GDP bounces back sharply in the first quarter

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www.davy.ie Bloomberg: DAVY<GO> Research: +353 1 18997 Institutional Equity Sales: +353 1 7981 Davy Research June 3, 11 Conall Mac Coille, Chief economist conall.maccoille@davy.

1 Bloomberg: DAVY<GO> Research: Institutional Equity Sales: Davy Research June 3, 11 Conall Mac Coille, Chief economist conall.maccoille@davy.ie / Irish GDP growth, real, seasonally adjusted % 8 Research Report: Irish economy National Accounts, Q1 GDP bounces back sharply in the first quarter Quarterly growth Annual growth Irish GDP growth Q 1 Q1 11 GDP growth, Real Annual, nsa -..1 Quarterly, sa Nominal, sa Annual Quarterly GDP growth bounces back in Q1 Irish GDP rose by 1.3% in Q1 11 following the 1.% decline in Q 1, upwardly revised from the 1.% fall in the previous national accounts release. This means that there was a marginal rise in real GDP on the year, with growth at.1% in annual terms. The bounce back is even more pronounced in nominal terms. Nominal GDP rose by 5.1% in the first quarter following a 5.9% decline in Q 1. Net trade continues to drive Irish economic growth Irish exports rose by 3.8% on the quarter with imports down.3%. Consumer spending and government spending both fell by 1.9%, and investment spending rose by 1.1%. Bounce back in nominal GDP pushes down on the government debt/gdp ratio The revisions to nominal GDP mean that the government debt/gdp ratio in 1 was 9.7% as opposed to 9% prior to today's national release. The debt/gdp ratio rose to 1.% in Q; the bounce back means that the ratio is now 95.8%. Today's data something of a relief for investors Investors had harboured severe worries about the sharp contraction in nominal GDP in Q. Today's data confirm that the decline in Q was erratic as GDP bounced back in the first quarter. Please refer to important disclosures at the end of this report. J&E Davy, trading as Davy is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. For business in the UK, Davy is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. All prices are as of close of previous trading day unless otherwise indicated. All authors are Research Analysts unless otherwise stated. For the attention of US clients of Davy Securities, this third-party research report has been produced by our affiliate, J & E Davy.

2 Research Report: National Accounts, Q1 June 3, 11 Irish GDP growth rebounds in Q1 11 Irish GDP bounces back sharply in Q1 11 Sharp declines in nominal GDP turned out to be temporary as we had expected The counterpart to the bounce back in GDP was a fall in GNP. The annual figures provide a better picture of overall economic growth. The bounce back in nominal GDP means that the government debt/gdp ratio fell from 1.% in Q to 95.8% for Q1 and was 9.7% in the overall year 1. Irish GDP growth rebounded in the first quarter, increasing by 1.3% over Q. The rise in real GDP in Q1 followed the 1.% fall in Q (revised up from the 1.% decline initially indicated by the Q national accounts). This is the highest rate of quarterly growth since Q 7. The annual GDP growth rate was marginally positive in Q1, at.1%, following the revised -.% growth rate in Q (up from the -.7% indicated by the Q national accounts). It had been a struggle to convince investors that the sharp declines in real and nominal GDP in the final quarter of 1 were erratic, related to a once-off decline in multinational sector profits, and likely to be temporary. Thankfully, today's data confirm that GDP bounced back in the first quarter. The Central Statistics Office indicates that nominal GDP fell by 5.9% in Q but rose by 5.1% in Q1 11. The counterpart to the sharp bounce back in GDP in Q1 was a.3% decline in GNP on the quarter. This fall in Q1 largely reflects the seasonal adjustment and is also erratic. Overall, the.9% decline in GNP on the year reflects the weakness of the domestic economy and compares to a.1% rise in GDP. The revisions to nominal GDP imply that the government debt/gdp ratio now looks more favourable. The nominal debt/gdp ratio is now estimated to be 9.7% in 1 as a whole, down from 9.% previously. The sharp decline in nominal GDP in Q 1 meant that the debt/gdp ratio had increased to 1.%, but this ratio has fallen to 95.8% in Q1 as nominal GDP bounced back. Figure 1: Irish quarterly GDP growth by expenditure %, oqa Figure : Irish annual GDP growth by expenditure %, oya Consumer Spending Government Spending Investment Change in Stocks Net Trade Residual GDP Consumer Spending Government Spending Investment Change in Stocks Net Trade Residual GDP Davy Research

3 Research Report: National Accounts, Q1 June 3, 11 The pattern of GDP growth remains similar to the past, with exports expanding but domestic demand remaining weak GDP growth in Q1 has been flattered by the bounce back from Q and is likely to slow But given the Q bounce back, even marginally positive growth in the remaining quarters should be enough to achieve official projections for Irish GDP in 11 Industry continues to drive the expansion of economic activity, with the domestic-facing sectors detracting from growth The pattern of GDP growth remains similar to the broad expansion of economic activity through 1. Growth in Q1 was entirely dependent on net trade, with exports up 3.8% on the quarter and imports down.3%. Consumer spending and government spending both fell by 1.9%, and there was a small rise of 1.1% in investment spending. So growth in Q1 has been flattered by the bounce back from the poor Q number. Looking forward, growth is likely to remain weak as consumer spending struggles in the face of hits to real incomes from the planned fiscal adjustment, weak nominal pay growth and the increase in consumer price inflation. That said, the bounce back in Q1 GDP may mean that some forecasts may need to be revised up. If the level of GDP remained flat through the remaining three quarters, annual growth would equal.3% in 11. We expect the rate of GDP growth to slow on a quarterly basis. But official GDP projections by the IMF and EU Commission for growth of.% in 11 might even look pessimistic in light of today's data. The configuration of Irish economic activity by sector is similar to that in 1. Figure illustrates that industrial sector output (orientated toward exports) has driven the rise in the annual growth of gross value added into positive territory. In contrast, the domestically-focused distribution and services sectors continue to detract from growth. Building and construction activity continues to contract and to push down on Irish GDP growth. That said, activity in this sector is likely to plateau in the near future. So the large negative contributions from construction to annual growth are likely to dissipate. Figure 3: Gross value added at factor cost, quarterly growth %, oqa 5 Figure : Gross value added at factor cost, annual growth %, oya Agriculture Forestry and Fishing Industry Distribution Public Admin and Defence Other Services (inc rent) Residual Building and Construction GDP at constant factor cost Agriculture Forestry and Fishing Industry Distribution Public Admin and Defence Other Services (inc rent) Residual Building and Construction GDP at constant factor cost Overall today's data provide something of a relief. Our view that the sharp decline in Q GDP was temporary has been borne out. All in all, today's data release does little to change our view but offers some relief that GDP has bounced back as we had expected. The broad configuration of growth remains similar to 1 with the export sector benefitting from robust global demand but domestic demand remaining weak. 3 Davy Research

4 Important disclosures Analyst certification I, Conall Mac Coille hereby certify that: (1) the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this report and () no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in this report. Investment ratings definitions Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E3) over the next 1 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or in some cases company-specific issues. Research reports and ratings should not be relied upon as individual investment advice. 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