Ireland: Economy loses pace in the second quarter on downbeat external sector
September 13, 2019
The economy lost traction in the second quarter, with GDP growth in quarter-on-quarter and seasonally-adjusted terms falling to 0.7% from the revised 2.7% expansion recorded in the first quarter (previously reported: +2.4% quarter-on-quarter s.a). Meanwhile, in annual terms, growth slid to 5.8% in Q2 from 7.4% in Q1. The significant presence of large multinationals in the country using Ireland as their base leads to marked volatility from one quarter to the next, thus making it difficult to gauge the true health of the Irish economy.
A negative contribution by net exports drove the downturn. While export growth picked up from 1.5% in Q1 to 2.6%, imports expanded at a much faster pace. Imports rebounded strongly from a 2.0% drop in the first quarter to a 43.0% jump in Q2—the strongest expansion in two years—and reflecting a notable acceleration in demand for capital goods.
On the domestic side, a massive surge in fixed investment was behind the marked turnaround in domestic demand and reflects the volatility of capital flows due to the highly open nature of the Irish economy. Fixed investment grew a marked 182.0% over the previous quarter in Q2, mainly owing to a surge in capital spending, but also partly reflecting a base effect (Q1: -22.7% qoq). Meanwhile, household spending picked up slightly, although growth of private consumption remained relatively muted amid downbeat consumer confidence (Q2: +0.8% qoq s.a., Q1: +0.6% qoq s.a.). Meanwhile, government expenditure kept pace from the previous quarter, rising 1.0% in Q2 (Q1: +1.0% qoq s.a.).
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 1.6% in quarter-on-quarter, seasonally-adjusted terms in Q2, contrasting the 2.2% expansion in the first quarter, due to a negative contribution by inventories. Thus, in this case, modified demand diverges significantly from unadjusted demand, revealing how the presence of large multinationals within the country can dramatically tilt and skew the metrics.
Looking ahead, the Irish economy is projected to lose this momentum this year and next, with the Eurozone’s broad-based slowdown and Brexit uncertainty weighing on the external sector. That said, domestic demand should strengthen next year on the back of an acceleration in fixed investment growth as business conditions improve. A no-deal Brexit continues to the biggest threat to the economic outlook.
Author: Nihad Ahmed, Economist