Quarterly Economic Commentary, Autumn 2018

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Quarterly Economic
Commentary, Autumn 2018
DATE
25th September 2018
VENUE
ESRI, Whitaker Square,
Sir John Rogerson’s Quay,
Dublin 2
AUTHORS
K. McQuinn, C. O’Toole,
P. Economides

www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie2 26 September 2018
Outline
• Forecasts
• Domestic environment
• Monetary and Financial Conditions
• Housing Market
• Public Finances
• External environment
• Conclusions and General Assessment

Economic growth in 2018 & 2019
Output
 Real GDP to grow by 8.9% in 2018 and 4.5% 2019.
Employment
 To reach 2,257m in 2018 and 2,313m in 2019.
 Unemployment rate to average 5.7% in 2018.
Public finances
 General Government Balance, 2018: -0.2%, 2019: 0.1%
 Debt-to-GDP, 2018: 64.2%, 2019: 60.7%

Forecasts
Real Annual Growth % 2016 2017 2018 2019
Consumption 4.0 1.6 2.9 2.5
Govt. Expenditure 3.5 3.9 4.0 4.5
Investment 51.7 -31.0 -6.3 9.8
Exports 4.4 7.8 7.5 5.2
Imports 18.5 -9.4 -0.7 6.0
Gross Domestic Product
(GDP) 5.0 7.2 8.9 4.5
Gross National Product
(GNP) 11.5 4.4 8.9 4.7

Source: Central Statistics Office
Note: 4-Quarter Rolling Averages
0
1
1
2
2
3
3
4
4
5
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018
0
2
4
6
8
10
12
14
16
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018
-20
-10
0
10
20
30
40
50
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018
 Revision to headline GDP due to two reasons
 Greater than expected growth in consumption and modified investment in first half
of 2018.
 And fall in imports
 Driven primarily by MNC services trade.
Real Private Consumption Growth Modified Investment Growth Export & Import Growth
Forecasts

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

Investment
Investment by asset type
 Intangible asset investments fell for six consecutive quarters.
 B&C Share; 20% of investment in Q2 2017 to 33% in Q2 2018.
B&C by asset type
 Dwellings +37.8%
(low base, one third of dwellings investment in 2005)
 Other B&C +10%
Housing completions forecast:
 18,550 in 2018 and
 24,500 in 2019.

Labour Market
Unemployment
 Rate 5.6 per cent in August
 Falling to 5.1 per cent in 2019
Employment
 Increase by 2.9 per cent in 2017 and 2018
 2.5 per cent increase expected in 2019
Earnings
 Average weekly earnings rose 2.8 per cent in 2018Q2
 Low inflation and falling unemployment suggests
 Further real wage growth in 2019

Monetary and Financial Conditions
 New mortgage lending remains in double digits year-on-year
 Q2 2018 saw 16.5% increase.
 Lending to SMEs up, particularly for construction & real estate
and hotels & restaurants.
 Given pace of acceleration in new lending, careful monitoring
required

Monetary and Financial Conditions
Source: Bank of International Settlements (BIS)
Outstanding stock of lending to the Irish economy by residency ($M)
0
50
100
150
200
250
300
350
400
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1999Q4
2000Q3
2001Q2
2002Q1
2002Q4
2003Q3
2004Q2
2005Q1
2005Q4
2006Q3
2007Q2
2008Q1
2008Q4
2009Q3
2010Q2
2011Q1
2011Q4
2012Q3
2013Q2
2014Q1
2014Q4
2015Q3
2016Q2
2017Q1
2017Q4
France Germany UK US Japan Belgium Cross-Border to GDP

Housing Market
 Large component of domestic sources of growth
 Value of mortgage drawdowns up 22% YoY Q2
 Completions increased by 34% YoY Q2
 Continued upward pressure on
 Prices – up 10.4% July YoY
 Rents – up 8% Dublin and 6% outside Dublin
 With supply still below levels of structural demand:
 Upward pressure on prices/rents expected to continue

Housing Market Affordability:
 Corrigan et al. (2018):
 Recent research on affordability issues in the Irish
housing market
 Persistent affordability difficulties
 Low income urban households renting privately
 Finding it difficult to access home ownership
 McQuinn (2018) updating earlier work:
 Housing demand set to increase in coming years
 Likely to exacerbate affordability issues
 Policies to increase housing supply critical
 Social and affordable housing
 Case for public capital investment

Assessment of the Public Finances
 Strong tax receipt growth into 2018
 Tax revenue increased by 5.1%
 Corporation tax (+10.5%), Income tax growth
(+6.6%), VAT (+3.9%), Excise Duty (-8%)
 General Government deficit/surplus (% of GDP)
 -0.2% in 2018
 +0.1% in 2019
 Public debt set to fall (64.0% of GDP, 2019)

Debt-to-GDP & Debt-to-GNI*
Source: QEC calculations
0
20
40
60
80
100
120
140
160
180
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
GDP GNI*

Assessment of the Public Finances
 Using GNI*
 Irish debt remains high
 Under “normal” circumstances, a contractionary budget would
be advisory.
 However:
1. Given infrastructural (housing) deficits and
2. Increased possibility of a no-Brexit deal,
 Under a neutral budgetary policy
 A mild surplus is a real possibility in 2019
 Adverse shock from no-deal Brexit scenario could be amplified
by a contractionary budget.

External environment
 At present:
 The trade balance makes a significant contribution to growth
 However, significant risks are looming
 US trade policy & Brexit.
 Long-standing result:
 1 per cent decline in global GDP equal to 1 per cent decline in Irish
output.

General Assessment
 Economic activity still increasing significantly
 Consumption and modified investment growing strongly
 MNE related activity impacting the balance of trade
 Global risks particularly elevated in 2019
 Public finances:
 Deficit in 2018 and minor surplus 2019.

Quarterly Economic Commentary
Autumn 2018

Quarterly Economic Commentary, Autumn 2018

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