The economy contracted a record 12.1 per cent in the first quarter when compared with the previous three month period, but continued to grow when the activity of multinationals was stripped out, new data from the Central Statistics Office shows.
The updated figure compares with a preliminary gross domestic product (GDP) estimate at the end of April that showed a drop of 2 per cent. Comparing the data on an annual basis, there was a decrease of 17.1 per cent in GDP.
GDP was hit by a 35 per cent contraction in the globalised industry sector in January, February, and March compared with the previous quarter, while the information and communication sector posted a decrease of 2 per cent over the same period.
Goodbody chief economist Dermot O’Leary said the scale of the fall “pushed the euro area into a contraction” in the quarter, with the revised estimate for Ireland knocking as much as 0.4 per cent off euro area GDP.
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Bank of Ireland said it was “the sharpest quarterly decline in Irish GDP on record” but noted it reflected “just a small number of multinational firms in the pharmaceutical sector”.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM Ireland, said GDP was dragged down by a collapse in goods exports – mostly pharma – as last year’s surge in exports ahead of US tariffs continued to unwind.
Compared with the same quarter last year, the industry sector, excluding construction, contracted by 38.2 per cent, while the information and communication sector grew by 3.2 per cent over the same period.
Gross value added, which is an economic tool measuring the value producers add to goods and services they have bought, contracted by 28.5 per cent in sectors dominated by multinationals over the year.
Overall, the multinational-dominated sector fell by 27.1 per cent in the quarter.
Pugh noted GDP growth has been negative for four consecutive quarters now, but pointed out the measure is not a reliable indicator of growth. “The Irish economy isn’t in a prolonged recession,” he said.
GDP is also considered an unreliable indicator due to the distorting effect of multinationals that funnel profits through Dublin but do not have tangible benefits for the economy.
Indeed, there was continued growth in the domestic economy with gross national product – a measure of economic activity that excludes the profits of multinationals – up 1.5 per cent in the quarter.
Modified domestic demand, a broad measure of underlying domestic demand that excludes intellectual property and aircraft-related globalisation effects, rose by 0.6 per cent in the quarter and 4.3 per cent in the year.
The increase was driven by personal spending, which increased 0.6 per cent in the quarter and by 2.6 per cent in the year.
Meanwhile, Government spending on goods and services was up 0.5 per cent over the three month period.
Public expenditure was up 3.7 per cent year-on-year as homebuilding and the expansion of the construction sector helped to drive a 9.4 per cent rise in investment.
On trade, exports declined by 7 per cent compared with the previous quarter, while imports rose by 4.2 per cent over the same period. As a result, net exports decreased by 39.8 per cent.
Compensation of employees, which includes wages as well as other payments such as bonuses and allowances, decreased by 3.1 per cent.
Pugh said the drop in employee compensation “looks odd” and would mean real wages unwound two years of positive growth in one quarter.
“We have no doubt that real income gains will slow sharply due to higher inflation, but this estimate will surely be revised in the coming months, especially as inflation didn’t spike until the end of the first quarter,” he said.
Overall, the domestic-based economy grew by 1.4 per cent year-on-year in the first quarter, while Pugh said RSM believes it will grow by around 2.5-3 per cent this year.
“The labour market remains robust enough to support rising real disposable incomes, in aggregate, despite our expectation that inflation will peak at around 4 per cent later this year,” he said.
“Households are saving over 10 per cent over their income, which suggests they have room to offset some of the squeeze on real incomes from higher inflation by saving a bit less.
“That said, a prolonged closure of the Strait of Hormuz that keeps energy prices higher for longer may see households start to cut back on discretionary spend.”
