Ireland: Economic growth contracts in Q1 amid rising global uncertainties
Quarterly national accounts data published by the Central Statistics Office on 19 July showed that in the first quarter of the year the Irish economy lost ground quarter-on-quarter, but sped up in annual terms. Quarter-on-quarter GDP contracted 0.6% in Q1, contrasting a revised 2.8% expansion in the previous quarter (previously reported: +3.2% quarter-on-quarter). Unfavorable weather conditions dampened economic activity, along with headwinds from Brexit-related and mounting global uncertainties. In annual terms, GDP expanded 9.1% in the first quarter, coming in above the fourth quarter’s revised 6.5% rise (previously reported: +8.4% year-on-year). The latest data underlines the sensitivity of the highly open Irish economy to even small changes in business, with growth skewed by the heavy presence of global companies in the country.
Looking at a breakdown of the components underpinning the quarter-on-quarter contraction, there was an across-the-board deterioration. Domestic demand grew at a slower pace of 2.2% in Q1 compared to 3.7% in Q4. Private consumption swung into negative territory, contracting 0.3% in Q1, which contrasted the previous quarter’s 0.6% expansion. This came despite average weekly earnings rising in Q1 and a dip in unemployment; consumers likely exercised more caution in their spending amid escalating uncertainties in the global arena. Government spending also rose at a more subdued pace of 0.4% in Q1 compared to 1.1% in Q4. Moreover, fixed investment growth tumbled to 0.6% in Q1 from 12.8% in the previous quarter, due to lower investment in tangible assets, including machinery and equipment; and a fall in intangible assets, including R&D spending by multinationals. Reduced investment in the construction sector was also behind the slower growth in fixed investment.
On the external side of the economy, exports and imports both contracted, with exports declining at a sharper rate compared to imports. Exports fell 5.8%, contrasting a 6.9% expansion in the previous quarter, and imports declined 2.5% after rising 4.4% in the fourth quarter. The fall in imports was likely due to the financial movements of multinational corporations, which in turn led to the downturn in fixed investment.
Statistical distortions created by multinational corporations make it difficult to gauge the true health of the Irish economy using standard indicators such as GDP. 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, grew 2.8% over the previous period in the first quarter. The result was above the fourth quarter’s 1.1% expansion and suggests firmer activity, conflicting with the GDP headline.
Looking forward, the most acute risk to the economic outlook stems from Brexit; in a recent report, the IMF warned that a “no-deal” Brexit would hit Ireland the hardest among all the countries in the Eurozone, due to the highly integrated nature of the Irish and U.K. economies. The future of the Irish border remains one of the thorniest issues in the ongoing negotiations. Escalating trade war tensions also pose a threat to the economy’s prospects.