Ireland’s economic growth surged by almost 8 per cent in the spring and early summer compared with the same period in 2013, prompting Minister for Finance Michael Noonan to upgrade his annual growth forecast for the second time in one week.
With less than one month to go before he unveils Budget 2015, the Minister now projects gross domestic product to expand by some 4.5 per cent this year. A week earlier, Mr Noonan said GDP would accelerate this year by a little more than 3 per cent, itself an appreciable increase from the 2.1 per cent Department of Finance forecast underpinning the spending plan this year.
The department had reiterated the 2.1 per cent projection last April, but figures released yesterday by the Central Statistics Office show that the nascent recovery was already shifting into a different gear at that point. According to Mr Noonan, the uptick in economic activity seen in “soft” economic data is confirmed in this latest set of quarterly national accounts.
Adjusted for seasonal factors, the CSO figures show that GDP grew 1.5 per cent in April-June compared with the previous quarter. It is GDP figures which form the basis for key budget calculations. Gross national product, which strips out the impact of multinational profit flows, advanced by 0.6 per cent quarter-on-quarter.
So where is the growth coming from? The latest figures suggest recovery is broadening, helped by a marked pick-up in domestic demand. They show that industrial output in general, including building work, increased by 4.7 per cent in volume terms between the first and second quarters. The volume of construction output grew 6.2 per cent and agricultural output grew 3.9 per cent.
In the same period, the volume of output in the distribution, transport, software and communication sectors increased 2.9 per cent. “That’s spread right across. Distribution and transport are showing growth along with software,” said Michael Connolly, senior statistician in the national accounts divisions of the CSO.
‘Sharp rise’
Mr Connolly told a news conference that a “very sharp rise” in multinational activity this year was notable. He went on to say, however, that the “traditional” indigenous industry was also growing and said that this sector was a bigger employer than the multinational sector and had a bigger impact on the domestic economy.
“We focus to some extent exclusively on the multinational sector when we talk about industry but it’s important to really be aware that the change in the result is more broadly based than that.”
Capital investment grew 9.1 per cent quarter-on-quarter and net exports grew 7.2 per cent. Such figures suggest domestic demand – embracing investment, personal consumption and government consumption – is feeding in to the turnaround this year for the first time since the crash.
Economists see this as a highly positive sign, with the prospect of modest income tax concessions and a consequent boost to disposable income fanning anticipation that further increases in demand are in store.
“Both domestic demand and net exports are contributing positively to GDP growth. This is something we have not seen for quite a long time,” Mr Connolly said. “We see really in the last two quarters that both of these measures of economic activity are increasing.”
Such figures for the second quarter of the year come on the back of a strong performance in the first quarter of the year. When compared with the period in 2013, the improvement is bigger still. Industrial output grew 6.3 per cent, output in the distribution, transport software and communications sectors grew 11.3 per cent, building and construction output grew 9.1 per cent and agricultural, forestry and fishing output advanced by 13.9 per cent.
Personal consumption was up 1.8 per cent, with a 3.9 per cent rise in consumption of goods largely driven by increased car sales. The consumption of services, however, was flat.
Growth spurt
All told, second quarter GDP accelerated by 7.7 per cent year-on-year and GNP growth came in at 9 per cent.
Nine months after the conclusion of a humiliating international bailout, Ireland is now the fastest-growing economy in Europe. The core of the euro zone remains in the doldrums, raising concern that the single currency area could succumb to Japanese-style deflation. At the same time, Ireland’s growth spurt suggests the economy is taking the benefit of the advancing recovery in the US and Britain.
“This is the strongest growth rate recorded since the early 2000s and shows that the strong and stable recovery in the Irish economy is well under way and is starting to be felt across all sectors of the economy,” Mr Noonan told reporters outside Government Buildings.
“The turnaround that we are seeing in the Irish economy is a direct consequence of the policies pursued by this Government and the sacrifices made by the Irish people.”
The performance was better than anticipated. “Taking all the factors into consideration, these latest numbers are gangbusters,” said economist Alan McQuaid at Merrion Stockbrokers.
For its part, BNP Paribas said the economy was now growing at a rate last seen during the Celtic Tiger boom.
“The archetypal growth model in Ireland is one of export growth leading to an increase in business investment, which in turn increases employment and then spills over into more domestic consumption,” said analyst Colin Bermingham at BNP Paribas.
“The data today show that we are further along this road than previously expected and, together with the employment data, show that the recovery in Ireland is becoming more sustainable.”
Although Mr Noonan’s latest growth forecast remains below some market analysts, he expects the acceleration to ease off a little as demand constrained at the height of the crisis tapers away.
“Obviously at the start when you’re in a catch-up phase of an economy after a recession, you’ll get very high growth figures in the early stages,” he said. “But as it settles I would hope we would have growth of around 3 per cent in the next five, and, God willing, for the next 10 years.”
Having laboured for years under the unforgiving demands of inspectors from the EU-IMF troika, the Government now finds itself within touching distance of the EU budget deficit limit of 3 per cent.
Whereas Budget 2014 was cast with the objective of bringing the deficit to 4.8 per cent of GDP, Mr Noonan now expects to deliver a deficit in the region of 3.5 per cent of economic output. “So it’s a short journey then to getting below 3 per cent of GDP,” said the Minister.
“For next year then of course we’ll be building on stronger GDP growth figures as well, which will have an effect not only on our estimates of tax flow but also the size of the GDP affects the debt-GDP ratios and the deficit ratios. So there’s an advantage there as well.”
The upshot of it all, however, is that the Government now faces increased pressure from the public for an immediate recovery dividend. Mr Noonan is adamant there is no clamour for a giveaway budget, but the Government has still committed to start cutting the income tax burden next year.
Tax returns
The Minister would not say whether he sees scope now to tackle the universal social charge and the higher income tax rate next month, and said tax returns for September were awaited before final decisions can be made. Still, he acknowledged he will not have any requirement for additional taxes or spending cutbacks.
While the public finances must still “consolidate” further to bring the deficit to heel, Mr Noonan suggested the momentum in the recovery would be sufficient to achieve the target. “There is enough tax buoyancy in the growing economy to deliver the resource to do that level of consolidation, as I say, without increasing taxes or without cutting expenditure further.”
This does not mean that the new water charge won’t be imposed or that the property tax will be scrapped, but it does open scope to deliver something tangible on the income tax front.
Both the scope and the scale are subject to negotiation between the Fine Gael and Labour camps, which presents a challenge in its own right. In the scheme of things, however, the political debate within Cabinet is a lot more positive than when budget talks were dominated by where the axe would fall.
Mr Noonan took care to point out yesterday that 11.2 per cent unemployment is still too high. The priority now is to sustain the recovery and turn it into jobs, he said. But was he saying the age of austerity is finished? “No,” said the Minister. “Because we have a huge debt. We must remember that there are a lot of legacies after the recession.”
