Despite Brexit and trade wars, growth is positive

By John Fahey

The release last week by the CSO of the Quarterly National Accounts for the first quarter provided the first official growth estimates of the economy for the opening months of the year.

The headline data showed that GDP declined by 0.6% on a quarterly basis.

The contraction in the first quarter was in a large part due to the fact that GDP was so strong and off such a high base in the last quarter of 2017.

However, Irish GDP is well known for its volatility on a quarterly basis.

There is also the issue that GDP does not provide an accurate read of activity in the economy.

This is due to distortions caused by multinational activity, movements in intellectual property rights and aircraft leasing.

Instead, a more useful measurement is modified final domestic demand.

This metric is more reflective of underlying economic activity in the domestic economy, as it excludes trade in airplanes by aircraft leasing companies and imports of research and development (R&D) related to intellectual property movements.

In the first quarter, modified final domestic demand registered yearly growth of 4.8%.

This followed a 3.2% average increase in 2017.

Consumer spending rose by 2.7% compared to the same quarter a year earlier and suggests an improved pace of growth in household expenditure after it averaged 1.6% growth last year.

The construction sector registered a very strong performance over the period.

New home building investment was up 27% on a yearly basis, while overall construction investment increased by 11%.

Meanwhile, underlying business spending on machinery and equipment (excluding aircraft leasing) also started off the year on a strong footing.

It rose by 16% on a year-on-year basis in quarter one, following two years of contraction in 2016 and 2017.

These figures, which show the on-going strong performance in the domestic economy, corroborate the data that were previously released for the labour market over the same period.

This included employment rising by 2.9% or 62,000 on year-earlier levels.

Crucially, more timely data on the Irish economy suggest that the strong performance from the first quarter continued into the second quarter.

In terms of survey data, the manufacturing purchasing managers’ index (PMI) averaged 55.8 in the second quarter, broadly unchanged from its level in the previous quarter.

The services PMI registered a stronger performance in the April to June period compared to the opening three months of the year, indicating a firmer pace of growth in the sector.

Similarly, the construction survey also recorded a very encouraging reading for quarter two.

On the consumer side, confidence remains at a strong level.

Confidence is being supported by the on-going strong performance in the labour market.

The unemployment rate fell further in June, moving down to a near 11-year low of 5.1%.

The robust sentiment levels among consumers, amid sustained falls in unemployment, are helping to provide a supportive backdrop for consumer spending.

Available data on core retail sales in the second quarter show that they have risen by 1.6% in April-May from levels in the first quarter.

In terms of the outlook, we are forecasting the economy to grow by around 4.5% this year, with growth moderating somewhat to 4% in 2019.

The main risks to the economy are external.

These include Brexit, a changing global tax environment and increasing trade protectionism.

However, there are also positive developments externally, including ongoing strong growth in the global economy.

John Fahey is senior economist at AIB.


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