Growth looks solid even with new GDP perspective

The most recent official growth statistics on the Irish economy were released last week.

They were contained within the CSO’s Quarterly National Accounts for the first quarter of 2017.

The data showed that in the first three months of the year, GDP registered a 2.6% decline. However, Irish GDP can be very volatile on a quarterly basis due to the openness of the economy including the impact of multinational activity, movements in intellectual property and aircraft leasing activity.

The contraction in the first quarter is more a reflection of the very strong performance in the last quarter of 2016, when GDP grew by 5.8% on a quarterly basis, rather than any underlying weakness in the economy in the opening three months of this year.

Indeed, making allowances for the volatility associated with Irish GDP by looking at the data on a yearly basis provides a different perspective of the economy’s performance in the first quarter.

On this basis, the economy registered a growth rate of 6.1%. Ireland’s official growth statistics have come under increasing national and international scrutiny in the aftermath of the publication of the national accounts for 2015. This data showed GDP rising by 25.6% in 2015, with the distortion mainly due to the relocation/restructuring activities of multinational firms.

As a result, a review group was established by the CSO to develop indicators that would give a more accurate read of what’s happening in the domestic economy. One of the recommendations was to publish a modified Gross National Income number (GNI*) with the aim of “excluding globalisation effects that disproportionately affect the measurement of the size of the Irish economy.

Based on this GNI* measurement, the size of the economy in 2016 in nominal terms was €189.2bn. This compares to the €275.6bn figure calculated using the GDP measurement.

The CSO also released a modified Total Domestic Demand variable. This measurement gives a better insight into underlying activity within the domestic economy as it excludes trade in aircraft by aircraft leasing companies and imports of R&D related to intellectual property movements.

Using this measurement, domestic demand grew by 3.5% in year-on-year terms in the first quarter of 2017.

This measure of domestic demand is closely aligned with the performance of the labour market over the same period. Indeed, employment growth also rose by 3.5% in quarter one. The strong increase in jobs growth was driven by the private sector and it was broad-based both in terms of sectors and geography.

Another ‘clean’ measure of underlying activity in the domestic economy is consumer spending. After increasing by 3.3% in 2016, consumer spending grew by 1.2% on a quarterly basis and by 1.8% in year-on-year terms in the first quarter of 2017.

A raft of hard data and survey indicators suggest the economy continued to perform well in the second quarter. Consumer confidence levels remained near 15-year highs, while retail sales increased by 1.7% over the April/May period compared to the first quarter.

Meanwhile, the strong downtrend in unemployment that has been evident in recent years continued, with the unemployment rate falling to 6.3% in June.

Elsewhere, survey data such as the manufacturing and services PMIs are also consistent with continued strong growth for the economy.

In terms of the outlook, the main risks to the Irish recovery are external, in particular, Brexit, given the strong trading links with the UK and the sharp fall in sterling. However, at the same time, there are also positive developments externally, with the global economy, including the eurozone, picking up momentum, which in turn will help Irish exports.

This positive assessment of the medium term outlook for the Irish economy was also reflected last week in the publication of the Department of Finance’s Summer Economic Statement.

The department is forecasting growth of 4.7% this year and 3.7% in 2018.

John Fahey is senior
economist at AIB


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