Bumper Irish growth rate comes with health warning

The Central Statistics Office (CSO) has warned about reading too much into the latest growth numbers for the Irish economy amid concern they have little resemblance to underlying economic conditions.

The agency was commenting in the wake of the latest quarterly national accounts which showed the economy grew by 7.8 per cent in gross domestic product (GDP) terms last year. This was more than three times the euro area average, and the fastest rate of growth recorded anywhere in Europe.

The CSO cautioned, however, that the headline rate was heavily distorted by the activities of multinationals, and could not be relied upon as an accurate gauge of activity. Instead it pointed to a 3.9 per cent increase in “modified” domestic demand, which strips out the impact of aircraft leasing and intellectual property imports, as a more reliable indicator .

However, some analysts said even this metric may be exaggerating the true rate of growth here.

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The preliminary figures show nearly all sectors of the economy experienced growth in 2017. While headline GDP rose by 7.8 per cent, gross national product (GNP), which excludes cross-border flows by multinationals, expanded by 6.6 per cent.

The figures show industry as a whole grew by 8.9 per cent in volume terms, led by strong expansions in the information and communication sector, which covers the Republic’s large IT industry, and construction. Both these sectors registered growth of 16.8 per cent for the year.

Personal consumption of goods and services, a key indicator of domestic activity, expanded by 1.9 per cent, although this is expected to be revised up later in the year.

Buoyant conditions

Another key driver of growth was exports, which rose by 6.9 per cent on foot of buoyant conditions internationally, while imports fell by 6.2 per cent.

Capital investment by companies declined by 22.3 per cent on foot of lower imports of intellectual property, which spiked in 2016.

The State’s balance of payments recorded a surplus of €37.1 billion, or 12.5 per cent of GDP, up from a surplus of €9.1 billion in 2016.

The figures come on foot of positive labour market data earlier in the week,which showed employment was now close to its pre-crash peak of 2.23 million.

Commenting on the latest numbers, KBC economist Austin Hughes said it should be emphasised that the figures produced by the CSO follow best international practice to arrive at the appropriate measure of GDP.

“However, the point is that these numbers are hugely influenced by the outsized activities of a small number of multinational companies and, as such, don’t readily reflect the spread of conditions across the Irish economy as a whole.

“Statistical issues aside, the reality is that the Irish economy has begun 2018 with a good deal more momentum than we previously envisaged,” Mr Hughes said.

Surplus

“While we had expected some headwinds from Brexit-related concerns and an uncertain geopolitical environment globally, apart from some sector-specific difficulties, the Irish economy has not seen much Brexit-related fallout and even managed to move from a current account deficit into a surplus with the UK between 2016 and 2017.”

Conall Mac Coille, economist with Davy Stockbrokers, said Ireland’s strong GDP growth was not entirely a statistical mirage, noting “we already know that employment expanded by 2.9 per cent last year, retail sales volumes by 7 per cent and tax revenues by 6 per cent”.

He said the scope for “catch-up” was most evident in construction, which saw 17 per cent growth in 2017. “Overall we believe Ireland’s underlying GDP growth rate was close to 5 per cent last year.”