Quarterly Economic Commentary, Spring 2018

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Quarterly Economic
Commentary, Spring 2018
DATE
22 March 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 22 March 2018
Outline
• Forecasts
• Domestic and external environment
• Monetary and Financial Conditions
• Public Finances
• Housing Market
• Conclusions and General Assessment

Economic growth in 2017-2019
Output
 Real GDP grew by 7.8% in 2017, expected to increase further by
4.8% in 2018 and 3.9% 2019.
Employment
 New LFS caused upward revision to 2.195m for 2017.
 Unemployment rate to average 5.4% in 2018
Public finances
 Tax revenues improvements in 2017, minor deficit
 2017: -0.3%, 2018: 0.2%, 2019: 0.5%

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 12.6 13.3
Exports 4.6 6.9 7.4 7.8
Imports 16.4 -6.2 9.7 11.0
Gross Domestic Product
(GDP) 5.1 7.8 4.8 3.9
Gross National Product
(GNP) 9.6 5.2 4.7 3.9

Major trade surplus contributes to 7.8% GDP
Source: Central Statistics Office and ESRI calculations

Unemployment rate 6.0 per cent in February.
Set to fall to average 5.4 per cent in 2018
Employment growth:
– 2.9% in 2017, 2.7% in 2018 and 2.0% in 2019.
– Major contribution from ICT and Admin/Support
Expected low inflation & low unemployment suggest
much room for real wage growth to occur
Labour market

PERSONAL CONSUMPTION OF GOODS AND SERVICES
Source: Central Statistics Office

Investment
 Moderation in accumulation of intangible assets.
 Intangibles; +111.2% in 2016, -40.6% in 2017.
 Excluding R&D related IP imports; +25.4% in 2017.
 Core investment mixed in 2017.
 Building and construction +16.7%.
(+32.6% investment in dwellings)
 Machinery and Equipment -11.0% .
(-6.0% when excluding changes in aircraft)
 Expect housing completions of 24,000 in 2018 and
29,500 in 2019.

Modified Investment
Source: Central Statistics Office

Understanding distortions in investment
ADDITIONS TO CAPITAL ASSETS - TOTAL (€ ‘000) BY PERSONS ENGAGED AND YEAR
Source: CSO Census of Industrial Production
2011 2012 2013 2014 2015
0 - 9 203,137 300,842 1,087,851 928,392 337,205
10 - 49 380,580 251,770 386,112 452,327 24,900,982
50 - 249 908,002 1,057,201 806,604 905,901 1,996,635
250 and over 4,211,731 4,447,978 5,485,614 7,382,312 8,773,512
 SME investment also distorted due to multinational influence.
 Small ‘brass plate’ companies.
 Inhibits observations about domestic activity even among
small Irish-resident firms.

Monetary and Financial Conditions
 New mortgage lending remains in double digits year-on-year
 Q4 saw 13.5% increase. Low base but careful monitoring required.
 Interest rate spread on new house purchase loans between
Ireland and Europe has widened over the last year; 3.1% to 2.0%
 Slowdown in credit flows to SME’s in last two quarters of 2017.
Important to review how this develops into 2018 as signal of
domestic firm activity.

Increasingly driving domestic growth
– Value of mortgage drawdowns up 23% YoY,
Q4.
– Completions grew by 29.1% in 2017.
Continued upward pressure on
– Prices up 12.5% January YoY.
– Rents up 9.5 per cent nationally in Q3 2017
Demand side pressures are very strong, under-
supply of homes likely to persist
Housing market

Housing Supply Trends
Source: Department of Housing Planning and Local Government and QEC calculations

Assessment of the Public Finances
 Strong tax receipts in 2017
 Tax revenue improved in Q4
 Corporation tax, Income tax growth, customs
 General Government deficit/surplus (% of GDP)
 -0.3 in 2017
 +0.2 in 2018
 +0.5 in 2019
 Capital Expenditure set to rise
 Debt rose by €10bn annually in Q3 (70.9% of GDP)

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

Debt-to-GNP & Debt-to-GNI*
Source: QEC calculations

National Account Issues I
 Highly volatile headline figures introduce major challenges
towards the identification of sustainable growth levels in Ireland.
 MNE presence masks potential risks of overheating.
 CSO provides alternative measures such as
 GNI*, modified demand, modified investment and modified current
account balance.

National Account Issues II
An alternative set of national accounts, designed to exclude the
distortionary transactions of particular firms. Would combine
approaches utilized in the previous figures.
Allows for more accurate observation of the Ireland’s economic
progress relative to estimates of sustainable domestic growth.
Essential for a successful budgetary policy
 Central to sustainable fiscal policy is identifying “potential output”

General Assessment
 National Accounts remain distorted in 2017
 Difficulty arises in providing an accurate estimate of sustainable
growth
 Such an estimate is required for successful budgetary policy
 Requires an alternative set of national accounts.
 Public finances:
 Surplus in 2018 and 2019.
 Risks emerging based on increasingly pro-cyclical tax base.
 Key policy challenge in medium run
 To keep growth on a sustainable path

Quarterly Economic Commentary, Spring 2018

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