• The Irish economy contracted by 0.6% q/q in the first three months of 2018. An expected un-winding of the extremely strong GDP growth we saw in the second half of 2017.
• However, there were some indications both in the GDP sub-components and the other indicators published this week that the domestic economy may be beginning to struggle.
• The modified GNI, designed to remove the effects of the multi-national corporations, suggests that growth for the domestic economy slowed to 3% in 2017, down from 9% in 2016 - and very different to the 7.6% growth suggested by the nominal GDP indicator.
• In combination with some international factors we are concerned that this set of numbers points to risks to the forecast beginning to shift to the downside for 2018-20.

Top-line GDP growth in the first quarter contracted by -0.6% q/q, close to our forecast. However, the composition of this downturn whilst broad based, showed a sharper than expected slowdown for private consumption. At the same time GNP, which excludes net factor income from the rest of the world, showed a very sharp contraction at -4.9% q/q; suggesting a much more abrupt slow-down for the domestic economy. Finally, the modified GNI, a custom indicator produced by the Irish central statistical office (CSO) designed to strip out the effect of the multi-national corporations, was published with this release, and showed a growth slowdown in 2017. According to the GNI the value of the Irish economy at EUR181 billion was more than 100 billion or nearly 30% less than the GDP estimate of EUR294 billion for 2017. More troubling the GNI suggests that growth for the economy slowed to 3% in 2017, much less than the 7.6% growth suggested by the nominal GDP indicator.

The distinction between GNI and GDP is of course somewhat esoteric. GNI might show a smaller economy than GDP; but our economic system is still designed around GDP numbers. We think about sovereign risk in terms of debt to GDP levels, the Maastricht treaty laws are based on GDP numbers, companies make investment decisions based on GDP growth. Significance lies in how the GNI numbers can influence the debate surrounding the stability of the Irish economy and potentially fiscal decision making. Following the revision two years ago of 2015's GDP numbers to 25%, there was a great deal of criticism as to the reliability of Ireland's GDP numbers. The rapid expansion of GDP in 2015 created significant downward pressure on the government debt to GDP ratio, bringing the ratio below 80% for the first time since 2010. In spite of this easing of fiscal pressure the government has in subsequent years still kept a close eye on the fiscal side, even during an election cycle. As Ireland has emerged from the 2012 Eurozone crisis it has consistently positioned itself as a responsible and fully engaged member of the European project. Which is why in our opinion the government has been cautious in using the expanded estimate of GPD as a basis for increased spending, or loosening of the fiscal side. This reasoning seems logical when we look at government debt to GDP and GNI ratios. We can see that this lower estimation of the size of the economy nearly doubles the ratio between government debt and the size of the economy.

We also believe that the GNI estimates of the economy could become more important should multinational corporations start to scale back their involvement in the Irish economy. There has been a rapid escalation in the risk of such a scale back in the last few months, first from the American tax cuts and jobs act (TCJA: 2017) and second from the emergent trade war between the EU and the USA. Conversely, whilst Ireland is often referenced as the EU economy with the most exposure to the US, the role of the multinational may insulate the economy against trade war risks in the short term. So far tariffs have not focused on the sectors that dominate trade between Ireland and the US - pharmaceuticals, chemicals, machinery, aeronautics - as those sectors are in turn highly linked to the American multinationals based in Ireland.

Overall, this set of data does point to increasing headwinds for Ireland. We expect that risks to our current forecast may be beginning to shift more towards the downside. Of course, we will have a clearer picture, of the implications of this data, once we integrate these numbers into our forecast at the beginning of August.