Rise in value of exports means growth is sustainable

Last week saw a series of encouraging GDP reports published in a number of economies, writes Oliver Mangan Chief Economist at AIB.

In the US and UK, GDP growth rebounded in the second quarter after weak starts to the year. The US economy grew by 0.6% after expanding by little more than 0.1% in the opening quarter of 2015. Meanwhile, GDP growth in the UK picked up to 0.7%, following growth of 0.4% in quarter one.

The pick-up in growth means both economies should grow by a solid 2.5% this year. It keeps the US Fed and Bank of England on course to begin hiking interest rates later this year and in early 2016, respectively.

We also got data last week showing the Spanish economy grew by 1% in quarter two, following a 0.9% rise in the opening three months of the year. Thus, Spain is now on a strong recovery path after a difficult time in recent years. Meantime, Belgium posted a solid 0.4% increase in GDP for quarter two.

The stand-out data last week, though, came from Ireland. The latest CSO figures show the economy grew by 5.2% last year. This strong trend has extended into the opening quarter of 2015, in which GDP grew by 1.4%. Revisions to data mean that GDP in 2014 exceeded its previous peak in 2007. GDP increased by almost 14% between 2010 and 2014.

Even allowing for population growth, GNP per capita, a better measure of national income, as it excludes the profits of multi-nationals, is now close to its 2007 level. Turning to 2015, most forecasts were that the Irish economy would grow by around 4% this year. We pointed out, though, in this column some weeks back that the trends evident year-to-date suggested growth could be even higher.

The strong start to the year, as shown by the first-quarter GDP figures published last week, vindicate this view. We would now expect to see GDP growth forecasts for 2015 revised upwards to 4.5% to 5%. Thus, we could well see the Irish economy grow by 5% for a second consecutive year. What was also encouraging about the figures published last week is that the recovery is becoming more broadly based.

There were upward revisions to consumer spending figures, in particular. It is now estimated to have risen by 2% last year, compared to 1% previously. Consumer spending rose by a further 1.2% in the first quarter of 2015, with the annual growth rate climbing to 3.8%. Retail sales data point to further strong growth in household spending during the second quarter of the year.

Meantime, output from the construction sector continues to rise, though the rate of recovery has been disappointingly slow to date. Activity in the sector remains at very subdued levels. Housing completions rose by just 16% in the opening half of the year and output from the sector remains well short of meeting estimated housing demand.

Exports, though, are performing exceptionally well, helped by a pick-up in demand in Ireland’s main markets and the sharp decline of the euro over the past year. Service export volumes were particularly strong in quarter one, growing by almost 12% on year-earlier levels.

Exports are rising even more strongly in value terms because of the fall of the euro, increasing by over 20% year-on-year in the first quarter. As a result, GDP rose by 12% from year-earlier levels in quarter one, with GNP up by 12.7%. This is very helpful from the point of view of Government debt and budget-deficit ratios.

Overall, then, Ireland is again the star performer in terms of European growth. This time, though, the growth looks more sustainable, as it is being built around exports and consumer spending, rather than a construction boom.

Source: Irish Examiner August 4th 2015