Danske Research Team
Danske Bank A/S
Irish Q2 GDP data released today showed an increase of 1.5% q/q and an astonishing 7.7% y/y. This is the highest year-on-year reading since Q1 07; before that we have to go back to Q1 01 for a higher print. GNP increased by 0.6% q/q and 9.0% y/y.
The change was mainly driven by strong domestic demand. Private consumption increased 0.3 % q/q, government consumption increased 3.8% q/q while investments surged by 9.1% y/y. Net exports also contributed positively to today’s strong figure. Before today’s print, the consensus expectation for 2014 growth was just 2.5% – this will soon be revised up. On the back of today’s strong print, we are revising our 2014 GDP forecast up from 4.0% to 5.0%.
Irish Finance Minister Michael Noonan said following the release that he now sees 2014 GDP growth at +4.5% versus the previous forecast of 2.1%. Noonan sees average growth ‘settling’ at 3% pa for the next five years.
On public finances, Noonan stated that that the budget deficit is set to drop to 3.5% of GDP versus the 4.8% target. The accelerating Irish growth is having positive spillover effects on public finances. The budget deficit will thus drop almost 4pp from 7.3% of GDP in 2013. Ireland will beat its target for the fourth consecutive year.
The primary balance will be well within positive territory, beating the -0.1% of GDP target. Ireland is on course to reach next year’s deficit target of 3% of GDP and exit the Excessive Deficit Procedure. Ireland has so far conducted 92% of the fiscal belt tightening that was agreed with the Troika and only EUR2bn remains according to the Irish Ministry of Finance.
Today’s release is aligned with other leading indicators out of Ireland. Hard data is also signalling strong growth with retail sales up by 8.6% y/y in July and industrial production trending upwards with the latest July print up by 17.5% y/y.
Soft data continues to signal very strong growth in Q3. Composite PMI increased in August to 61.8 from 60.2 – the highest reading since August 2000. Recall that Irish GDP increased by more than 10% that year. Irish service PMI climbed higher to 62.4 in August from 61.3.
Both the labour market and housing market are also in a positive development. The unemployment rate has dropped 4pp since the peak and at 11.2% in August (source: Live Register) it is now below the euro area average. Employment has been increasing since the end of 2012. Irish house prices increased 2.0% m/m in July. Compared to a year ago, house prices are up by 13.4%. House prices have increased 17.1% since the bottom, but are still some 41% down from the 2006 peak. House prices in Dublin increased 2.7% in July. House prices in Dublin have increased 33% since the bottom but prices are still 41% down from the 2006 peak.
We expect that the convergence towards soft-cores such as Belgium and France will continue.
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