GDP surge gives budget comfort

GDP surge gives budget comfort

By Eamon Quinn

Official figures confirming very strong economic growth will give comfort to Finance Minister Paschal Donohoe ahead of his budget but the jury is still out on whether the surge supports a potential increase back up to 13.5% from 9% in the Vat rate levied on hotels and tourism, economists said.

The CSO said the second- quarter figures were free of the huge distorting effects caused previously by multinationals shifting huge amounts of intellectual property into or out of their Irish companies.

The conventional measure of economic growth, GDP, used by the European Commission for budget-setting rules, showed the economy climbed 2.5% in the second quarter from the first quarter and surged 9% from a year earlier.

The 2.5% quarterly expansion was by far the fastest in Europe — posting a growth rate which was over six times the median for many other European countries in the same period.

That means the Government will have to revise its own annual growth projections. However, CSO senior statisticians said it was “striking” in the quarter that so-called modified measures of economic growth designed to reflect activity in the domestic economy without the distortions caused by the accounting by multinationals, “told the same story” of strong growth.

Construction and areas such as hotels and restaurants were up sharply in the quarter. Conall Mac Coille, chief economist at Davy, said that it would be a nitpicking exercise to find negative news in the second quarter figures, as jobs growth was clearly driving people’s income.

Investment in construction is up from a very low base and exports were up, he said, adding that fears that the tax cuts of US president Donald Trump would hurt the Irish economy hard had so far not been realised.

“The international sector is not pushing the pause button in investment plans. That is good news,” he said.

However, Mr Mac Coille said that the Brexit-driven weakness of sterling against the euro had brought some effect on Irish exports to the UK.

Austin Hughes, chief economist at KBC Bank said: “We still have an artificially inflated GDP growth because of the particular buoyancy of the multinational sector and that remains in place.

“There is also in these numbers signs of an improvement in domestic demand, particularly the pick-up in consumer spending and construction.

“The broader economy is strengthening”.

Alan McQuaid, chief economist at Merrion said that the Department of Finance’s GDP growth forecasts for this year were far too low.

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