Growth figures good news, but room for giveaways still limited

Challenge now lies in maintaining expansion in exports and consumer spending

 Michael Noonan has been facing down budgetary demands Photograph: Nick Bradshaw/The Irish Times

Michael Noonan has been facing down budgetary demands Photograph: Nick Bradshaw/The Irish Times

 

To borrow the famous “Bertie-ism”, the boom is getting boomier. The economy was growing at an annual rate of 6.7 per cent in the second quarter of this year, according to the latest figures from the Central Statistics Office. Growth rates for the first quarter have also been revised up. All the signs are of an economy bouncing back from the huge losses of the crisis years, helped by a uniquely favourable backdrop of low interest rates, low oil prices, a falling euro and some growth in export markets.

With a general election on the way, this is good news for the Government, though it remains to be seen how much credit the electorate will give them. It will make the budget figures look better, too, although ironically the extra room for additional giveaways beyond what is already planned will be limited because of the way EU budget rules are framed.

There are signs in the figures that the public are starting to feel the benefits of recovery. However, growth in consumer spending – up 0.4 per cent in the quarter and 2.8 per cent year on year – is steady rather than spectacular.

Elsewhere the breakdown of the figures is significantly affected by a major acquisition of intellectual property by an Irish-based company - presumably a multinational subsidiary – which had the effect of boosting investment in the second quarter by almost 20 per cent compared to the first quarter. Investment is rising, with some growth in house-building from a low base and a significant rise in investment in machinery and equipment, but the figures thus overstate the increase very significantly.

However the impact of this on overall GDP is more or less neutral, as the acquisition is also booked in the national accounts as an import. Research and development imports rose by €1.7 billion in the second quarter – so this was a big deal.

Domestic economy

The net effect is that the contribution of investment to the GDP rise is overstated, but that net exports – exports minus imports – made a bigger contribution than is apparent. Overall there is growth now in the overall domestic economy as well as in exports, and while GDP growth rates may ease, there is no reason to expect a reversal. Davy and Goodbody stockbrokers now both expect GDP to rise by more than 6 per cent this year.

There are still peculiarities about what is going on. Despite the strength of economic growth, the rate of inflation remains low, with the consumer price index in August unchanged on last year. Part of the explanation is low oil prices and the falling euro, which cuts imports prices. However it looks as if it is still difficult for retailers to increase prices, as would usually happen at this stage of an economic recovery..

Higher growth is good news for the Government finances because it boosts tax revenue and makes the deficit and debt figures – both measured as a percentage of GDP – look a bit better.

If strong growth can be forecast to continue at a strong rate it will create a bit more budget wriggle room. But the key constraint will remain the EU rules, which oblige the Government to cut the deficit by a certain amount each year.To that extent, the Irish budgetary game has changed.

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