Quarterly national accounts data just released by the CSO show a strong pick-up in the pace of growth in the Irish economy during Q3. During the last quarter GDP expanded 1.5% q/q (+1.7% y/y) while GNP rose 1.6% q/q (+3.9% y/y). The CSO has revised up its assessment for Q2, as it now believes the economy grew 1.0% q/q in GDP terms (GNP -0.1% q/q), from the previous estimate of 0.4% q/q (GNP -0.4% q/q).
An improvement in underlying Irish economic growth had been anticipated, given positive readings from a host of high frequency indicators, such as retail sales, PMIs and employment data. Hence, we are encouraged to see a return to y/y growth in total domestic demand (+0.6% y/y in Q3) for the first time since Q1 2011.
On the personal consumption side we had been expecting a strong result, given that headline retail sales volumes rose 4.0% q/q in Q3 after a 0.6% q/q decline in Q2, helped by the introduction of the new ‘132’ license plate in July. However, the rate of improvement was less than we would have expected, with Q3 consumption rising 0.9% q/q from Q2’s +0.7% q/q (revised up from the initial estimate of +0.5% q/q) outturn.
Despite on-going belt tightening, net government spending proved to be a positive contributor to growth in Q3, rising 1.1% q/q (Q2: -0.9% q/q).
A highlight within today’s release was the strong gross domestic fixed capital formation result, as it posted a 10.9% q/q rise during the quarter. This was driven by an improvement in both building and construction activity and machinery and equipment, albeit the former off a low base. The Construction PMI posted its first above-50 reading in six years in September (and it has stayed above 50 in the two readings since then, which augurs well for further expansion here in Q4).
Headline exports declined 0.8% q/q during Q3 (Q2: +4.6%), as a pick-up in services exports (which was expected given the strong readings from the new export business component of the Services PMI) was more than offset by ‘patent-cliff’ influenced declines in goods exports. Imports were marginally lower (-0.3% q/q) in Q3 with weak services imports outweighing a pick-up in goods imports. On this note, balance of payments data published alongside the national accounts show a current account surplus of €3.4bn in Q3 2013, up from €2.9bn in the prior quarter and €2.2bn last year. The quarterly improvement is entirely attributable to a €1.4bn narrowing in the ‘Invisibles’ deficit, which in turn is boosted by a €0.6bn expansion in the services trade surplus. The rolling four quarter surplus now stands at €10.4bn, or 6.4% of GDP, though this is exaggerated by distortions relating to MNCs moving tax domicile to Ireland.
In terms of the read-through for the public finances, nominal GDP was €42.3bn in Q3 (+2.4% y/y), bringing the year to date total to €123.2bn. The government’s full year target (i.e. the denominator in its 7.3% deficit to GDP target) is €165.9bn, implying a €42.6bn target for Q4 2013. This would require annual growth of 4.8% in the last quarter, which looks ambitious. Nevertheless, with Exchequer Returns showing tax receipts and voted (discretionary) spending outperforming profile by a combined €1.0bn in the first 11 months of the year, the government’s full year deficit target should be beaten once again.
As we have previously said, given how volatile and revision-prone Irish quarterly national accounts data are, we prefer to look at what the underlying trends are saying as opposed to obsessing about headline figures. Today’s release confirms what we had already suspected, namely that the prospects for the domestic economy have clearly improved since the beginning of H2. With recent data releases pointing to continued expansion in Q4 and the risks to data revisions likely to lie to the upside, we continue to expect that Irish GDP will grow, albeit modestly, for a third successive year in 2013.