Economic Outlook: Growth, Risks, and Sustainability John McHale - PowerPoint PPT Presentation

Economic Outlook: Growth, Risks, and Sustainability John McHale Whitaker Institute, NUI Galway Irish Fiscal Advisory Council September 14, 2015 Presentation to the Fianna Fáil Parliamentary Party, Marine Hotel, Sutton

Overview • Recent macroeconomic performance and outlook • Risks to the outlook – Internal – External • Sustaining growth – Value of the new fiscal framework

Strong recent growth performance Real GDP and GNP Growth (% Year-on-Year) 15 10 7.3 6.8 % Change Y-Y 5 0 GDP GNP -5 -10 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: CSO.

Near return to pre-crisis peak R EAL GDP PER CAPITA 110 105 102 100 100 99 98 96 Index: 2007 = 100 95 95 94 92 91 91 91 90 89 89 88 86 85 83 80 80 75 73 70 67 65 60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: CSO; internal calculations.

Sharper downturn + recovery than trading partners R EAL GDP PER CAPITA 110 105 100 Index: 2007 = 100 95 90 85 IE UK 80 75 US EA 70 65 60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: CSO; IMF and internal calculations.

€ billions Sources : Department of Finance; CSO. Central scenario is for solid growth to continue 100 150 200 250 50 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Real GNP Real GDP

Increasing contribution of domestic demand to recovery C UMULATIVE C ONTRIBUTION TO R EAL GDP G ROWTH S INCE T ROUGH 20 18.2 Residual Domestic Demand 15 % Growth Since Trough in Q2 2009 Net Exports Real GDP 8.8 10 5 9.4 0 -5 -10 2010 2011 2012 2013 2014 2015 Source: CSO.

Evidence of rebalancing % OF N OMINAL GDP 35% 30% 25% 20% 15% 10% Investment 5% Net Exports 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: CSO.

Challenges with interpreting the National Accounts • Patent cliff • Contract manufacturing • Re-domiciled PLCs • Treatment of profits in IT sector • Aircraft leasing

But high-frequency data confirm strong growth • Employment • Unemployment • Industrial production • Retail sales / consumer confidence • Exchequer returns

Source: CSO. % Growth Y-Y -10 -8 -6 -4 -2 0 2 4 6 8 Q1 1999 Q3 1999 Encouraging employment growth Q1 2000 Q3 2000 Q1 2001 Q3 2001 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 -8.56 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 3.0

Unemployment rate falling, but well above pre-crisis lows U NEMPLOYMENT R ATE (% T OTAL L ABOUR F ORCE ) 16 14 12 % Total Labour Force 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: CSO

Industrial production volumes strong, including traditional sector 60 Manufacturing 50 % change y/y (3 month moving average) Modern 40 Traditional 30 20 10 0 -10 -20 Jan 2007 May 2007 Sep 2007 Jan 2008 May 2008 Sep 2008 Jan 2009 May 2009 Sep 2009 Jan 2010 May 2010 Sep 2010 Jan 2011 May 2011 Sep 2011 Jan 2012 May 2012 Sep 2012 Jan 2013 May 2013 Sep 2013 Jan 2014 May 2014 Sep 2014 Jan 2015 May 2015 Source: CSO. Notes: Traditional sector excludes all modern sectors (i.e. Chemicals and pharmaceuticals; Computer, electronic, optical and electrical equipment; Reproduction of recorded media; and Medical and dental instruments and supplies) but may still include activities with a high concentration of MNCs.

Good growth in retail sales augers well for consumption Note: Core retail sales excludes motor trades. Source: CSO. % Change Y-Y, 3M Moving Average -25 -20 -15 -10 10 15 -5 0 5 Jan 2009 Apr 2009 Jul 2009 Oct 2009 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011 Jul 2011 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Total Retail Sales Core Retail sales Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 6.0 7.6

Consumer sentiment now above long-run average 120 100 100.3 3 month moving average 80 60 40 20 0 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Source: KBC/ESRI Note:Long-run average of consumer sentiment index = 85.5.

Strong year-on-year growth in exchequer revenues 20 15 11.7 10 5 % Change Y-Y 0 -5 -10 -15 -20 -25 -30 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Source: Department of Finance. Note: Based on in-year cumulative figures to end of quarter specified (e.g., Q2 2015 shows y/y % change for first six months of 2015 compared to same period in 2014.

Revenues above Budget-day expectations F IGURE 3: T AXES AND PRSI R ELATIVE TO C UMULATIVE P ROFILE 1,800 Income Taxes VAT Excise Duties Corporation Tax 1,600 Capital Taxes Stamp Duties "Other" PRSI 1,400 1,200 € million 1,000 800 912 600 400 200 0 -200 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Source: Department of Finance.

But significant risks • Encouraging central growth scenario • But significant risks surround that scenario • Internal risks – Domestic imbalances • Requires ongoing monitoring • External risks – Volatile external environment

Large margins of error surround growth forecasts R EAL GDP F AN C HART B ASED ON SPU 2015 P ROJECTIONS ( TO 2016) 8 5.2 6 4.0 4 3.8 2.6 % Change Y-Y 2 1.4 0.4 0.2 0 80% likelihood range -2.6 -2 60% likelihood range -4 40% likelihood range -5.0 20% likelihood range -6 Official Outturns / Point Forecasts -8 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: CSO; Department of Finance; internal IFAC calculations. Note: Distributions or 'fans' around historical growth estimates are based on previous revisions to real GDP data. Both forecast errors and revisions are based on 1999-05 sample.

Monitoring internal imbalances • Credit growth • Property prices / construction • Competitiveness • Current account balance

New mortgage lending rising from low base 100 25 87.7 90 80 20 19.2 70 Number of loans, '000s 60 15 Value of loans, €bn (RHS) 50 40 10 30 22.2 20 5 4.1 10 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: IBF/PwC Mortgage Market Profile. Notes: Both series cover first-time buyer and mover purchaser loans (moving 4-quarter sum).

Monitoring for signs of overvaluation 6 35 30 5 25 4 20 3 Price: Disposable Income per household * 15 Price: Annual Avg. Rent (RHS) 2 10 1 5 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: ESRI/PTSB; CSO. *Average house prices divided by moving 4-quarter sum of adjusted personal disposable income per household.

House completions low but increasing Total Housing Completions 100,000 93,419 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 11,016 10,000 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source : DOECLG

Construction shares of GNP below long-run averages 16 14.1 14 12 Dwellings Roads 10 % GNP Other B&C 8 6 4 2.3 2 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source : CSO Note: Respective long-run median (in same colours) of each series shown in horizontal lines.

Significant supply shortfall in Dublin Housing Completions and Requirements ('000s) 8 7.5 7 House Completions in 2014 6 5 House Completions in H1 2015 4 3.3 Estimated Housing Requirement p.a. (2014-2018) 3 2 1.4 1.2 1.0 0.9 1 0.6 0.5 0.5 0.3 0.3 0.2 0.2 0.2 0.1 0.2 0.2 0.1 0 Dublin City & Cork City & Suburbs Galway City & Limerick City & Waterford City & Kilkenny City Suburbs Suburbs Suburbs Suburbs Source: Housing Agency; DoECLG. Note: Completions cover rural + urban settlements (private and social); requirements only cover urban settlements of 1,000+ persons.

Improvement in competiveness R ELATIVE R EAL E FFECTIVE E XCHANGE R ATE (B ASE : 2001 = 100) 150 145 137 140 133 130 126 123 123 120 119 119 119 120 113 113 111 107 110 106 106 104 102 101 100 100 96 90 80 70 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources : AMECO; Central Bank of Ireland. Note : Relative Real Effective Exchange Rates (REER) are based on unit labour costs and are benchmarked against the performance of 24 industrialised economies.

Current account near balance excluding re-domiciled PLCs 6 3.6 4 3.1 2 0.5 % GDP -0.1 -0.4 -0.6 0 -0.8 -1.0 -1.2 -1.5 -0.2 -2 -3.3 -4.1 -4 -4.9 -3.9 Current Account Balance -5.8 -4.5 -6.1 -5.1 -6 -5.7 Adjusted for Re-domiciled PLCs -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014