Latest economic growth data puzzling

The CSO has just released Ireland’s national accounts data for Q4 2013.

At a headline level, GDP disappointed, decreasing by 0.3% in 2013, while GNP rose by 3.4% – a divergence which hints at the extent to which Irish national accounts data can be skewed by sector-specific issues in the large multinational sector.

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On this point, it is important to note that were it not for the drag from a fall in aircraft purchases (which we estimate shaved c. 1% from GDP) and ‘patent cliff’ pressures in the pharma sector GDP would have increased last year. In Q4 2013 GDP fell 2.3% q/q in volume terms while GNP expanded by 0.2% q/q.

The big surprise within this release is that the data show no improvement in personal consumption over 2013, with a 1.1% decline recorded for the full year and declines of 0.6% q/q and 1.1% y/y recorded in Q4. Retail sales data had pointed to an improvement (for 2013 as a whole retail sales volumes rose 0.7% y/y and by 0.8% y/y if the volatile motor trade component is excluded), particularly in the second half of the year.

Net expenditure by central and local government fell 0.5% y/y in volume terms in 2013, which was to be expected given the on-going fiscal consolidation moves by the government.

One highlight within the release was the recovery in investment as the year went on. While it was +4.2% y/y for 2013 as a whole, it was very much a ‘year of two halves’ with increases of 14.7% y/y and 20.7% y/y posted in Q3 and Q4 respectively. We understand that this primarily reflects a return to growth for the construction sector (the construction PMI rose above 50 for the first time in six years in September of last year). The growth in headline investment is all the more impressive given the drag from a steep drop in aircraft purchases compared to 2012.

On the trade side, exports rose 0.2% y/y in 2013 as a drop in merchandise exports was offset by continued growth in services exports. We had seen indications (CSO Goods Exports and Imports and the export component of Investec’s Services and Manufacturing PMIs) that the export sector had a stronger finish to the year, so we are not surprised to see that exports rose by 2.1% q/q and by 2.9% y/y in Q4. Turning to imports, these rose 1.0% y/y in 2013, led by the services side, but we do note a spike in merchandise imports in Q4 which is possibly driven by the brighter outlook for the economy. Net exports (-2.7% y/y) were therefore a drag on GDP for the first time since the onset of the crisis.

Balance of payments data published alongside the national accounts show that Ireland booked a current account surplus of €3.3bn in Q4 2013 (Q4 2012: €2.9bn), bringing the annual surplus to €10.9bn last year (2012: €7.3bn), which was equivalent to 6.6% of GDP (2012: 4.4%). The year-on-year improvement was driven by a €7.8bn improvement in the invisibles balance, partially offset by a €4.2bn deterioration in the merchandise balance (driven by the well-documented ‘patent cliff’ issues in the pharmaceutical sector). While the rebound in Ireland’s current account from a deficit of €10.2bn in 2008 (5.6% of GDP) to a surplus of €10.8bn in 2013 (6.6% of GDP) has been very impressive, we note that the headline figures are exaggerated by distortions relating to MNCs moving their tax domicile to Ireland.

Ahead of today’s national accounts release two numbers we wanted to focus on were domestic demand and nominal GDP. Domestic demand declined marginally in 2013 (-0.1% y/y) – given the improving fortunes for the labour market in particular we see this turning positive in 2014. Nominal GDP, against which Ireland’s debt and deficit figures are benchmarked, was only +0.1% y/y last year to €164.1bn. We speculated that the NTMA’s motive for buying back a portion of the 4% 01/14 Treasury bond in mid-December, just a matter of weeks before its scheduled maturity, was in order to put a gloss on the year-end debt/GDP figures. Whether or not that was the case, the €4.1bn buyback shaved 2.5ppt from the end-2013 general government debt / GDP ratio.

All in all, the optics around this release are not great – we had assumed that GDP would increase by 0.7% last year – but it is important to note the impact caused by sector-specific issues in the export-oriented part of the economy which have limited bearing on the domestic backdrop. In any event, the momentum behind the domestic economy, allied to recovery across Ireland’s key trading partners and a likely easing of the patent cliff pressures as the year goes on, points to a positive outturn for 2014. Philip O’Sullivan, Investec

Ibec, the group that represents Irish business, today said that the latest CSO data on economic growth are somewhat puzzling given the resurgence in employment, as well as business and consumer confidence.

Commenting on the latest CSO figures, Ibec’s Head of Policy and Chief Economist, Fergal O’Brien said: “It is a bit of a puzzle that the GDP numbers are so disappointing at a time when economic recovery is clearly taking hold. The Q4 data doesn’t fit with either the 60,000 jobs growth number last year, or the strong improvement in business and consumer confidence. The pharma patent cliff is a significant  factor in the export data, but it was particularly disappointing to see that the consumer spending numbers were so weak. We know that retail had recovered in Q4 and we also know that other consumer sectors, such as hospitality, performed strongly last year, so it is surprising that overall consumer spending was so weak.”

“The main positive in the latest data is the recovery in investment. Looking to 2014 we strongly believe that the recent economic resurgence will be reflected in the official data over the coming quarters and that GDP will grow by close to 3% this year. Indeed, the weak base performance from the 2013 data could well provide an upside possibility to our 2014 forecast. The economy is clearly recovering but domestic spending needs a further shot in the arm – the best way to do that is to increase consumer spending power by cutting taxes.”