Ireland: growth set to bounce back

Leading indicators continue to signal strong growth in Ireland and, according to our models, we should brace ourselves for a strong rebound when Q1 GDP data is released next week. We expect a jump in GDP of 1.6% q/q (2.3% y/y).

Hard data continues to improve with industrial production up 10.6% y/y in April. Retail sales are trending upwards with the latest April print up 6.8% y/y. Car sales have surged around 25% since bottoming during 2013. Also, leading survey data indicators are signaling strong growth. Service PMI is still hovering above 60 while manufacturing PMI at 55 is close to the pre-crisis highs. Consumer confidence has jumped recently, signaling that private consumption also will contribute to positive growth in 2014, having been a drag for the past three years.

Furthermore, we expect some payback after a very poor Q4 print. GDP dropped 2.3% q/q in Q4 (0.7% y/y) while the alternative measure GNP (more domestically-focused) was significantly better, showing an expansion of 0.2% q/q and (4.2% y/y). There is no doubt that the print was weak, but the headline gave an exaggerated negative picture of the health of the Irish economy. This underscores the inherent volatility seen in the Irish GDP data series (see chart). The drop was solely driven by a large increase in imports of +5.8% q/q, implying that net exports took almost 2.5% off the quarterly growth rate. The quarterly drop was related to high imports from the Pharma industry and we expect it to have been a one-off.

Quarterly Irish GDP has proven to be notoriously volatile (see chart) and one should be careful not to rely too much on this figure when judging the strength of the Irish recovery. In our view, a cross check of economic data paints a more adequate picture of the Irish economy. As mentioned above, a broad range of indicators are signaling strong growth and also the labour and housing markets are in positive development. The unemployment rate has dropped 3pp since the peak and is now at the euro area average. Employment has been increasing since the end of 2012 and house prices are up 8.5% y/y.

For 2014 as a whole, we expect a moderate growth rate of 2.0% – held down by the basis effect from a weak Q4 print. Looking ahead, we expect GDP growth to accelerate to 2.6% and 2.7% in 2015 and 2016, respectively. With a large export share in particular, Ireland should benefit from improving growth in the US, UK and the euro area.

As market participants are well aware of the inherent volatility in the quarterly GDP print, we expect a limited market impact. What is more important for the Irish market is the turn in the rating cycle. S&P upgraded Ireland to A- (positive outlook) on 6 June while Moody’s upgraded Ireland to IG January and delivered another two-notch upgrade to Baa1 on 16 May. In particular, the upgrade to IG had a big impact but also the A rating from S&P should open the door for more official money such as central banks. The next upcoming rating event is Fitch on 15th August.