; and net exports were +104.4% y/y (this is not a typo).

To go through those in turn, the strong personal consumption growth was as we expected, given a slew of positive consumer data, with total employment +2.4% y/y in Q217, unemployment currently at a nine-and-a-half year low of 6.1%, average weekly earnings +1.7% y/y in Q317 and retail sales volumes showing growth of 5.2% q/q and 4.2% y/y in Q317. Government consumption growth was 2.1% y/y in the first three-quarters of 2017 (Q317: +2.1% y/y), so these data are tracking in line with guidance provided in October’s Budget of FY17 growth of 2.0% y/y.

The seeming collapse (-44.7% y/y) in gross fixed capital formation (investment) is driven by the multinational sector. The CSO says that “large imports of intellectual property products and of aircraft relating to the leasing sector were absent” from the data (this has knock-on effects on both investment and imports). The detail in the QNAs shows that investment in intangibles and ‘other transport equipment’ (which includes aircraft) were -67% y/y and -44% y/y respectively. The ‘Modified Gross Domestic Fixed Capital Formation’ data, which exclude most of the MNC effects, show growth of 11.7% y/y in Q3 (+14.2% y/y for the first nine months of 2017) and this is a better indication of underlying conditions in the ‘real’ economy in Ireland. Indeed, other data show that housing completions were +28% y/y in the first 10 months of 2017, while total sales (both new and second hand) of goods vehicles were -2.0% y/y in the first 11 months of the year.

In terms of net exports, the headline growth cited above is flattered by the fall in imports (which is mirrored by the move in MNC investment, so largely netting out in the final GDP calculation). The national accounts measure of gross exports was +8.7% y/y in Q317, with strong growth seen across both goods (+9.2% y/y) and services (+7.9% y/y). The goods export figure here seems a little high compared to previously released monthly merchandise trade data, so we wouldn’t be surprised to see this revised downwards in due course. The services export figure is also somewhat flattered by higher exports of royalties arising from previous transfers of IP assets by the multinationals into Ireland.

Balance of Payments (BoP) data released alongside the national accounts show that the surplus for the first three quarters of 2017, at €22.2bn, was more than three times the figure for the corresponding period of 2016 (€6.8bn). This is not a surprise given the factors discussed above.

As an aside, we note that growth in nominal GDP – the denominator for headline government debt and deficit calculations – was 8.2% y/y in the first three quarters of 2017, well in excess of the 4.9% FY 2017 growth pencilled in by the Department of Finance (DoF) in its Budget calculations. While accepting the MNC distortions that are a factor behind this outcome, the scale of the outperformance nonetheless provides reassurance to our view that the public finances will beat ‘official’ guidance (for example, we see a General Government surplus in 2018, which is two years ahead of the DoF’s projection).

Ireland’s QNA data tend to be very volatile and subject to revision, so they always carry something of a health warning. To compensate for this, the CSO provides ‘modified’ data which exclude some of the MNC effects. Year to date, growth in modified total domestic demand is running at 4.9% y/y, more or less in line with the 4.8% GDP forecast we had before these QNAs were released. Our gut feeling is that this is the ‘real’ growth in the underlying economy (and this is supported by a slew of other data, such as the 5.8% y/y growth in tax receipts and the increases in total employment and housing completions discussed above), with MNC distortions adding an extra kicker to reported (headline) growth. With high frequency data such as the Exchequer Returns and Investec Manufacturing PMI (currently at its highest level since December 1999) suggesting a strong Q4 performance for the economy, we think that (absent any material revisions to these QNAs) Ireland should see its GDP increase by a remarkable 7.0% in 2017, which would cement the country’s position as the EU’s fastest growing economy for a fourth successive year.