Economy continues to contract

The Irish economy continued to contract during the first six months of 2009, but there is evidence that the rate of decline has slowed, new figures from the Central Statistics Office showed today.

Sharp alls in consumer spending and construction output contributed to the slide.

Gross domestic product (GDP), the value of goods and services produced in the State, fell 8.4 per cent to €85.8 billion in the first half of the year. Last year, GDP fell to €93.6 billion in the same period.

Gross national product (GNP) – which excludes the contribution from foreign-owned firms operating here - for the first half of 2009 fell 12.4 per cent to €70.3 billion.

On a quarterly basis, GDP at constant prices fell 7.4 per cent, while GNP was 11.6 per cent lower.

Seasonally adjusted estimates indicated no change in GDP compared with the previous quarter, but GNP showed a small decline of 0.5 per cent. The rate of decline has slowed, however.

Consumer spending fell 6.8 per cent year on year in volume terms during the quarter, while capital investment also fell, slipping 24.4 per cent.

However, net exports rose the during the three-month period, up €1.3 billion compared with the same quarter a year earlier.

Analysts had expected net exports to return to growth, mainly due to the resilience of the multinational sector. Davy Stockbrokers pinpointed pharmaceutical and medical devices firms as one of the possible drivers behind this increase.

Industry output fell 11.3 per cent in volume terms, compared with the second quarter of 2008. The construction industry was hard hit, suffering a 30.8 per cent decline in output during the period.

However, on a quarterly basis, the rate of decline in the sector slowed, with the industry showing a 3.3 fall on the previous quarter to €2.5 billion. This compares with a 14.7 per cent fall in the first quarter of the year.

Minister for Finance Brian Lenihan said the decrease was not unexpected.

"These economic figures are in line with the projections set out in the supplementary budget at the start of last April. While still negative, the figures are a relative improvement on those recorded in the first quarter. The supplementary budget forecasted that Gross Domestic Product would contract by 7¾ per cent this year," he said.

"A positive that can be taken from the data is that the rate of export decline is very small in comparison to many other export-oriented economies."

The Minister cautioned against early optimism on economic recovery overseas.

"Internationally, tentative signs of a recovery have emerged in many of our major trading partners. While this is encouraging, it is fair to say that one-off factors, including various fiscal measures, have played a role. A key uncertainty is the extent to which private sector demand will be able to take over the baton once fiscal stimulus is withdrawn - as it must eventually be - in many regions," he said.

Bloxham analyst Alan McQuaid said the figures showed the economy was "deep in recession, with the light at the end of the tunnel still a long way off".

"However, we at least appear to be heading in the right direction, with the overall level of contraction in real GDP/GNP on an annual basis lower than in the first quarter," he said in a research note today.

He said weak domestic demand had resulted in the Irish economy contracting more sharply than other deficit economies such as the US and UK.

"The export side of the economy is holding up remarkably well despite weak global demand conditions in the first half of the year," he said. "Indeed, the relatively strong performance of exports in the year to date augurs well for when global demand does eventually pick up. However, it is quite clear that there is a dichotomy between the healthy export performance of the 'Modern' sector and the weak external trade performance of the 'Indigenous' sector."

Goodbody analyst Dermot O'Leary said investment spending would continue to be the major drag.

"Investment spending did come in better than we would have thought at -24 per cent, but this was solely due to an increase in investment in planes, which is notoriously difficult to forecast. Given that these are imported, there is no net addition to economic output in any case," he said.

"Outside of this, investment fell by 34 per cent year on year, with construction output falling by 31 per cent, pretty much in line with the rate of decline seen in Q1. Given that we have more visibility on the likely path of construction output, we can be more certain that this component will continue to contract from GDP for a number of quarters."