28 Dec 2017 | 01.57 pm
CSO Data Points To Economy In Overdrive
EU’s fastest growing economy for fourth successive year
28 Dec 2017 | 01.57 pm
Q3 2017 economic data from the Central Statistics Office indicate that Ireland’s economy will have grown by around 7% by year-end, based on a figure of 7.3% GDP growth for the first three quarters combined with indicators which suggest that growth is continuing through Q3.
According to Investec chief economist Philip O’Sullivan, the quarterly data show “extraordinarily strong growth at a headline level”, with GDP up 4.2% between Q2 and Q3 indicating an annualised rate of 10.5%.
He added: “For the first three quarters of the year annual growth has averaged 7.3%, so even if quarterly growth were flat in Q4 this would imply a full-year GDP increase of 6.5%, well ahead of our current 4.8% forecast. The data is flattered by the multinational sector but a deep dive confirms a strong underlying growth profile.”
Given the recent modifications to GDP measurements implemented by the CSO, in the wake of ludicrous results such as the 23% growth in GDP two years ago, O’Sullivan added a caution: “Ireland’s QNA data tend to be very volatile and subject to revision, so they always carry something of a health warning. To compensate for this, the CSO provides ‘modified’ data which exclude some of the Multinational Enterprises (MNEs) effects.
“Year to date, annual growth in modified total domestic demand is running at 4.9%, more or less in line with our 4.8% GDP forecast. Our gut feeling is that this is the ‘real’ growth in the underlying economy. With high frequency data such as the Exchequer Returns and Investec Manufacturing PMI suggesting a strong Q4 performance for the economy, we think that Ireland should see its GDP increase by a remarkable 7.0% in 2017, which would cement the country’s position as the EU’s fastest growing economy for a fourth successive year.”
At Ulster Bank, economist Simon Barry noted that analysis of the national accounts continues to be hampered by distortions linked to major swings in some key variables related to MNE activity. In Q3, this again included a large annual fall in R&D-related intellectual property imports, in turn producing corresponding weakness in investment.
Barry explained: “The Modified Domestic Demand (MDD) measure attempts to present a more meaningful measure of domestic demand in the economy by stripping out some particular identifiable MNE-related distortions in the investment figures associated with aircraft leasing and imported R&D. These series also display high levels of q/q volatility, but final MDD is still growing at a very strong pace of 4.9% y/y in the year-to-Q3 – above the very healthy 4.7% growth recorded last year.
“These ‘modified’ variables are highly volatile and far from free from MNE distortion. MNE activity continues to exert a strong influence over Machinery & Equipment and Intangible investment spending trends, meaning that some of the recorded buoyancy in final MDD is in fact attributable to MNE activity (notably, purchases of imported software). One clear and unambiguous feature of the investment figures is the continuing strength of construction activity, with very strong growth in both new dwellings and non-residential spending contributing to a 15.2% year-to-date increase.”
One of the few areas of the Quarterly National Accounts which are free from MNE-distortion is consumer spending. Barry observed: “The news here was positive with a welcome return to positive growth of 1.9% q/q, the strongest quarter in over 10 years, generating an acceleration in y/y growth to 2.7% y/y in Q3, the best performance in five quarters. This more positive picture of trends in consumer spending is also more in line with other data on the Irish consumer including core retail sales, consumer sentiment, wealth gains and income and employment growth, all of which suggest that near-term prospects for overall consumer spending remain positive.”
Exports were a major driver of the stronger Q3 growth performance, with a 4.4% quarterly surge resulting in a sharp acceleration in y/y growth from 3.4% to 8.7% y/y in Q3. In Barry’s view, here too the distorting influence of MNEs is very much evident. Increased MNE use of contract (internationally-outsourced) manufacturing was a key driver of the Q3 export acceleration, while there was also a notable pickup in royalty exports, an effect that is linked to the growing levels of intellectual property products located in Ireland.
Despite these caveats, in Barry’s opinion improved growth performance in aggregate of Ireland’s trading partners in recent quarters is an underlying source of support for the Irish export sector and the wider economy more generally, and is evident in the PMI survey measures of export performance, which are not as volatile as the QNA measures.
“While there is some evidence of growth being skewed somewhat towards MNE-dominated sectors (including IT and Professional Admin & Support which includes aircraft leasing), the strength of construction output growth is a notable feature of the economy’s performance in the first three quarters of 2017, consistent with the signal from the expenditure side of the accounts. Robust expansion in Agri output is another welcome feature of the economy’s performance in 2017,” said Barry.
“Overall, the Irish national accounts continue to be characterised by high levels of complexity, MNE-related distortion and volatility. In particular, exceptionally strong GDP growth of 10.5% in Q3 (and 7.4% year to date) is painting an overly flattering picture of the economy’s recent performance.
“However, the broad story remains one of an economy which has been performing very well and which remains one of the fastest growing in Europe, a point evidenced by the strength of a wide range of other indicators, including core retail sales, employment and the PMI surveys.”