The scale of Irish contract manufacturing, where an Irish-based company hires a company abroad to manufacture products on its behalf, has grown tremendously since 2015.
The production process continues to be recorded in Ireland’s national accounts as part of imports, exports and GDP, although none of the activity takes place in Ireland. Contract manufacturing has become a major part of the business of some Irish-based multinational companies.
It is therefore not surprising that this large-scale supply chain activity has created significant volatility in the Irish Quarterly National Accounts and monthly industrial production data. GDP fell by 4.6% in the first quarter of 2023 due to an 18% drop in industrial production. With the exception of 2019, every year since 2016 there has been a large quarterly decline in the production of the multinational sector and thus a decline in GDP, which was then reversed in the following quarter.
Industrial production data for April shows that Irish GDP is already on track to recover. Manufacturing output fell 45% in March, causing a marked fall in GDP. It then rebounded by 70% in April, keeping it 12% above its Q1 average.
However, very weak GDP data for the first quarter is likely to lead to a downward revision of full-year growth forecasts. According to most forecasts, GDP will grow by about 5.5% in 2023. The first official forecast after the recent weak data came from the OECD last week. Ireland’s GDP looks set to grow by 4.4% this year.
Of course, the recent data once again emphasizes that GDP is not a reliable measure of Irish economic activity and that it is important to consider a wide range of indicators when assessing the performance of the economy. In this context, the National Accounts also showed that adjusted final domestic demand increased by 2.7% in the first quarter, making it 5.5% higher on an annual basis. Consumer spending increased by 1.7%, while investment in both building & construction and machinery & equipment grew very strongly.
In the labor market, employment increased by 1.9% in the first quarter and by 4.1% on an annual basis. The unemployment rate fell to 4.1% in the quarter from 4.8% a year earlier. Preliminary estimates suggest that the unemployment rate has continued to fall, reaching an all-time low of 3.8% in May.
Meanwhile, car sales have been strong this year, with industry data showing new car registrations up 18% through the end of May. In addition, tax revenues continue to grow strongly in all major revenue categories, increasing by more than 10% year-on-year through the end of May.
So the economy continues to perform strongly. That said, the growth rate is slowing. Tax revenue growth has slowed significantly from the over 20% rates recorded in both 2021 and 2022. Employment growth has also slowed significantly from rates of 6-7% in 2021-22.
The strong increase in housing activity appears to be leveling off. Changes in final domestic demand are likely to slow growth in 2023 to less than half of last year’s 8.2% increase. The growth of exports of services has already slowed considerably. However, the slowdown is due to very high growth rates and the economy will still show impressive growth in 2023.
Oliver Mangan is chief economist at AIB