Ireland: GDP logs largest contraction on record in Q2 on Covid-19 containment measures
September 7, 2020
The economy shrank at a record-breaking pace in the second quarter as the Covid-19 health crisis hammered activity. GDP plummeted 6.1% on a seasonally-adjusted quarter-on-quarter basis in Q2, notably below the 2.1% contraction seen in Q1. Moreover, in annual terms, economic activity declined 3.0% in Q2, contrasting Q1’s 5.7% expansion and marking the largest contraction since Q3 2009. However, the substantial presence of multinationals using the country 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.
The downturn in domestic demand (Q2: -45.9% s.a. qoq; Q1: -7.1% s.a. qoq) was mainly driven by lockdown measures to halt the spread of the coronavirus. Private consumption plummeted 19.6% in Q2, well below Q1’s 3.6% contraction, amid rising unemployment and shredded incomes. Moreover, fixed investment dived at a rate of 69.8% (Q1: -12.7% s.a. qoq), reflecting elevated uncertainty and depressed sentiment. Meanwhile, public spending expanded 7.5% in Q2 (Q1: +2.1% s.a. qoq), likely owing to the government’s stimulus packages.
On the external front, exports of goods and services contracted 3.1% in Q2, marking the worst result since Q1 2013 (Q1: +0.1% s.a. qoq), reflecting a weak global trading environment and disrupted supply chains. In addition, imports of goods and services declined at a more pronounced rate of 35.5% in Q2 (Q1: -2.0% s.a. qoq), marking the worst reading since Q3 2017.
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 15.7% in the second quarter, contrasting the previous quarter’s 2.3% rise. The downturn thus indicates falling domestic activity, consistent with the GDP headline in this case.
The economy is expected to contract this year due to the Covid-19 pandemic. Strict lockdown measures at home are set to constrain consumer and capital spending, while muted global demand will hammer the external sector. Although fiscal and monetary stimulus should provide some support, a potential second wave of the virus poses a downside risk.
Author: Hanna Andersson, Economist