Ireland: Ireland leads growth in EU as volatility in national accounts persists
March 9, 2017
Financial movements from multinational corporations continue to distort and generate extreme volatility in the Irish national accounts. In the fourth quarter, the economy grew 2.5% from the previous quarter in seasonally-adjusted terms, coming in below the 4.0% expansion in Q3 but vastly exceeding market analysts’ expectations of a softer 1.0% increase. In annual terms, economic growth jumped from a revised 6.2% expansion in Q3 (previously reported: +6.9% year-on-year) to an impressive 7.2% increase in Q4. 2016 growth came at 5.2%, making Ireland the fastest growing economy in the single-currency bloc for the third year running, though the expansion was far below the 26.3% rate recorded the preceding year.
Q4’s expansion was driven by a sharp increase in domestic demand, which more than offset a poor performance from the external sector. Fixed investment swung from a mild 1.5% contraction in Q3 to a massive 85.7% expansion in the fourth quarter. The exorbitant increase can be traced to imports of intellectual property into the country by multinational corporations. In 2016, growth in fixed investment accelerated to 45.5%, up from 32.7% in 2015. Private consumption, which constitutes over 40% of GDP, grew at a stable pace in Q4. The modest increase in private consumption is surprising considering the context of a strengthening labor market, higher real personal disposable income and strong retail sales figures throughout the quarter. Overall, domestic demand expanded a staggering 28.8% in Q4 (Q3: +1.0% year-on-year).
The external sector performed poorly in the final quarter as export growth paled in comparison to growth in imports. Exports expanded a strong 4.9% but imports surged 37.2%. The strong increase in imports again reflects the transfer of intangible assets, such as research and development and intellectual property, into Ireland. The contribution of the external sector deteriorated significantly from plus 8.3 percentage points in Q3 to minus 26.7 percentage points in Q4.
The large swings in national accounts have made it extremely difficult to assess the health of the Irish economy and therefore the Central Statistics Office is now developing a new methodology. Although indicators such as retail sales and unemployment, which tend to offer a more credible picture of the economy, continue to point to an expansion, the mid- and long-term outlook is extremely uncertain. The United Kingdom is poised to trigger Article 50 and Ireland’s open economy is highly exposed to any changes in trade policy with the UK. Evidencing its concerns, the Central Bank has cut the country’s growth forecasts on three occasions since the Brexit vote in June. To make matters worse, the decision of the Prime Minister to step down in spring comes at a particularly bad time. Ireland is set to lose a well-seasoned leader and domestic political infighting could take the spotlight, sidelining complex issues related to the EU Brexit negotiations.