Data points to economy on strong growth path

Ireland is a small and very open economy.

As I highlighted in this column last year, its large external trade, in particular, means that Irish data can quite often give confusing signals about the state of the economy.

The National Accounts data for 2013 published by the CSO last week is a very good example. Its show that, on a GDP basis, the economy contracted by 0.3% last year, following growth of just 0.2% in 2012.

However, on a GNP basis, the data shows that the economy expanded by 3.4% last year, after growth of 1.8% in 2012. This conflicting data shows it is very important to drill down into the figures to find out exactly what is going on. One should also use a broad range of indicators in assessing the state of the economy.

Exports registered a very poor performance last year, growing by a meagre 0.2%.

Although service exports grew by 4%, the volume of merchandise exports fell by close to 4%.

This decline was nearly all attributable to a sharp fall in pharmaceutical exports following the expiry of patents on a number of key products manufactured here.

Pharmaceutical exports fell by €4.7bn last year, which is equivalent to almost 3% of GDP. Thus, the fall in these exports had a very depressing effect on GDP last year. However, the contraction in pharma output and exports is having only a limited impact on the real economy. Indeed, the main effect seems to be on the profits of the multinationals concerned.

Balance of payments data for 2013, also published last week, show a fall of almost €4bn in profit outflows last year. This is not accounted for in GDP figures but it is taken into consideration in GNP data, which include so-called net factor income flows.

With the fall in pharma exports being offset to a considerable extent by a decline in profit outflows, GNP has not been greatly impacted by the expiry of the pharma patents.

Hence, the GNP data showed a strong performance by the economy last year, with growth of 3.4% This is more in keeping with other data pointing to a strong performance by the economy last year, in particular employment, which grew by 2.4% in 2013.

It is true that 2013 GNP was also boosted by a fall in interest payments to foreign holders of debt of the Irish resident financial sector.

As highlighted in the latest Central Bank Quarterly Bulletin, both the amount of debt issued by the Irish financial sector and the interest rates on newly-issued debt have fallen sharply, resulting in the lower debt interest payment outflows. This gave a boost to GNP last year.

Nonetheless, judging by other data, it is clear the economy performed well last year, as indicated by the GNP figures. What is particularly encouraging in the National Accounts data is the clear evidence of a recovery in domestic demand.

Indeed, domestic spending grew by close to 2.5% year-on-year in the second half of 2013. Investment activity last year grew by 16.5%, led by a marked pick-up in business investment and construction.

Consumer spending also recovered after a weak start to the year, while government spending fell by just 0.5% in 2013, having average declines of 4.2% over the previous four years.

Overall, data for 2013 suggests that the economy has moved on to a strong growth path. The strength of PMI surveys for the first two months of 2014 indicate this trend is continuing. We expect GNP to grow by around 3% again this year.