Investec – Irish Economy Update – July 2016

headway-essex-supporters-links_3_3167127427Following the release of the latest national accounts data we have taken the opportunity to refresh our growth forecasts and update our views on the key segments of the Irish economy. At a high level, we now see GDP expanding by 4.8% in 2016 and by 3.5% next year, reflecting downgrades of 20bps and 50bps respectively to our previous forecasts. These cuts reflect greater caution about the prospects for export and investment growth in a post-Brexit world, which is partly offset by a stronger consumer profile as labour market data continue to impress.

The national accounts data themselves attracted global attention this week as statistical reclassifications relating to the treatment of inversion deals involving multinationals, purchases by aircraft leasing firms and companies relocating intangible assets to Ireland combined to produce GDP growth of 26.3% in 2015, more than three times the rate of expansion (+7.8%) that was originally estimated when preliminary FY15 figures were released in March. The usefulness of the national accounts in terms of taking the temperature of Ireland’s economy is open to debate, but a host of other data – government tax receipts (+10.5% in 2015), retail sales volumes (+8.2% in 2015) and total employment (+2.6% in 2015) confirm that underlying growth has been very healthy indeed.

As a small open economy Ireland is not immune to international headwinds. The recent deterioration in the UK’s prospects is clearly unhelpful in this regard, but it is worth noting that five-sixths of Irish exports go to markets other than the country’s next door neighbour. Another point is that exports are skewed towards areas that we would expect to be relatively resilient, even in more uncertain times, e.g. pharmaceuticals, software and food.

In all, our sense is that 2016 will prove to be a year of two halves for Ireland. High frequency indicators show a strong performance in the opening six months of the year, particularly on the domestic side of the economy. In H116 tax receipts increased by 9.2% y/y, car sales were +23.9% y/y and the merchandise trade surplus widened by 22.2% y/y in the period to end-April. Towards the end of the half there were signs of emerging softness, with the headline Manufacturing PMI falling to its lowest since July 2013 in May, while in the previous month the headline Services PMI softened to its weakest outturn since February 2014, although both remain comfortably above the 50 ‘no change’ line separating growth from contraction. Post the UK’s EU referendum, we fear that further weakening is inevitable. Notwithstanding this moderation, and barring any more statistical anomalies, the Irish economy is still likely to turn in some of the strongest growth in the European Union in both this year and the next.

Irish Economy Update – July 2016 (PDF)

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