Kieran McQuinn delivered this presentation at the Dublin Economics Workshop on Saturday, 14th September. More information about the event, including other presentations delivered at the workshop, can be found here: https://www.dublineconomics.com/

1. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications
@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie
Small open economies –
vulnerabilities in a changing world
DATE
13th September 2019
VENUE
Clayton Whites Hotel,
Wexford.
AUTHORS
K. McQuinn, C. O’Toole, M.
Allen-Coghlan, P. Economides

2. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie2 19 September 2019
Outline
• Uncertainty and the Irish economy
• Global issues and Brexit
• Impact of Brexit on short-term forecasts
• Recent examination of uncertainty in the QEC:
• Consumption - impact of Brexit already?
• Investment - US policy
• Concluding comments

3. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie3 19 September 2019
IMPACTS OF DIFFERENT BREXIT SCENARIOS ON THE IRISH ECONOMY
Source: QEC Spring 2019, Box 1
LONG-TERM IMPACT (+10 years) SHORT-TERM COMMENTARY FORECASTS
Scenario
% Deviation
from
Baseline
Withdrawal (FTA) -2.6
No Deal -4.8
Disorderly -5.0
Scenario Year
GDP Level
(Volume, €bn)
Annual %
Growth
Baseline 2019 324.5 4.0
Baseline 2020 334.7 3.2
Disorderly 2019 316.1 1.2
Disorderly 2020 323.7 2.4

4. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie4 19 September 2019
Personal Consumption of Goods and Services
Source: Central Statistics Office
20,000
21,000
22,000
23,000
24,000
25,000
26,000
-6%
-4%
-2%
0%
2%
4%
6%
Euro Mn Growth Y-o-Y

5. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie5 19 September 2019
Consumer Sentiment Indicator
Source: European Commission data and ESRI calculation
40
50
60
70
80
90
100
110
120
2011m1 2011m7 2012m1 2012m7 2013m1 2013m7 2014m1 2014m7 2015m1 2015m7 2016m1 2016m7 2017m1 2017m7 2018m1 2018m7 2019m1

6. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie6 19 September 2019
Brexit and consumer sentiment I
• Specify a model of consumer sentiment
• Lovell and Tien (2000) specify
• An economic discomfort index (EDI)
EDI = ̇𝑝𝑝𝑡𝑡 + 𝑢𝑢𝑡𝑡
• ̇𝑝𝑝𝑡𝑡 is the absolute rate of inflation and
• 𝑢𝑢𝑡𝑡 is the unemployment rate.
• Compare performance of model with sentiment

7. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie7 19 September 2019
Residuals from Sentiment Model
Source: ESRI calculation
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
2013m7 2014m1 2014m7 2015m1 2015m7 2016m1 2016m7 2017m1 2017m7 2018m1 2018m7 2019m1

8. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie8 19 September 2019
Brexit and consumer sentiment II
• Over the period 1998 – 2019
• The model performs quite well
• Captures the movements in consumer sentiment
• However since mid 2018
• Marked dis-improvement in the performance of
the model?
• Sentiment declining while “fundamentals” still
doing well?
• Impact of Brexit?

9. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie9 19 September 2019
Investment by Asset (%)
Source: Central Statistics Office
-15
-10
-5
0
5
10
15
20
25
30
GFCF Intangible Assets Machinery & Equipment Buildings & Construction
Four Quarter Rolling Average Growth Rate

10. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie10 19 September 2019
Global uncertainty and Irish
investment?
0
50
100
150
200
250
1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1 2014Q3 2016Q1 2017Q3 2019Q1
US Ireland
Economic Policy Uncertainty – Based on media mentions of key phrases

11. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie11 19 September 2019
COSMO accelerator model
• ∆𝑙𝑙𝑙𝑙𝐼𝐼𝑡𝑡 = 𝛽𝛽1∆𝑙𝑙𝑙𝑙𝐼𝐼𝑡𝑡−1 + 𝛽𝛽2∆𝑙𝑙𝑙𝑙 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡−1 + 𝛽𝛽3∆𝑙𝑙𝑙𝑙𝑟𝑟𝑡𝑡−1 +
𝜎𝜎 𝑙𝑙𝑙𝑙𝐼𝐼𝑡𝑡−1 − 𝜑𝜑𝜑𝜑𝜑𝜑𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡−1 − 𝜐𝜐𝜐𝜐𝜐𝜐𝑟𝑟𝑡𝑡−1
• In an error correction model link investment to
• output growth, the cost of capital and other factors
• Then separately include US and Irish uncertainty
indicators

12. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie12 19 September 2019
Model estimates
Long Run Equations
Overall Construction M&E Intangibles
ln(𝐸𝐸𝐸𝐸𝐸𝐸(𝑈𝑈𝑈𝑈)𝑡𝑡)
-0.406*** -0.408*** -0.502*** -0.156+
(0.054) (0.063) (0.113) (0.081)
ln(𝐸𝐸𝐸𝐸𝐸𝐸(𝐼𝐼𝐼𝐼)𝑡𝑡)
-0.201* -0.163 -0.304*** -0.127
(0.081) (0.107) (0.076) (0.060)
Short Run Equations
Δln(𝐸𝐸𝐸𝐸𝐸𝐸(𝑈𝑈𝑈𝑈)𝑡𝑡−1)
-0.271*** -0.170** -0.482*** -0.091
(0.047) (0.055) (0.080) (0.090)
Δln(𝐸𝐸𝐸𝐸𝐸𝐸(𝐼𝐼𝐼𝐼)𝑡𝑡−1)
-0.026 0.010 -0.107 -0.021
(0.030) (0.033) (0.067) (0.069)
Observations 91 91 91 91
Models Including US & Irish Economic Policy Uncertainty

13. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie13 19 September 2019
Implication of results
 US economic policy uncertainty
 Significant and negative impact on Irish investment
 Both in the short and the long term
 Long-term result:
 One percentage point increase in uncertainty
 Lowers investment by -0.4 percentage points
 Holds for all investment types however
 Noteworthy that machinery and equipment is most sensitive to
US uncertainty
 May be a factor in the slowdown in the short-run
 Seen in this asset type recently

14. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie14 19 September 2019
Concluding comments
 Notwithstanding the recent strong performance of
the Irish economy
 Both Brexit and developments in the US
 Appear to have had a contractionary impact
already on domestic economic activity
 Helped to cool an overheating economy?
 However, going forward the impacts far less
benign?

15. Thank you