Ireland: GDP records sharpest contraction since Q1 2017 in final quarter of 2020
March 5, 2021
The economy fell back into contraction in the final quarter of 2020 amid the reimposition of tough lockdown measures. GDP declined 5.1% on a seasonally-adjusted quarter-on-quarter basis in Q4, contrasting the 11.8% expansion recorded in the third quarter and marking the sharpest contraction since Q1 2017. Meanwhile, in annual terms, economic growth lost pace, slowing to 1.5% from Q3’s 8.7%. Taking the year as a whole, however, the economy expanded 3.4% in 2020 (2019: +5.6%)—one of the best results in the developed world. That said, the significant presence of large multinationals which use Ireland as their base of operations leads to volatility from one quarter to the next, thus making it difficult to gauge the true health of the Irish economy.
Looking at the details of the release, domestic demand dynamics improved from the previous quarter (Q4: +10.6% s.a. qoq; Q3: +9.4% s.a. qoq), on the back of a pickup in fixed investment growth, which came in at 28.7% in seasonally-adjusted quarter-on-quarter terms in Q4 (Q3: +5.9% s.a. qoq). However, private consumption contracted 2.3% in Q4, contrasting Q3’s 20.9% expansion, while government spending growth moderated to 0.1% (Q3: +1.0% s.a. qoq).
Meanwhile, 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—increased 0.2% in seasonally-adjusted quarter-on-quarter terms in Q4, marking a notable slowdown from Q3’s 15.7% expansion. Thus, in this case, modified demand diverged markedly from unadjusted demand, revealing how the presence of large multinationals within the country can dramatically skew the metrics.
On the external front, exports of goods and services increased 4.2% on a seasonally-adjusted quarterly basis in Q4, which was below the third quarter's 7.2% expansion. Conversely, imports of goods and services picked up, expanding 24.4% in Q4 (Q3: +2.1% s.a. qoq) and marking the best reading since Q4 2019.
Looking ahead, economic growth is set to pick up this year as the effects of the pandemic fade. Continued accommodative fiscal and monetary policies should support domestic demand, while firming global demand will boost exports. However, uncertainty over the evolution of the pandemic and potential disruptions as the country adjusts to its new trading relationship with the UK represent downside risks.
Author: Hanna Andersson, Economist