Investec Comment: Irish economy on track to meet our full-year expectations
Expectations
Quarterly national accounts data released by the CSO show that the Irish economy contracted by 0.6% q/q in GDP terms in Q118. On an annual basis output was a remarkable 9.1% above year-earlier levels.
We had expected a soft quarterly outturn for Q1 given the disruption caused by the extreme weather events seen in the opening months of 2018. Indeed, the Investec Manufacturing PMI fell to a 12 month low of 54.1 in March, while the Investec Services PMI reading of 56.5 in the same month was the weakest in the year to date. A number of other indicators help to illustrate this disruption, such as Retail Sales, where the value of sales fell 5.1% m/m (on a seasonally adjusted basis) in March before surging 6.9% m/m in April.
To this end, the annual growth rate is somewhat more meaningful (in as much as Irish national accounts data, with the usual caveats around multinational distortions, can be). The expenditure side of the national accounts shows that the 9.1% y/y increase in GDP was produced by a 2.7% y/y increase in personal consumption; a 3.7% y/y rise in net government expenditures; a 3.8% y/y decline in gross fixed capital formation (investment); a 6.1% y/y rise in exports; and a 1.1% y/y fall in imports.
Personal Consumption
The extent of the rise in personal consumption is a little surprising given the relatively lacklustre annual move in retail sales volumes in Q1 (+1.0% y/y). Furthermore, Department of Finance data show that aggregate consumer tax (VAT, excise and customs) revenues were only +1.2% y/y in Q1. Government consumption growth of 3.7% y/y is double the rate guided by the Department of Finance for FY18 (+1.9% y/y). Export growth of 6.1% had been signalled by strong merchandise trade data (goods exports +7.1% y/y in the year to date) and, to a lesser extent, the export component of the Investec Services PMI releases. Elsewhere in the release we note that the national accounts measure of goods exports was +10.0% y/y in Q1, while services exports rose 1.1% y/y in the same period.
The drop in GFCF was down to the multinational sector, as imports of intangibles (mainly intellectual property) fell by a third on an annual basis. Underlying investment was much stronger, with expenditures on building and construction rising at a double-digit pace while underlying (excluding aircraft) spend on machinery and equipment increased by a sixth over the Q117 outturn. The fall in GFCF produced the 1.1% y/y drop in the national accounts measure of imports (goods imports rose 7.9% y/y while services imports, which includes intangibles, fell 5.4% y/y).
Forecasted Growth
Balance of Payments data released alongside the national accounts show that a current account surplus of €9.6bn was recorded in the quarter, which equates to 12.4% of quarterly GDP. This outturn was flattered by the fall in services imports noted above, but it suggests that last year’s 8.5% surplus is on track to be at least matched in 2018.
Holding quarterly GDP steady for the remainder of 2018 would suggest full-year GDP growth of 4.6%. However, given the recovery in the pace of growth in activity following the Q1 weather disruptions (the June Investec Manufacturing and Services PMIs both came in at five month highs) we suspect that the economy should comfortably meet our current 5.0% forecasted growth for FY18. This would keep Ireland at or very close to the top of the EU28 ‘growth charts’ following the 7.2% (revised downwards from the previous 7.8% estimate) expansion that was recorded in FY17. Finally, as a sense check we note that the CSO provides an estimate for ‘modified total domestic demand’, which aims to strip out the multinational distortions. This measure rose 4.8% y/y in Q118, which we think is a good proxy for the underlying progress being made here.
Pat Webb
Investment Manager
T: 086 335 1856
E: pat.webb@investec.ie
Nigel Poynton
Investment Manager
T: 087 223 1418
E: nigel.poynton@investec.ie