Ireland: Irish economy weathers Brexit shock in Q3
September 21, 2016
The Irish national accounts data continues to be affected by distortions and volatility. In the third quarter, the economy grew 4.0% from the previous quarter in seasonally-adjusted terms, coming in above the 0.7% expansion observed in Q2 and marking one of the fastest rates in the European Union. In annual terms, economic growth edged up from 3.1% in Q2 to 6.9% in Q3. Q3’s acceleration reflects financial movements by multinational corporations.
Q3’s growth was driven by a sharp improvement in the external sector’s contribution to growth, which more than offset a sharp decline in domestic demand. Exports swung from a 0.9% drop in the second quarter to a 1.7% expansion on the back of higher exports of computer and business services. The external sector also showed strength against the depreciation of the pound sterling after the Brexit vote in June. In Q3, imports nosedived from a strong 10.6% expansion in Q2 to a steep 8.6% decline. A collapse in imports of business services and intangible assets, such as research and development and intellectual property, are to blame for the fall. As imports plunged and exports grew, the contribution of the external sector improved markedly from minus 10.4 percentage points in Q2 to plus 10.2 percentage points in Q3.
Fixed investment plunged 17.8% in the third quarter, a stark contrast to the 36.9% increase observed in the second quarter. The quarterly print, which marks the lowest reading in four years, was dragged down by a sharp fall in financial flows of multinational firms established in Ireland. Meanwhile, private consumption swung from a contraction in Q2 to a soft expansion in Q3 while government consumption stayed broadly stable. The private consumption reading was surprisingly weak given the strength of the labor market this year. Due to the sharp drop in fixed investment, domestic demand swung from an expansion to a sharp contraction, marking a multi-year low.
It has become increasingly difficult to assess the underlying strength of the Irish economy due to the large quarterly swings. Although short-term prospects seem robust, some weaknesses are starting to appear. While unemployment has been steadily declining throughout the year and hit a pre-crisis low in October, consumer sentiment has weakened while retail sales have slowed in the second half of the year. The medium- and long-term prospects are worse, owing to the prospect of growing protectionism and disruption to existing trade deals after President Donald Trump was elected as U.S. President. The prospect of a ‘hard Brexit’, if it materializes, could also have devastating consequences for the economy.