16 Sep 2019

Irish Economy: GDP +5.8% y/y in Q219

Quarterly National Accounts data for Q2 from the CSO show that the economy expanded by 5.8% y/y in the second quarter. 

The expenditure side of the accounts show solid growth in domestic demand, although multinational distortions are again to the fore.

Personal consumption increased by 3.1% y/y in Q2, a modest pick-up on the 2.5% y/y growth seen in Q1. Net expenditure by the government sector was +3.6% y/y and Exports were +10.7% y/y (goods exports +6.2% y/y and service exports +16.6% y/y). However, the headline Investment and Import categories were heavily impacted by greatly increased imports of intellectual property products, which had the effect of inflating the value of both categories, although the effects largely offset each other with a broadly neutral impact on aggregate GDP. Looking through these effects at other components of Investment shows that expenditure on Dwellings & Improvements was +4.3% y/y and Other Building & Construction was +7.5% y/y.

Growth in the CSO's Modified Final Domestic Demand (MFDD) measure was +2.9% y/y in Q2. MFDD is an indicator of underlying domestic demand that excludes globalisation effects such as trade in intellectual property and aircraft leasing.

Following an upward revision to the Q1 growth rate, GDP in H119 was +6.6% y/y. However, given the difficulties in interpreting some of the national accounts data, we would point to other domestic indicators, such as employment (+2.0% y/y in Q2) and earnings (+3.5% y/y in Q2) as well as the MFDD data, as providing a better gauge of underlying economic activity at present. 


Oil spikes on supply concerns

There have been several drone attacks in recent months targeting oil infrastructure in Saudi Arabia, however, until now they had not caused much damage and have failed to disturb supplies. In addition, the Saudi's had seemed to become effective in shooting them down, allowing oil markets to ignore the potential supply risks. This latest attack has changed the situation completely as 5 mb/d are apparently now offline, leading to a dramatic deficit in global supply/demand. 

In the short term, the question for markets is how quickly the disruption can be resolved vs how much oil the Saudi's have stored. There is scant detail on this currently. 

The price of Brent crude spiked dramatically higher to just below $72pb from Friday’s close of just over $60pb as markets opened late last night. It pulled back just as sharply with a $66pb price greeting the European open. However quickly (or not) Saudi Arabia brings production back on line; this incident raises profound questions over Saudi Arabia’s role as the world’s reliable swing producer. 

If this can happen once, presumably it can happen again. This suggests oil markets need to price in a much larger risk premium, whereas the market had been turning a blind eye to a series of attacks in Saudi Arabia since the Spring. This is also bad news for OPEC generally as much of OPEC’s credibility rests on Saudi Arabia. If there were to be another attack in the coming weeks, all bets are off. There is also the possibility of military escalation in the Gulf. Iran has said "We have been constantly preparing ourselves for a full-fledged war".

Brexit and UK politics – update

The past weekend has been yet another busy one for Brexit news. One major focus has been talk of Boris Johnson defying the legislation, which would force him to ask for an extension rather than accept a no-deal, from 19-October. Here PM Johnson’s parallel with the Hulk grabbed many headlines as he said “the madder Hulk gets, the stronger Hulk gets”. However, despite this talk there is more speculation that Mr Johnson is working towards a deal and looking at proposals to replace the backstop mechanism. 

The PM is in Luxembourg today meeting European Commission President Jean-Claude Juncker, with other key advisers. Aside from the press that went to former PM David Cameron’s memoirs, the defection of Tory MP Sam Gyimah to the Liberal Democrats served as a reminder that Mr Johnson’s headache over divisions in his party are not over. The Liberal Democrat party conference at the weekend confirmed speculation that the party would now move forward on a platform of campaigning for a revocation of Article 50. Coming up we have the Labour party conference over the coming weekend and into next week. 

Finally, the Supreme Court is set to rule tomorrow on the legality of the decision to prorogue Parliament, which is now suspended until 14 October. Depending on the ruling, this could lead to Parliament being recalled and then potentially a second prorogation, kicking off another political storm. 

At its current standing, sterling is holding onto gains from the perception that no-deal risks look to have lessened after the passage of the recent legislation and that a deal might be within reach. 

Economic Releases

Nothing to note.