* Minister says GDP not a good gauge of underlying activity * Modified domestic demand -2.9% q/q, -5.0% y/y * Govt says domestic recovery began in Q2, set to accelerate (Adds detail, finance minister quotes) DUBLIN, June 4 (Reuters) - Irish gross domestic product grew by 7.8% quarter-on-quarter and 11.8% year-on-year in the first three months of the year as the large multinational sector again cushioned the blow of a strict lockdown that hit other parts of the economy. But the damage to the domestic economy was not as severe as during the initial shutdown last year. Modified domestic demand, a measure that strips out some of the ways multinationals can distort Irish GDP, fell 2.9% on the quarter and was 5.0% lower compared with the mostly pre-pandemic first three months of 2020. The measure, which is more closely watched by economists and ministers as it covers personal, government and investment spending, collapsed by 16.4% in the April-June quarter last year during Ireland’s first lockdown. Finance Minister Paschal Donohoe said as the exceptionally strong GDP growth was driven by a relatively small number of sectors generating limited domestic employment in some cases, it was not an accurate measure of what is going on in the economy. “I place a much greater emphasis on measures such as modified domestic demand. Encouragingly, while the level of restrictions was comparable with that of the first lockdown, the fall in domestic economic activity was much less severe on this occasion,” Donohoe said in a statement. Donohoe said the data showed that companies and consumers adapted much better to the restrictions this time around, a phenomenon that has also been borne out in other data. Ireland still faces a major employment challenge with 22% of people either temporarily or permanently out of work at the end of April, when the government slowly began to unwind its third and longest shutdown. Restaurants and bars will not be fully open until early July and have only traded for four of the last 15 months under one of the world’s toughest lockdown regimes. However Donohoe said a recovery in the domestic economy has commenced in the second quarter and should accelerate into the second half of the year. (Additional reporting by Conor Humphries; Editing by Hugh Lawson and Jane Merriman) Our Standards: The Thomson Reuters Trust Principles.