The fourth quarter of 2008 saw annual GDP decline 7.5%, leaving growth for 2008 as a whole at -2.3%, the worst performance in 30 years.

IHS Global Insight Perspective
Significance	Irish GDP collapsed in the final quarter of 2008, down by a far-worse-than-expected 5.2% quarter-on-quarter (q/q). This followed contractions of 1.2% q/q in the third quarter, 0.4% q/q in the second quarter, and 0.8% q/q in the first quarter.
Implications	Particularly unexpected was the extent of the fall in capital investment. True, capital investment has plunged since peaking in the first quarter of 2007, but its 18.7% q/q and 30.5% y/y fall in the final quarter of 2008 could not have been easily predicted.
Outlook	The scale of the contraction in real GDP in 2008 means that IHS Global Insight's 2009 forecast for the Irish economy is likely to be revised downwards from the current estimate of -5.9% in its next forecast round.

The Central Statistics Office (CSO) has revealed that Irish GDP collapsed in the final quarter of 2008, down by a far-worse-than-expected 5.2% quarter-on-quarter (q/q). This followed contractions of 1.2% q/q in the third quarter, 0.4% q/q in the second quarter, and 0.8% q/q in the first quarter. Consequently, annual GDP growth recorded a decline of 7.5% in the fourth quarter. This compares with a 0.3% year-on-year (y/y) rise in the third quarter and declines of 0.7% y/y and 1.2% y/y in the second and first quarters, respectively. This left real GDP growth for 2008 as a whole at -2.3%, the Irish economy's worst performance in 30 years.

The CSO also indicated that gross national product (GNP) declined 6.7% y/y in the fourth quarter of 2008, falling by 3.1% in the year as a whole, down from growth of 4.1% in 2007. The profits of foreign-owned enterprises are excluded from the GNP data, which are also affected by other income flows between residents and non-residents. The timing of the income flows can be variable on a quarterly basis. All of this can lead to significant differences in the rates of growth in the quarterly GNP and GDP data. The latest GDP figures confirm that the surprising third-quarter jump in annual GDP did not mark an end to the Irish downturn. Indeed, it was very much the consequence of the higher profits earned by foreign-owned multinationals. These profits are included in the GDP figures, but excluded from the GNP data.

Dramatic Fall in Investment, Net Exports Add to Growth

The detailed breakdown shows that all of the GDP components saw marked deterioration in the final quarter of the year. Nevertheless, particularly unexpected was the extent of the fall in capital investment. True, capital investment has plunged since peaking in the first quarter of 2007, but an 18.7% q/q and 30.5% y/y fall in the final quarter of 2008 could not have been easily predicted. The continued sharp decline in capital investment since the first quarter of 2007 has mainly been the consequence of a marked correction in the construction sector following extended, heady growth. The fourth-quarter capital investment figures confirm that this correction is proving to be even more painful than previously thought. For 2008 as a whole, capital investment contracted by 19.9%, again the worst performance in 30 years. Consumer spending also fell on an annual basis, but unlike investment this was not a complete surprise. Specifically, it declined by 4.0% y/y in the last three months of 2008, compared with a 3.8% y/y drop in the previous three months. Consumer spending fell by 0.8% in 2008 as a whole, down from a 6.3% rise in 2007. Interestingly, it rose by 4.5% q/q in the final quarter of 2008, up from a 0.5% q/q increase in the third. Consumer spending was supported for an extended period by high and rising employment, healthy earnings growth, and strong house-price gains, as well as the substantial release of money from the maturing of SSIAs (government-backed savings schemes). However, these supporting factors have increasingly waned since the first half of 2007. In particular, house prices fell for a 23rd successive month in January, unemployment is rising sharply, and purchasing power was squeezed throughout much of 2008 by elevated energy and food prices. Further weighing down on consumption has been tight credit conditions, markedly lower equity prices, and higher interest rates until October. The q/q rebound in consumer spending in the fourth quarter of 2008 may therefore have been a reflection of the significant retreat in oil and commodity prices, helping support purchasing power, as well as the European Central Bank's (ECB) recent interest-rate cuts.

Meanwhile, government spending growth rose by 0.3% q/q in the final quarter of 2008, down from an increase of 0.7% q/q in the third quarter but up from a 0.5% q/q drop in the second quarter. It was up by only 0.5% y/y in the final three months of 2008, compared with a 1.2% y/y increase in the previous three months. In 2008, government spending increased by 2.1%, down from a rise of 6.0% in 2007. Surprisingly, given the current weakness of Ireland's main trade partners (the United States and the United Kingdom), there was another positive contribution to growth from net trade in the fourth quarter, as was the case in the third quarter, but only because imports contracted even more strongly than exports on an annual basis. Specifically, exports of goods and services fell by 4.9% y/y, while imports dropped by 10.4% y/y. Net exports (exports minus imports) at constant prices were 1.633 billion euro (US$2.2 billion) higher in the fourth quarter of 2008 than in the same period of 2007. Despite the annual falls, real exports rose by 0.6% q/q in the final quarter of 2008, compared with a 6.0% q/q increase in real imports over the same period. Interestingly, the fourth-quarter 2008 figures indicate that Ireland's domestic demand is clearly weakening, while net exports are still adding to growth, a different pattern to that possibly seen in other Eurozone economies.

Industrial Production Dragged Down by Plunging Construction Output

On the output side, industrial production decreased by 12.5% y/y in the final quarter of 2008. The sharp fall in industrial production was mainly driven by a significant contraction in building and construction output, as has been the case since the early months of 2007. Indeed, this fell by a further 24% y/y in the final three months of 2008. However, the rest of the components also felt the pinch in the final quarter of the year. For example, output of distribution, transport, and communications was down 8.3% y/y, while that of other services was 2.2% y/y lower in the fourth quarter of 2008.

Outlook and Implications

The latest data and survey evidence suggest very clearly that the Irish economy has remained in the doldrums during the first quarter of 2009. Indeed, heightened financial sector problems and very tight credit conditions are currently intensifying the problems facing the economy. For example, the purchasing managers' surveys for both the manufacturing and service sectors indicated a significant contraction in output during January and February and very sharply falling orders, while retail sales volumes continued to decline sharply in January, falling by 20.4% y/y, the largest annual decline on record. Consequently, we suspect that there will be a significant decline in GDP in the first quarter of this year. Moreover, the scale of the contraction in real GDP in 2008 means that our forecast for the Irish economy in 2009 as a whole is likely to be revised downwards from the current estimate of -5.9% in our next forecast round. Consumer spending will remain weak in the face of rising unemployment, a collapsing housing market, tight lending conditions, and financial market turmoil. In addition, construction investment will continue to suffer in reaction to falling house prices and the over-expansion of recent years, thereby dragging down overall gross fixed capital formation. On top of this, business investment is being pared in the face of depressed confidence, markedly lower final demand, and tight credit conditions. Investment by U.S.-owned multinationals may also be further hit by sharply weaker performances in their domestic market. Government spending growth will also remain modest in 2009, as slower revenue growth hurts public finances. However, we believe that net trade could continue to make some positive contribution to GDP growth in 2009, driven by imports falling somewhat faster than exports.