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

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SLIDE 1

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

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SLIDE 2

Overview

  • Recent macroeconomic performance and outlook
  • Risks to the outlook

– Internal – External

  • Sustaining growth

– Value of the new fiscal framework

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SLIDE 3

Strong recent growth performance

7.3 6.8

  • 10
  • 5

5 10 15 2007 2008 2009 2010 2011 2012 2013 2014 2015 % Change Y-Y

Real GDP and GNP Growth (% Year-on-Year)

GDP GNP

Source: CSO.

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SLIDE 4

Near return to pre-crisis peak

67 73 80 83 86 88 91 94 98 100 95 89 89 91 91 92 96 99 102

60 65 70 75 80 85 90 95 100 105 110 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Index: 2007 = 100

REAL GDP PER CAPITA

Source: CSO; internal calculations.

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SLIDE 5

Sharper downturn + recovery than trading partners

60 65 70 75 80 85 90 95 100 105 110 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Index: 2007 = 100

REAL GDP PER CAPITA

IE UK US EA

Sources: CSO; IMF and internal calculations.

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SLIDE 6

Central scenario is for solid growth to continue

50 100 150 200 250 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 € billions Real GDP Real GNP

Sources: Department of Finance; CSO.

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SLIDE 7

Increasing contribution of domestic demand to recovery

Source: CSO. 9.4 8.8 18.2

  • 10
  • 5

5 10 15 20 2010 2011 2012 2013 2014 2015 % Growth Since Trough in Q2 2009

CUMULATIVE CONTRIBUTION TO REAL GDP GROWTH SINCE TROUGH

Residual Domestic Demand Net Exports Real GDP

slide-8
SLIDE 8

Evidence of rebalancing

0% 5% 10% 15% 20% 25% 30% 35% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% OF NOMINAL GDP

Investment Net Exports

Source: CSO.

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SLIDE 9

Challenges with interpreting the National Accounts

  • Patent cliff
  • Contract manufacturing
  • Re-domiciled PLCs
  • Treatment of profits in IT sector
  • Aircraft leasing
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SLIDE 10

But high-frequency data confirm strong growth

  • Employment
  • Unemployment
  • Industrial production
  • Retail sales / consumer confidence
  • Exchequer returns
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SLIDE 11

Encouraging employment growth

  • 8.56

3.0

  • 10
  • 8
  • 6
  • 4
  • 2

2 4 6 8 Q1 1999 Q3 1999 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 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015

% Growth Y-Y

Source: CSO.

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SLIDE 12

Unemployment rate falling, but well above pre-crisis lows

2 4 6 8 10 12 14 16 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 % Total Labour Force

UNEMPLOYMENT RATE (% TOTAL LABOUR FORCE)

Sources: CSO

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SLIDE 13

Industrial production volumes strong, including traditional sector

  • 20
  • 10

10 20 30 40 50 60 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 % change y/y (3 month moving average) Manufacturing Modern Traditional

Source: CSO. Notes: Traditional sector excludes all modern sectors (i.e. Chemicals and pharmaceuticals; Computer, electronic, optical and electrical equipment; Reproduction

  • f recorded media; and Medical and dental instruments and supplies) but may still include activities with a high concentration of MNCs.
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SLIDE 14

Good growth in retail sales augers well for consumption

Source: CSO. Note: Core retail sales excludes motor trades.

6.0 7.6

  • 25
  • 20
  • 15
  • 10
  • 5

5 10 15 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 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 % Change Y-Y, 3M Moving Average Core Retail sales Total Retail Sales

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SLIDE 15

Consumer sentiment now above long-run average

Source: KBC/ESRI Note:Long-run average of consumer sentiment index = 85.5.

100.3 20 40 60 80 100 120 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 3 month moving average

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SLIDE 16

Strong year-on-year growth in exchequer revenues

11.7

  • 30
  • 25
  • 20
  • 15
  • 10
  • 5

5 10 15 20 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 % Change Y-Y

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.

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SLIDE 17

Revenues above Budget-day expectations

912

  • 200

200 400 600 800 1,000 1,200 1,400 1,600 1,800 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 € million

FIGURE 3: TAXES AND PRSI RELATIVE TO CUMULATIVE PROFILE

Income Taxes VAT Excise Duties Corporation Tax Capital Taxes Stamp Duties "Other" PRSI

Source: Department of Finance.

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SLIDE 18

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

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SLIDE 19

Large margins of error surround growth forecasts

  • 2.6
  • 5.0

0.4 2.6 0.2 1.4 5.2 4.0 3.8

  • 8
  • 6
  • 4
  • 2

2 4 6 8 2008 2009 2010 2011 2012 2013 2014 2015 2016 % Change Y-Y

REAL GDP FAN CHART BASED ON SPU 2015 PROJECTIONS (TO 2016)

80% likelihood range 60% likelihood range 40% likelihood range 20% likelihood range Official Outturns / Point Forecasts

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.

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SLIDE 20

Monitoring internal imbalances

  • Credit growth
  • Property prices / construction
  • Competitiveness
  • Current account balance
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SLIDE 21

New mortgage lending rising from low base

87.7 22.2 19.2 4.1 5 10 15 20 25 10 20 30 40 50 60 70 80 90 100 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of loans, '000s Value of loans, €bn (RHS)

Source: IBF/PwC Mortgage Market Profile. Notes: Both series cover first-time buyer and mover purchaser loans (moving 4-quarter sum).

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SLIDE 22

5 10 15 20 25 30 35 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Price: Disposable Income per household * Price: Annual Avg. Rent (RHS)

Monitoring for signs of overvaluation

Sources: ESRI/PTSB; CSO. *Average house prices divided by moving 4-quarter sum of adjusted personal disposable income per household.

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SLIDE 23

House completions low but increasing

93,419 11,016 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Total Housing Completions

Source: DOECLG

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SLIDE 24

Construction shares of GNP below long-run averages

14.1 2.3 2 4 6 8 10 12 14 16 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% GNP

Dwellings Roads Other B&C

Source: CSO Note: Respective long-run median (in same colours) of each series shown in horizontal lines.

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SLIDE 25

Significant supply shortfall in Dublin

3.3 1.2 0.6 0.3 0.2 0.2 1.4 1.0 0.3 0.2 0.2 0.1 7.5 0.9 0.5 0.5 0.1 0.2

1 2 3 4 5 6 7 8 Dublin City & Suburbs Cork City & Suburbs Galway City & Suburbs Limerick City & Suburbs Waterford City & Suburbs Kilkenny City

Housing Completions and Requirements ('000s)

House Completions in 2014 House Completions in H1 2015 Estimated Housing Requirement p.a. (2014-2018)

Source: Housing Agency; DoECLG. Note: Completions cover rural + urban settlements (private and social); requirements only cover urban settlements of 1,000+ persons.

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SLIDE 26

Improvement in competiveness

106 106 107 104 101 96 100 102 113 119 123 126 133 145 137 123 119 113 120 119 111

70 80 90 100 110 120 130 140 150 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RELATIVE REAL EFFECTIVE EXCHANGE RATE (BASE: 2001 = 100)

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.

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SLIDE 27

Current account near balance excluding re-domiciled PLCs

  • 0.4
  • 0.6
  • 1.0

0.5

  • 0.1
  • 3.3
  • 4.9
  • 6.1
  • 5.8
  • 4.1
  • 0.8
  • 1.2
  • 1.5

3.1 3.6

  • 5.1
  • 3.9
  • 4.5
  • 5.7
  • 0.2
  • 8
  • 6
  • 4
  • 2

2 4 6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % GDP Current Account Balance Adjusted for Re-domiciled PLCs

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SLIDE 28

Openness makes the economy vulnerable to external shocks

  • China / Emerging Markets
  • US monetary policy normalization
  • Euro Area stagnation
  • Brexit
  • Long term growth slowdown / secular stagnation
  • Geopolitical Risks
  • “Unknown unknowns”

112

50 100 150 200 250

US Japan Australia Turkey UK France Italy Spain Canada Greece Mexico Albania Finland Norway Portugal Montenegro Romania EU-15 EU Serbia Euro area Sweden Germany Croatia Poland Macedonia … Korea Austria Iceland Denmark Cyprus Latvia Bulgaria Switzerland Slovenia Lithuania Netherlands Belgium Czech Rep. Estonia Hungary Slovakia Ireland Malta Luxembourg

Exports as % of GDP

Source: AMECO.

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SLIDE 29

Growing dependence on certain sectors

10 20 30 40 50 60 70 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 %

CHEMICAL AND RELATED PRODUCTS AS % TOTAL GOODS EXPORTS

Sources: CSO.

5 10 15 20 25 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

COMPUTER & FINANCIAL SERVICES AS % TOTAL SERVICES EXPORTS

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SLIDE 30

Corporation Tax: Top 10, 20 & 50 Companies

Source: Pigott and Walsh (2014); authors’ analysis of Revenue data.

Top 10, 20 and 50 Companies €bn unless stated % of Total Total Corporation Tax 4.1 Top 10 Companies CT Paid 1.0 24% Top 20 Companies CT Paid 1.3 32% Top 50 Companies CT Paid 1.9 46% CORPORATION TAX PAYMENTS (ANNUAL AVG. 2008-2012)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2008 2009 2010 2011 2012

CORPORATION TAX PAYMENTS (% OF TOTAL)

Top 10 Companies CT Paid Companies 11 - 20 CT Paid Companies 21 - 50 CT Paid All other companies CT Paid

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SLIDE 31

Euro Area challenges

2.2 2.4 2.3 2.1 2.2 2.2 2.2 2.2 3.3 0.3 1.6 2.7 2.5 1.3 0.4 0.1 1.0 1.2 1.4 1.5 1.7

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 % Change Y-Y

Euro Area: CPI Inflation

3.8 2.1 0.9 0.7 2.2 1.7 3.2 3.0 0.5

  • 4.5

2.0 1.6

  • 0.8
  • 0.4

0.8 1.5 1.7 1.6 1.6 1.6 1.5

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 % Change Y-Y

Euro Area: Real GDP Growth (% Y-Y)

Source: IMF (Latest World Economic Outlook).

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SLIDE 32

Pattern of Euro Area growth downgrades

97 98 99 100 101 102 103 104 105 106 2010 2011 2012 2013 2014 2015 2016 Index (Base: 2010 = 100)

Euro Area: Real GDP (European Commission Forecast Vintages)

Spring 2015 Winter 2015 Autumn 2014 Spring 2014 Winter 2014 Autumn 2013 Spring 2013 Winter 2013 Autumn 2012 Spring 2012

Sources: European Commission Forecasts, Different Vintages.

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SLIDE 33

Sustaining growth

  • -Avoiding pro-cyclicality
  • -Preventing crises
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SLIDE 34

Some emerging lessons from the banking inquiry

  • Difficulty of avoiding pro-cyclical policies in times of

strong economic growth

  • Importance of risk management

– Looking beyond central scenarios

  • Significant crisis-induced institutional reforms

– Banking – Fiscal

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SLIDE 35

Value of a strong budgetary framework

  • European rationale

– Spillovers across countries

  • Domestic rationale

– Avoid pro-cyclicality in good times – Avoid large forced adjustments in bad times

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SLIDE 36

Risk: Net debt ratio among highest in the world

9 11 12 15 15 20 29 29 29 32 38 44 46 54 55 55 59 60 69 71 72 72 73 77 80 83 86 87 89 94 97 100 111 120 130 161

20 40 60 80 100 120 140 160 180

Sweden EM & MI Avg.* Bulgaria Finland Denmark Australia* Czech Rep. Latvia Romania Lithuania Canada* Poland Slovakia Netherlands Germany Slovenia Austria Malta Hungary EU

  • Adv. Economies*

UK Croatia Euro Area US* Spain Ireland (GDP) France Cyprus Ireland (Hybrid) Belgium Ireland (GNP) Portugal Italy Japan* Greece

% GDP

NET DEBT RATIOS (% GDP, Q1 2015 UNLESS STATED)

Sources: Eurostat; IMF Fiscal Monitor (April 2015); CSO and internal IFAC calculations. Notes: Other than those countries marked by an asterisk, all net debt ratios are based on Q1 2015 Government Finance Statistics from Eurostat or the CSO (for Ireland). Net debt is calculated as Gross Consolidated Debt less EDP debt instrument assets (F2: Currency and Deposits; F3: Debt securities; and F4: Loan assets). * IMF 2015 estimates are reported for those countries not covered by Eurostat Q1 Government Finance Statistics. For cross-country comparability, net debt levels reported are those of national statistical agencies for countries that have adopted the 2008 System of National Accounts (Australia, Canada, United States) excluding unfunded pension liabilities of government employees’ defined-benefit pension plans.

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SLIDE 37

Fiscal rules should bring debt to safer levels

24.0 123.2 105.0 48.6

20 40 60 80 100 120 140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

% GDP

General Government Gross Debt Scenario

Outturns Scenario

Source: Department of Finance; internal IFAC calculations. Notes: Illustrative scenario assumes Department of Finance projections for 2016-2020 adjusted for minimum compliance with the Budgetary Rule; real GDP growth of 3% beyond 2020, with GDP deflator growth of 2% and marginal borrowing costs of 3.5%.

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SLIDE 38

Debt path highly sensitive to growth shocks

101.9 95.9 90.2 105.0 84.7 79.3 74.1 69.0 60 70 80 90 100 110 120 130

2012 2013 2014 2015 2016 2017 2018 2019 2020 General Government Debt, % of GDP GENERAL GOVERNMENT DEBT PATHS: SCENARIOS AROUND SPU 2015 DEBT TO GDP PROJECTION

  • 1.5
  • 1
  • 0.5

Base +0.5 +1 +1.5

Source: Department of Finance, internal IFAC calculations based on the Council's Fiscal Feedbacks Model. Note: The figure shows alternative projections of the balance ratio based on GDP growth forecasts that deviate from SPU projections by 0.5, 1.0 and 1.5 percentage points in either direction. The "Base" scenario corresponds to the central projection for the debt GDP ratio as published in SPU 2015.

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SLIDE 39

Complementary domestic and European elements

Effectiveness

  • f Domestic

Framework Effectiveness

  • f European

Framework

Monitoring, peer pressure and possible sanctions of the European framework enhances the effectiveness of the domestic framework Domestic ownership adds legitimacy to the European rules

slide-40
SLIDE 40

Synergies between rules, institutions and processes Rules Institutions Processes

Fiscal Framework

slide-41
SLIDE 41

European/Domestic fiscal rules

Domestic European Corrective Arm

  • f SGP

Preventive Arm

  • f SGP

3% Deficit Rule 1/20th Debt Rule MTO / Adjustment path to MTO Expenditure benchmark Domestic Budgetary Rule Domestic Expenditure Ceilings Domestic Budgetary Rule Consistent with Preventive Arm of SGP Domestic Expenditure Ceilings Consistent with Expenditure Benchmark

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SLIDE 42

Summing up

  • Strong recent economic performance
  • Encouraging central scenario for projected growth
  • But significant risks around that scenario
  • Institutional reforms should help avoid repeat of past

mistakes

  • But now need to respect the new frameworks