Ireland: Economic growth tumbles on a downturn in the external sector
Quarterly national accounts data published by the Central Statistics Office on 13 December revealed that the Irish economy slowed markedly in the third quarter, owing to a notable deceleration in exports. This reflected weaker growth more widely across the Eurozone against the backdrop of heightened global trade tensions and Brexit-related uncertainties. The economy grew 0.9% over the previous quarter in Q3, following a revised 2.1% quarter-on-quarter expansion (previously reported: +2.5% quarter-on-quarter) in the second quarter. Volatility in the GDP reading from one quarter to the next highlights the highly open nature of the Irish economy and its sensitivity to even small changes in business due to the heavy presence of big multinationals.
On the domestic side of the economy, domestic demand rebounded to a 7.3% expansion over the previous quarter in Q3, to a 1.6% contraction in Q2. The upsurge was fueled by fixed investment growth soaring to 21.8% in the third quarter, up from 1.4% in the second quarter, as investment in machinery and equipment, and intangible assets bounced back amid elevated business confidence. On the other hand, private consumption growth moderated from 1.3% in the second quarter to 1.0% in Q3, as higher inflationary pressures ate into households’ purchasing power and thus led to weaker private spending. Government spending also grew at a weaker pace of 1.8% in Q3, down from 2.1% in Q2.
A downturn in the external sector was behind the marked deterioration in growth in the third quarter from the previous period. Export growth plummeted to 1.5% in Q3, down from 6.8% in Q2, due to a broad-based slowdown in the Eurozone and persistent fears over what shape Brexit will ultimately take and the increasing global trend towards protectionism. Conversely, imports continued to accelerate, rising 7.1% in the third quarter following a 4.1% expansion in the second quarter. Statistical distortions created by multinational corporations make it difficult to gauge the true health of the Irish economy using standard indicators such as GDP.
Modified domestic demand, the national account metric developed by the CSO that strips out the more volatile components such as research and development, and aircraft leasing operations, fell 0.6% over the previous period in the third quarter, after contracting 2.6% quarter-on-quarter in the second quarter. The improved reading indicates a firming in activity to some extent, marking a discrepancy with the GDP headline in this case.
Going forward, the possibility of a no-deal Brexit will continue to pose the most severe risk to the economic outlook; the Irish economy would be among the hardest hit in the Eurozone due to its highly integrated nature with the UK economy. The future of the Irish border also remains the most contentious point in the negotiations and threatens to jeopardize economic and diplomatic ties between the two countries.