Quarterly Bulletin Q3 2013

9
The Domestic Economy
Overview
n Annual National Accounts data for 2012
point to a significant slowdown in the
Irish economy last year, with GDP growth
moderating to 0.2 per cent from 2.2 per
cent in the previous year. The slowdown last
year was mainly due to a marked decline
in the growth rate of exports. This reflected
a progressive deterioration of demand
conditions in most of Ireland’s main trading
partners. Domestic demand also contracted
but at a much slower pace than in the
previous year.
n
n
The progressive deterioration in export
performance during 2012 became more
acute in the first quarter of this year
when exports declined at an annual rate
of 4.1 per cent. Two factors are likely to
have accounted for this relatively weak
performance. The first was weak external
demand, most notably in the euro area but
also in the UK. The second was the negative
impact on goods exports of patent expiry in
the pharmaceutical sector which accounts
for a large share of overall goods exports.
Recent indicators point to a projected
recovery in exports in the remainder of this
year and this is expected to gather strength
next year in line with a projected, but
uncertain, recovery in external demand.
The outturn for domestic demand was
also quite weak in the first quarter of 2013.
Consumer spending was particularly
muted and this has motivated a downward
revision in the forecast for consumption
growth in 2013. The sharp annual decline
of 20 per cent in investment reflects the
distortionary impact of aircraft investment,
which conceals an incipient recovery in
other machinery and equipment expenditure
and non-housing construction. In the case
of housing completions, although these are
down in the year to May, leading indicators
point to the potential for an increase for
the year as a whole. Domestic demand
is expected to stabilise this year and to
make a small positive contribution to overall
GDP growth which is projected at 0.7 per
cent for 2013. This projection represents a
downward revision of about 0.5 per cent
compared to the previous Bulletin.
n The trend in GNP, which expanded by 1.8
per cent last year following contraction of
1.6 per cent in 2011, is not reflective of
underlying conditions in the Irish economy.
The gap between Irish GDP and GNP is
driven by profit repatriation by multinational
firms located here (See Box B). In recent
years, net factor income outflows have been
reduced by profit inflows from foreign owned
PLCs that are domiciled in Ireland but are not
engaged in any meaningful economic activity
here. This has had the effect of boosting
the growth rate of GNP in some years, most
notably 2010 and 2012.
n
n
Labour market conditions are showing clear
signs of improvement. Following a marginal
annual increase in the fourth quarter of
2012, the first for 5 years, the numbers at
work increased by 20,500 year-on-year in
the first quarter of this year. The number
unemployed fell by 29,900 – the largest
such fall since Q1 1999. The increase in
employment reflected a rise in part-time
work. Reflecting recent improvements, the
rate of unemployment is expected to fall in
2013 due to a combination of an increase
in employment and a small reduction in
the size of the labour force. A return to
stronger employment growth awaits a
recovery in domestic demand which should
begin in 2014. Nonetheless, our central
projections imply a continuing high level of
unemployment.
The annual rate of HICP inflation averaged
2 per cent in 2012 with higher energy
prices being the main contributing factor,
accounting for 1.1 percentage points of total
inflation. For 2013, energy price inflation is
expected to be considerably weaker while
domestically generated inflation should
remain contained. As a consequence,
inflation should weaken to 0.8 per cent in
2013. A projected pick-up in HICP inflation
to about 1.1 per cent in 2014 is motivated,
in the main, by technical assumptions
pointing to higher oil prices next year, which
are subject to a high degree of uncertainty.