Revised figures show Irish GDP growing sharply in 2015, activity contracts in Q1 2016

Figures released by the Central Statistics Office (CSO) show Irish GDP growing by 26.3% in 2015. This figure has been revised from a previous estimate of 7.8%. Gross national product (GNP), which excludes net factor income from the rest of the world, grew by 18.7% in volume terms.

The breakdown of the figures shows that fixed capital formation was the main factor responsible for the sharp increase in GDP last year. Capital formation was boosted by a 122.8% increase in spending on research and development (R&D), which accounted for almost 40% of total investment spending in 2015. The increase in R&D spending reflected the fact that several multinational companies moved intangible assets to Ireland to take advantage of its low tax rates. The impact of this factor on GDP growth was moderated by a corresponding increase in imports. The import of intangible assets for tax reasons also has a positive impact on GNP as it decreases the amount of royalty payments to abroad. A number of large "tax inversion" deals (in which a company moves its headquarters to Ireland for tax reasons) and an increase in aircraft leasing business were also behind the sharp increase in GDP in 2015.

Q1 GDP contracts because of falling investment

Figures also released by the CSO show Irish GDP contracting by 2.1% quarter on quarter (q/q) during the first three months of 2016. This followed a 2.3% q/q increase during the final three months of 2015. On a year-on-year (y/y) basis, GDP still rose by 2.8% during the first quarter. Meanwhile, GNP increased by 1.3% q/q during the period.

The breakdown on the expenditure side shows that the quarterly decline in activity was driven by a sharp fall in capital formation. Moreover, GDP was also depressed by a 5.0% q/q fall in exports of goods and services. This was the first quarterly contraction in exports in three quarters, although they still rose by 2.8% y/y. On the other hand, private consumption was robust during the first quarter, rising at a quarterly pace not seen since 2007.

The figures also show value added increasing for service sectors during the first quarter. Value added in the distribution, transport, software, and communications sector rose by 2.8% q/q, while in public administration and defence it grew by a further 1.9% q/q. On the other hand, value added in the manufacturing sector fell by 11.1% q/q, while it contracted by just 0.1% in the construction sector.

Current-account surplus rises markedly in Q1

Meanwhile, Ireland posted a current-account surplus of EUR8.9 billion (USD9.9 billion) during the first quarter of 2016, according to figures released by the CSO. As a percentage of GDP, the surplus stood at 14.3% during the first quarter. The current account had showed a surplus of EUR4.5 billion during the first quarter of 2015. The increase in the surplus resulted from a sharp fall in the deficit on the primary income account (as outbound royalty payments fell as multinational firms moved their headquarters to Ireland), while the surplus on merchandise trade also improved slightly.

Outlook and implications

The revised GDP figures paint an extremely distorted picture of the Irish economy. It is true that activity was strong last year, but the newly released data significantly overstate the strength of the recovery. In our view, net national income, which rose by 6.5% in 2015, or total employment, which increased by a solid 2.9%, provide a better indication of underlying economic growth in Ireland.

This does not mean that the newly released figures will not have implications. For example, they mean that the debt-to-GDP ratio is now estimated to have sat at 79% of GDP in 2015 instead of 93.8%, while the general government fiscal deficit is now estimated to have been 1.9% of GDP. Nevertheless, we do not expect Ireland's fiscal policy to be significantly affected by the revisions and we still expect it to be mildly accommodative.

Moreover, we do not think that the quarterly contraction in GDP during the first quarter of 2016 is a good representation of current economic conditions. The strong increase in private consumption is encouraging and highlights that improving labour market conditions and a more expansionary fiscal policy are having a positive impact on household spending. Although investment contracted sharply during the first quarter, it is expected that the large (and artificial) rise in capital formation in 2015 will result in a correction this year.

We continue to argue that the UK's decision to leave the EU is the main risk to the Irish economy over the coming years. The United Kingdom is one of Ireland's main trade partners, accounting for around one-fifth of Irish exports and one-quarter of Irish imports of goods. Moreover, there are strong cultural, geographic, and historical links between the two countries. We expect significantly higher uncertainty resulting from the referendum result to hit business and consumer confidence, weighing down on consumption and investment spending, as well as employment. Confidence would most likely be particularly damaged if it became clear that post-exit negotiations between the EU and the UK were messy and antagonistic. On the external front, a weaker currency vis-à-vis the US dollar should help to support Irish exports to outside the Eurozone. However, exports to the UK (which account for around 18.1% of total Irish exports of goods and 20% of exports of services) will be hit by weaker demand (due to the expected slowdown of the UK economy following the "leave" vote) and an appreciation of the euro against sterling. Over the long term, the impact of Brexit is more difficult to assess and it will depend heavily on the extent of the trade agreements between the EU and the UK following the latter's withdrawal from the bloc.

The revised Irish national account figures will lead to significant revisions to our forecasts. These revisions will be reflected in our August detailed round.