Economy grew by 2.7 per cent in the first quarter

Revised figures mean €2bn budget adjustment could be cut by up to half

Ships in Dublin Port being loaded with goods for export. Net exports contributed €541 million in volume terms on a seasonally adjusted basis during the first quarter. Photographer: Dara MacDonaill

Ships in Dublin Port being loaded with goods for export. Net exports contributed €541 million in volume terms on a seasonally adjusted basis during the first quarter. Photographer: Dara MacDonaill

Thu, Jul 3, 2014, 11:36

The public finances look likely to substantially overshoot the Government’s deficit target for this year following the release of new positive data on the economy.

Experts are speculating that the Goverment could cut its planned Budget adjustment for next year by half in money terms, to €1 billion from €2 billion, and still bring in a deficit of below three per cent of Gross Domestic Product.

The latest Quarterly National Accounts, which were published this morning by the Central Statistics Office, indicate that on a seasonally-adjusted basis there was a 2.7 per cent increase in Gross Domestic Product (GDP) in the first quarter of this year compared to the fourth quarter of last year. Gross National Product (GNP) rose by 0.5 per cent over the same period.

Revised figures also show that GDP grew by 0.2 per cent in 2013 as against a previous estimate showing the economy contracted by 0.3 per cent. In other words, the statistics now show that the economy did not contract last year.

Also, the CSO has adopted new international rules for calculating the size of the economy which have had an effect of increasing by almost 5 per cent the size of Ireland’s GDP.

This, in turn, reduces the size of the deficit in the public finances when measured as a percentage of GDP.

Ireland’s GDP for last year is now estimated as €174.8 billion, an increase of approximately €8 billion over what the figure would be using the former standard. The new standard is being introduced across the EU and is having varying effects on economic data depending on the nature of the economies.

The latest data from the CSO comes in the wake of exchequer figures released yesterday by the Department of Finance which showed that taxes were approximately €500 million ahead of target for the first half of the year.

The strong performance of the economy comes on the back of continuing positive data on employment growth, but also continuing weak data on retail sales.

KBC Bank economist Austin Hughes said previous estimates about the size of the required budget adjustment were based on “a smaller economy than we now perceive it to be” and that as a consequence the adjustment did not have to be as big. “We could get away with an adjustment of close to €1 billion,” he said, while adding that we were still only half way through 2014.

The new statistical standards, the EU System of National and Regional Accounts framework, take account of spending on research and development and illegal economic activities such as prostitution and illegal gambling.

The standards include other measures which are less relevent to Ireland. R&D expenditure, which used by treated as an ancillary cost to the main production of an enterprise, is now recognised as an investment and included in the capital formation figures. The change has added 4.1 per cent to Irish GDP.

The introduction of new estimates for illegal economic activities mean that prostition the sale of drugs, including calculations as to their “retail” and “wholesale” prices, are now also included in the GDP figures. The revision in this regard has added 0.72 per cent to GDP.

The new standards have been used to backdate economic data to the 1990s and have not materially affected economic growth trends.

Other data released by the CSO shows that net exports contributed €541 million in volume terms on a seasonally-adjusted basis during the first quarter, up 1.8 per cent. Personal consumption declined by 0.1 per cent.

On the output side, industry, which includes building and construction, rose by 2.8 per cent in volume terms in the first three months of 2014. Other servies were up 1.1 per cent while, distribution, transport, software and communications increased by 0.7 per cent. There was a 0.3 per cent decline in volume terms in public administration and defence, while agriculture, forestry and fishing was down 0.2 per cent.

Capital investment fell by 8.1 per cent, largely due to the implementation of The European System of National and Regional Accounts (ESA 2010).

Government expenditure was down by 2.1 per cent.

Separate CSO figures reveal a current account surplus of €960 million, or 2.2 per cent of GDP, on the balance of payments in the first quarter. This marks a rise of €781 million, or 1.8 per cent of GDP.