State’s domestic economy contracts as cost-of-living challenges mount

Economic activity, as measured by modified domestic demand (MDD), falls by 1.1 per cent between July and September

The State’s domestic economy contracted in the third quarter as soaring prices prompted consumers to rein in spending on goods and services.

The latest quarterly national accounts from the Central Statistics Office (CSO) show economic activity, as measured by modified domestic demand (MDD), a more precise indicator of domestic conditions than gross domestic product (GDP) as it strips out the distorting effects of the multinational sector, fell by 1.1 per cent between July and September. This followed investment-driven growth of 4.7 per cent in the second quarter.

The squeeze on real incomes from higher energy costs appears to be curtailing consumption, with growth in spending on goods and services slowing to an anaemic 0.3 per cent.

The CSO said personal spending in the third quarter was 1.3 per cent below its pre-pandemic peak level of €28.2 billion recorded in the second quarter of 2019.

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Activity in the distribution, transport, hotels and restaurants sector, a key area that covers a raft of domestically focused businesses, declined by 0.3 per cent quarter-on-quarter.

The more traditional measure of economic growth – GDP – increased by 2.3 per cent, largely on the back of increased exports.

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Exports of goods and services rose by 4.8 per cent while imports rose by 27 per cent, leading to a significant decline in overall net exports of 40.9 per cent (-€21.4 billion).

While economic activity increased in certain sectors, there was a mixed picture overall, the CSO said.

The multinational-dominated “industry” sector, which includes big pharma, grew by 9 per cent quarter-on-quarter.

However, the information and communication sector posted a decline of 7.4 per cent, reflecting a decline in the tech sector internationally. Several high-profile tech companies here, including Twitter, Stripe and Facebook, have announced lay-offs on the back of decreased earnings.

The construction sector expanded by 0.9 per cent in the quarter but there were declines in the distribution, transport, hotels and restaurants sectors as well as in the professional administrative and finance sectors.

“Whilst GDP continues to grow strongly, this does not reflect events on the ground in the domestic economy, given the outsized role the multinational sector plays in our economy,” Minister for Finance Paschal Donohoe said.

Noting the fall in modified domestic demand, Mr Donohoe said: “This modest decline in activity largely reflects a return to trend for investment following an exceptionally high level in the second quarter, which was largely driven by multinational investments in plant and machinery.

“Consumer spending slowed over the third quarter, broadly in line with expectations, though it did grow modestly, an encouraging outcome considering the headwinds households continue to face” he said.

“This resilience reflects the strength of the labour market, with well over 2½ million people in employment, a record level, and an unemployment rate of just 4.4 per cent in November.”

Nonetheless he warned that growth prospects across the Republic’s main trading partners had weakened in recent months with potential knock on implications for Irish exports.

“And we saw this morning that one of Ireland’s biggest employers is temporarily scaling-back employment, albeit on a voluntary basis,” he said, referring to chipmaker Intel’s plan to place a significant segment of its workforce on temporary leave in response to falling demand internationally for its products.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times