Quarterly Economic Commentary, Summer 2018 Presentation

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Quarterly Economic
Commentary, Summer 2018
DATE
19th June 2018
VENUE
ESRI, Whitaker Square,
Sir John Rogerson’s Quay,
Dublin 2
AUTHORS
K. McQuinn, C. O’Toole, P.
Economides, T. Monteiro

www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie2 19 June 2018
Outline
• Forecasts
• Domestic and external environment
• Monetary and Financial Conditions
• Housing Market
• Public Finances
• Conclusions and General Assessment

Economic growth in 2018 & 2019
Output
 Real GDP to grow by 4.7% in 2018 and 3.9% 2019.
Employment
 To reach 2,248m in 2018 and 2,286m in 2019.
 Unemployment rate to average 5.6% in 2018.
Public finances
 General Government Balance, 2018: -0.2%, 2019: 0.1%
 Debt-to-GDP, 2018: 66.6%, 2019: 64.0%

Forecast Summary
Real Annual Growth % 2016 2017 2018 2019
Consumption 3.3 1.9 2.4 2.5
Govt. Expenditure 5.3 1.8 2.5 3.0
Investment 61.2 -22.3 13.0 13.4
Exports 4.6 6.9 5.4 5.2
Imports 16.4 -6.2 7.0 7.7
Gross Domestic Product
(GDP) 5.1 7.8 4.7 3.9
Gross National Product
(GNP) 9.6 5.2 5.3 3.9

Productivity
New CSO estimates for labour and multi-factor productivity.
Distinguishes between foreign-owned multinational enterprise
dominated sectors and other sectors.
Labour Productivity Growth Rate (%) for “Other sectors excl. foreign-owned MNE dominated sector”
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Source: Central Statistics Office

Productivity
 Combining new productivity measure with employment growth allows
for calculation of proxy-domestic growth rate.
 Stable rate, suggesting more moderate improvements than GDP or GNP
would imply.
Alternative output growth rates (%) for the Irish economy: 2001 – 2016
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2001 2003 2005 2007 2009 2011 2013 2015
Calculated GDP GNP

Productivity
This calculation highlights the importance of economic data
distinguishing between foreign-owned MNE’s and the rest of
the economy.
QEC forecasts of future labour productivity growth decline
marginally from 2017 to 2019.
Combining forecasts of productivity and employment signals
growth of 4.6% in 2018 and 3.7% in 2019.
Forecasts are almost exactly in line with current QEC forecasts
of real GDP growth.

PERSONAL CONSUMPTION OF GOODS AND SERVICES

Unemployment rate 5.9 per cent in April.
Set to fall to average 5.6 per cent in 2018
Employment growth:
– 2.9% in 2017, 2.4% in 2018 and 1.7% in 2019.
– Major contribution from ICT and Admin/Support
Some recent pick up in earnings
Low inflation & low unemployment suggest room
for further real wage growth
Labour market

Investment
Investment by asset type
 Intangible Share; from 16% in 2007 to 32% in 2017.
 B&C Share; from 55% in 2007 to 40% in 2017.
B&C by asset type
 Dwellings +32.6%.
(low base, 32.1% of dwellings investment in 2006)
 Other B&C +18.7% .
(surpasses 2008 height by 3.6%)
Summer 2018 QEC notes expected housing completions of 25,000 in 2018 and
31,000 in 2019.
With new CSO revisions, figures closer to 18,700 in 2018 and 23,200 in 2019

New Data on Housing Completions
0
5,000
10,000
15,000
20,000
25,000
2011 2012 2013 2014 2015 2016 2017
Completions Connections
New CSO completions data provides better estimate of new dwellings

Investment in B&C by Asset Type
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Dwellings Improvements Other Buildings and Construction

Monetary and Financial Conditions
 New mortgage lending remains in double digits year-on-year
 2018 Q1 saw 13.5% increase.
 Increase in lending to SME’s up 10% relative to 2016. Broad-
based rise across sectors.
 Given pace of acceleration in new lending, careful monitoring
required

Increasingly driving domestic growth
– Value of mortgage drawdowns up 22% YoY, Q1
– Completions increased on average by 26% in
2018 (January & February relative to same periods last year)
Continued upward pressure on
– Prices up 12.7% March YoY
– Rents up 6.4% nationally in 2017Q4
As supply continues to be below estimates of
structural demand, upward pressures expected to
persist
Housing market

Differences in Price Changes Across Distribution
Source: Property Price Register
-30
-20
-10
0
10
20
30
2011 2012 2013 2014 2015 2016 2017
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5

Assessment of the Public Finances
 Resilient tax receipt growth into 2018
 Tax revenue increased by 3.8%
 Corporation tax (+5.2%), Income tax growth (+5.8%),
VAT (+1.6%), Excise Duty (-4.5%)
 General Government deficit/surplus (% of GDP)
 -0.2% in 2018
 +0.1% in 2019
 Public debt set to fall (64.0% of GDP, 2019)

Annual Changes in Major Tax Sub-Components (%)
Source: QEC calculations

Debt-to-GDP & Debt-to-GNI*
Source: QEC calculations
60
80
100
120
140
160
180
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
GDP GNI*

NDP Simulation
Concept
 Macroeconomic effects of NDP and potential alternatives.
Scenarios
 Public Investment increase.
 Income Tax decrease.
Benefits
 NDP: Long-run, increased potential output
 Tax cut: Short-run, boosts disposable income and consumption

NDP Simulation
Percent deviation from Baseline Level, Average: 2018-22 2023-27 Average 2018-22 2023-27 Average
Potential Output 0.5 1.7 1.1 0.3 0.9 0.6
Gross Value Added at Basic Prices, Non-Traded Sector 0.7 2.1 1.4 0.7 1.7 1.2
Total Investment 1.6 4.7 3.2 0.9 2.7 1.8
Employed Persons 0.8 1.8 1.3 0.5 1.1 0.8
Disposable Income 0.7 1.4 1 1.2 1.8 1.5
Exports 0 0 0 0.1 0.8 0.5
Deviations from Baseline, Average 2018-22 2023-27 Average 2018-22 2023-27 Average
Personal Consumption Deflator 0 0 0 -0.1 0 0.0
Unemployment Rate -0.5 1 -0.8 -0.2 -0.6 -0.4
Deviation from Baseline, End of Period: 2020 2023 2027 2020 2023 2027
General Government Debt, % GDP
Personal Consumption of Goods and Services
General Government Balance, % GDP
Gross Value Added at Basic Prices, Trade Sector
Gross Domestic Product at Basic Prices
0.4 1.6 3.7 1.3 2.7 4.4
-0.3 -0.6 -0.5 -0.4 -0.6 -0.5
0.6 1.3 0.9 1 1.6 1.3
0 0 0 0.1 0.7 0.4
Public Investment Increase Income Tax Cut
0.7 1.4 1.1 0.3 1 0.7

NDP Simulation
Conclusion
Both scenarios result in a variety of impacts
Public investment scenario results in the larger positive impact on
economic activity and employment
Tax cut produces a larger increase in consumption and a more
balanced impact in sectoral terms
Caveats
NDP: Details of plan matter. Well targeted plan could generate
higher positive impact from investment. Vice-versa for poor plan.
Given the strength of recent economic activity, special care needs
to be exercised in using fiscal policy to stimulate economic growth.

External risks
 The international environment in general
 Is positive for Irish growth
 Significant risks are looming
 Continued uncertainty concerning Brexit
 More general uncertainty within the EU
 Italian elections
 Tensions in global trade relationships
 US and China
 Long-standing result that
 1 per cent decline in global GDP = 1 per cent decline in Irish output

General Assessment
 Economic activity still increasing significantly
 Slowdown in unemployment decline
 Investment expected to improve
 Global risks elevate, shadow cast on growth forecasts.
 Public finances:
 Deficit in 2018 and minor surplus 2019.
 Given the NDP commitment,
 Little room for changes in taxation to stimulate activity
 Key policy challenge in medium run
 To keep growth on a sustainable path

Quarterly Economic Commentary
Summer 2018

Quarterly Economic Commentary, Summer 2018 Presentation

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