National Economic Dialogue Macroeconomic Outlook June 28 th , 2017 - - PowerPoint PPT Presentation

National Economic Dialogue Macroeconomic Outlook

June 28th, 2017 esri.ie

Kieran.McQuinn@esri.ie

Outline

 Forecasts  Domestic and External Environment  Monetary and Financial Conditions  Housing Market  Public Finances and Brexit  Conclusions and General Assessment

Irish economy: boom, bust and boom?

Export lead growth

• 8
• 6
• 4
• 2

2 4 6 8 10 12 14 1989 1993 1997 2001 2005 2009 2013 2017 GDP , % change, volume

Domestic lead growth Recession and Recovery

Economic growth to continue in 2017 and 2018

Output

Real GDP to grow by 3.8% in 2017 and by 3.6% in 2018

Employment (2018)

Numbers employed to average of 2.134 million Unemployment rate to average 5.4%

Public finances

Tax revenues lower than expected 2017: -0.5%, 2018: -0.3%

Forecast summary

Real Annual Growth % 2015 2016 2017 2018 Consumption 4.5 3.0 3.1 3.0

• Govt. Expenditure

1.2 5.3 2.5 2.6 Investment 32.7 45.5 9.5 8.7 Exports 34.4 2.4 5.9 5.6 Imports 21.7 10.3 7.6 7.7 Gross Domestic Product (GDP) 26.3 5.2 3.8 3.6 Gross National Product (GNP) 18.7 8.9 3.5 3.3

Labour market

 Unemployment rate 6.4 per cent in May  Employment growth:



3.3 per cent in 2017 and 2.3 per cent in 2018

 Unemployment rate

 5.3 per cent by end of 2018

 Strong 2017 Q1 growth in

 Construction and ICT sectors

Investment

 Volatility in components such as

 Intangibles and transport equipment

 Core Investment growing strongly

 Building and construction  Dwellings 27.6 per cent in 2016

 Expected housing completions

 18,500 in 2017 and  23,500 in 2018

External environment

 Export growth of 5.9% and 5.6% in 2017-18

 Imports expected to outpace exports  Net exports negative contribution

 Brexit still a source of great uncertainty

 Large Forecast range for UK  Soft Brexit more likely?

 Despite international uncertainty  Overall trade outlook positive

Investment and consumption driving growth

• 10.0
• 5.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 2011 2012 2013 2014 2015 2016 2017 2018 Consumption Government Spending Net Exports Investment

Monetary and financial conditions

 Normalisation of activity in banking sector

 Pace of deleveraging slowing  Fall in non performing loans

 Credit growing

 New lending to SME’s  Mortgage credit  Low base

 Careful monitoring required

Credit to SME’s trending up (4 quarter rolling average)

200 400 600 800 1000 1200 1400 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Other Business services including ICT and Finance Hotels and restaurants Wholesale and retail Construction and real estate Manufacturing, transport and utilities Primary industries

Annual growth of new mortgage drawdowns (%)

• 0.80
• 0.60
• 0.40
• 0.20

0.00 0.20 0.40 0.60 0.80 1.00 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Number of Mortgages Value of Drawdowns

Housing market

 Increasingly driving domestic growth

 Mortgage drawdowns up 40% YoY (low base)  Construction employment

 Continued upward pressure on

 Prices up 10.5% April YoY  Rents up 8.6 per cent nationally

 Revised estimates of structural demand

 30,000 – 35,000 units required  18,500 in 2017?

Assessment of the public finances

 Strong tax receipts in 2016.  Tax revenue weaker than expected in 2017  Corporation tax, Income tax growth, excise.  General Government deficit/surplus (%GDP)

 -0.5 in 2017  -0.3 in 2018

 Deficit higher than previously expected.

Annual changes in major tax sub-components (%) for the period January - May

• 60.0
• 40.0
• 20.0

0.0 20.0 40.0 60.0 80.0 100.0 120.0 2014 2015 2016 2017 Excise Duty Stamps Income Tax Corporation Tax Valued Added Tax Total

Alternative debt to GDP

60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 2013 2014 2015 2016 2017 2018 Adjusted GDP GDP

Impact of Brexit on potential output

 “Hard” Brexit (WTO) reduces economic

activity in the medium term

 Loss of GDP after 10 years:

 3.2% in the UK (NIESR, 2016) and  3.8% in Ireland (ESRI, 2016) with respect to baseline

 Lower activity affects potential output

 Emphasis on the traded sector  Higher unemployment reduces hours  Lower investment hurts capital accumulation

Potential output loss, sectoral disaggregation

• 3.5
• 3
• 2.5
• 2
• 1.5
• 1
• 0.5

t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32 t+36 t+40 Traded sector Non-traded sector Government sector Potential output

Implications for fiscal space

 Expenditure benchmark

 Spending can grow at reference rate potential

 Hard Brexit

 Reduces potential output and  Reference rate

 Ultimately this means

 Reduced fiscal space over the medium-term  Cumulative impact of €600 million after 3 years

General assessment

 International environment uncertain

 On balance positive

 Credit growth

 Sustainable but requires monitoring

 Domestic sources of growth remain robust

 Construction + Consumers

 Caution on the public finances:

 Weak growth in taxation revenue  Possible impact of hard Brexit

Thank You

ESRI/RTB rent index

70 80 90 100 110 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Q3 2007=100

National National Houses National Apts

External environment

Euro Area United States United Kingdom

• 2
• 1

1 2 3 4

2012 2013 2014 2015 2016 2017 2018

• 2
• 1

1 2 3 4

2012201320142015201620172018

• 2
• 1

1 2 3 4

2012 2013 2014 2015 2016 2017 2018

Irish economy showing strong growth

• 10.0
• 5.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP GNP

Housing supply trends

200 400 600 800 1000 1200 1400 1600 1800 2015 2016 2017