Economics: Irish GDP likely to have posted another strong year-on-year increase in Q2

It’s a busy day ahead for Ireland’s Central Statistics Office, with GDP and Balance of Payments data for the second quarter, as well as the Consumer Price Index for August, all due for release.

Although GDP was down 0.6% in the quarter in Q1, which was probably weather related, it was still up 9.1% year-on-year in real terms, once again topping the EU growth league table. Meanwhile, GNP was down 4.9% in the quarter, but up 8.8% in the year.

On the expenditure side of the accounts, exports decreased by 5.8% in the opening quarter compared with the final quarter of 2017, which when combined with an import decline of 2.5% meant overall net exports for the quarter fell by 13.2%.

Capital formation increased by 0.6% while government expenditure showed a rise of 0.4% over the same period. Personal consumption, which accounted for 50% of domestic demand in the first quarter, decreased by 0.3% compared with the previous quarter.

Total domestic demand rose 3.7% quarter-on-quarter. When combined with the 13.2% decrease in net exports, the result was the overall drop in real GDP of 0.6%. Modified domestic demand, an indicator of domestic demand that excludes the impact of trade in aircraft by aircraft leasing companies and trade in research and development and intellectual property, increased by 2.8% in the quarter and 4.8% in the year in the first quarter.

Based on the data for the first quarter, it looks like headline GDP growth for 2018 as a whole will be a lot higher than most commentators had been predicting. We now expect overall GDP growth of 7-9%, with underlying growth of 4.5% to 5.5%.

GDP growth in Q2 is likely to be strong again, though not as high year-on-year as the opening quarter. We are looking for an annual rise of about 7.5%.

Economics: Strong current account surplus forecast for the second quarter

The Balance of Payments current account, a measure of Ireland’s economic flows with the rest of the world, showed a surplus of nearly €9.6bn (12.4% of GDP) in the first quarter of 2018. A merchandise surplus of over €27bn was partially offset by a deficit of €17.5bn on services and income. This surplus in the first quarter followed a similar surplus of €9.4bn in the fourth quarter of 2017.

For last year as a whole, the current account surplus was €25bn (8.5% of GDP), an increase of €36bn on 2016, where large imports of intellectual property dominated the figures.

The Balance of Payments has become a more closely watched indicator internationally since the euro crisis erupted. A deficit is a sign the economy is uncompetitive.

Ireland and other “peripheral” economies were running deficits before the crisis, but Ireland has now returned to substantial surplus. The surplus is also important in relation to the economy’s very large foreign debts. These cannot be paid down unless a surplus is being run on the Balance of Payments.

Another very strong surplus is on the cards for 2018, probably somewhere in the region of €25-30bn.

For the second quarter a positive current account balance of €2,500m is anticipated, as against a deficit of €3,303m in the same period last year.

Economics: August CPI to show Irish inflationary pressures still muted

Ireland’s annual inflation rate came in at 0.8% in July, double the rate of the two previous months, and the highest rate since April last year. Prices were up 0.4% in the month, compared with a monthly rise of 0.1% in June.

Meanwhile, the HICP rate, the measure used for EU comparative purposes, was also up 0.4% in the month, giving an annual inflation rate on this basis of 1.0%, up from 0.7% in the two previous months. The July inflation rate was the highest in five years or so.

The main monthly changes affecting the CPI in July were increases in the cost of air fares, hotel accommodation and alcohol. Against that, the cost of clothing and footwear was lower than in June due to the Summer sales.

Despite strong Irish economic growth, there is as yet little sign of sustained pressure on the prices front, which appears to be the same story across the Eurozone, suggesting that the European Central Bank will be in no hurry to increase interest rates. That said, base effects could push Ireland’s headline inflation rate above 1.0% before the year is out.

Ireland’s average inflation rate was 0.4% in 2017, up from 0% in 2016. Although the average for the first half of 2018 was only 0.2%, the average for the year as a whole should pick up to around 0.7%.

For August, we are anticipating a monthly rise in the headline CPI of 0.2%, which would push the annual inflation rate down to 0.6%. The HICP is also predicted to be up 0.2% in the month, giving a year-on-year increase of 0.8%.

Alan McQuaid (13/9/18)
Economist