Irish Economy 2011: GDP up 1.3% in Q1 on exports boost; GNP down 4.3% in quarter as domestic demand dipped

Irish Economy 2011: Initial estimates for the first quarter of 2011 show an increase, on a seasonally adjusted basis, of 1.3% in GDP (gross domestic product) and a decline of 4.3% in GNP (gross national product) compared with the previous quarter. In comparison with the corresponding quarter of 2010, GDP at constant prices was marginally up (+0.1%) while GNP was 0.9% lower.

GDP includes the profits made by foreign multinationals in Ireland. The foreign-owned sector is more significant in Ireland than in any other developed economy. For an explanation of the difference between GDP and GNP click here.

Strong net exports: The Central Statistics Office reports that net exports (exports minus imports) grew by €1.56bn (20.6%) at constant 2009 prices between the first quarter of 2010 and the first quarter of 2011. Domestic demand, on the other hand, declined by €990m (-3.1%) over the same period with personal consumption down by 2.9%.

On the output side of the accounts Agriculture, Forestry and Fishing (+3.9%) and Industry excluding Building and Construction (+1.1%) were the only sectors to record annual growth. However, the Other Services sector, which accounted for almost a half of GDP at factor cost in Q1 2011, declined at a more moderate rate than in previous quarters.

Seasonally adjusted series: Personal consumption and Government expenditure both fell by 1.9% on a constant price seasonally adjusted basis between the final quarter of 2010 and the first quarter of 2011. Capital formation (+1.1%) and Exports (+3.8%) were both up while Imports fell by 0.3%.

On the Output side of the accounts there were seasonally adjusted increases in Distribution (+1.3%) and Other services (+0.7%) with all other sectors recording declines.

Net factor outflows increased by close on €2 billion seasonally adjusted between Q4 2010 and Q1 2011. Increased profit outflows from Ireland and a decline in the overseas profits earned by foreign Public Limited Companies headquartered in Ireland were the major contributors to this

Latest 2010 data shows GNP rose in 2010:

The CSO also said today that detailed annual national accounts show that GDP fell by 0.4 per cent in constant prices between 2009 and 2010. This confirms the trend in the previously published quarterly estimates of GDP. Meanwhile GNP, on the other hand increased by 0.3 per cent between 2009 and 2010 compared with a previously signaled 2.1 per cent decline.

Industry the main contributor to growth in 2010: Industry (excluding Building and Construction) grew by 11.2 per cent between 2009 and 2010 while Agriculture, Forestry and Fishing increased marginally by 0.7 per cent. However, these increases were not sufficient to counteract the declines which took place in the remaining sectors of the economy. Building and Construction activity (-30.1%) continued to decline in 2010. Public Administration and Defence (-2.7%), Other Services (-2.3%) and Distribution, Transport and Communication (-2.0%) all recorded volume declines between 2009 and 2010.

Strong export growth: On the expenditure side of the accounts exports performed strongly in 2010. However, the growth in net exports of €5.9 billion at constant prices (23.8%) was outweighed by a decline of €6.7 billion (-4.9%) in the combined total of the components of domestic demand. Personal consumption, which accounts for nearly two thirds of domestic demand, fell by 0.8 per cent while Government expenditure was 3.8 per cent down on 2009. Capital formation (-24.9%) registered the largest percentage decline, reflecting the continued weakness of the construction sector.

Current account deficit of over €1 billion in Q1 2011

The CSO reported that the Balance of Payments current account deficit for Q1 2011 was €1.03bn - - down from a deficit of €1.47bn in Q1 2010. The first quarter merchandise surplus of €9.12bn was almost unchanged on the same quarter of 2010.

Compared with the results for the first quarter of 2010 the services deficit (€1.44bn) decreased by over €300m while the income deficit (€8.03bn) was broadly similar.

Total service exports at €18.28bn increased by €1.6bn largely due to computer services (+€900m) and business services (+€400m). Total service imports at €19,722m were up almost €1.3bn with increases for business services (+€1.2bn) and royalties/licences (+€200m) and a decrease for tourism and travel (-€160m).

In the current account the direct investment income abroad of Irish-resident businesses increased to €3.2bn while the corresponding outflows of foreign-owned enterprises in Ireland were largely unchanged between Q1 2010 and Q1 2011. Portfolio investment income outflows increased by €651m to €7.16bn.

In the financial account, direct investment in Ireland increased by €15.9bn while direct investment abroad increased by €5.4bn. Portfolio investment assets decreased by €1.3bn while liabilities increased by €3bn. Other investment assets decreased by €24bn and liabilities decreased by €33bn.

The CSO says the current account balance for 2010 has changed from a deficit of €1.11bn to a credit of €761m while the change in the 2009 deficit has been less pronounced.

Dermot O'Leary, Goodbody's chief economist, says due to the volatility of Irish data there is something for everything in today’s GNP/GDP release. However, the key takeaway for us is that the economy has effectively been stable over recent quarters after the heavy declines of 2008 and 2009:

Economy flatlining... - As measured by either GDP or GNP, is flatlining, with strong exports offsetting the continued contraction in domestic demand. On first glance, the data today do little to alter our forecasts for a flat outturn for the full-year in 2011, before growth returns in 2012.

...despite quarterly volatility - For the record, GDP increased by 1.3% qoq (seasonally-adjusted) in Q1 2011, but GNP contracted by 4.3% qoq. The reason for unusually large fall in GNP is a large increase in net factor income outflows relative to Q4 2010. This, in turn, is due to the large multinational presence in Ireland and is a key theme throughout the volatility and revisions. A better gauge is the annual rate of change, where GDP was effectively flat (-0.1%), while GNP fell by 0.9%. Annual growth in GDP has been trending close to zero over the past three quarters.

Strong exports/weak domestic demand trend continues - The reasons behind this flat performance are familiar ones. Export growth continues to be strong - up 7% yoy in Q1 - while domestic demand continues to contract - down 4.1% in Q1. One glimmer of hope, however, can be found in the performance of investment. Investment did fall by 9.1% yoy but this was the slowest rate of decline since Q3 2008. More importantly, a more detailed look at the drivers revealed that business investment (excluding planes) grew by 2% yoy in Q1, representing the first growth since the end of 2007.

Current a/c now in surplus - Two other positive elements today’s data are worth pointing out. Firstly, the CSO upwardly revised previous years estimates for GDP based on new data. Secondly, it was confirmed that Ireland recorded a balance of payments current account surplus in 2010 for the first time (in a calendar year) since 1999 (since 2004 on a rolling four-quarter basis). This indicates that a significant private sector surplus is offsetting the large public sector deficit.