Quarterly Economic Commentary, Winter 2018

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Quarterly Economic
Commentary, Winter 2018
DATE
11th December 2018
VENUE
ESRI, Whitaker Square,
Sir John Rogerson’s Quay,
Dublin 2
AUTHORS
K. McQuinn, C. O’Toole, M.
Allen-Coghlan, P. Economides

www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie2 12 December 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 8.2% in 2018 and 4.2% 2019.
Employment
 To reach 2,258m in 2018 and 2,331m in 2019.
 Unemployment rate to average 5.7% in 2018.
Public finances
 General Government deficit in 2018 and 2019
 Debt-to-GDP, 2018: 64.3%, 2019: 62%

Forecasts
Real Annual Growth % 2016 2017 2018 2019
Consumption 4.0 1.6 2.6 2.3
Govt. Expenditure 3.5 3.9 4.5 5.0
Investment 51.7 -31.0 -6.3 9.8
Exports 4.4 7.8 8.7 5.2
Imports 18.5 -9.4 1.7 6.3
Gross Domestic Product
(GDP) 5.0 7.2 8.2 4.2
Gross National Product
(GNP) 11.5 4.4 7.8 3.8

IMPACTS OF DIFFERENT BREXIT SCENARIOS ON THE IRISH ECONOMY
Source: QEC Winter 2018, Box 1
MEDIUM-TERM IMPACT (2027) SHORT-TERM COMMENTARY FORECASTS
Scenario
% Deviation
from
Baseline
EEA -2.3
EFTA -2.7
WTO -3.8
Scenario Year GDP Level (€bn)
% Growth
2019/2018
Estimate 2018 318.8
Baseline 2019 331.5 4.2
EEA 2019 328.6 3.2
WTO 2019 327.1 2.8

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 (€mn, constant prices)
0
4,000
8,000
12,000
16,000
20,000
24,000
28,000
32,000 1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1
Modified Total Investment
Source: Central Statistics Office

Dwellings Investment Growth (Y-on-Y, %)
Source: Eurostat
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
1999Q1
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
European Union (current composition) Ireland United Kingdom

Labour Market
Unemployment
 Rate 5.3 per cent in November
 Falling to 5.1 per cent in 2019
Employment
 Increase by 2.9 per cent in 2018 and 3.2 per cent in 2019
 Overall labour force to grow by 2 per cent in 2018 & 2019
Earnings
 Average weekly earnings rose 2.8 per cent in 2018Q3
 Expectations of sustained low inflation, real wages are likely to
rise

Potential price pressures if unemployment drops further…
Labour Market
INFLATION RATE AND UNEMPLOYMENT SCATTER PLOT
-8
-6
-4
-2
0
2
4
6
8
0 2 4 6 8 10 12 14 16 18
Unemployment Rate
CoreCPI
Source: Central Statistics Office.
Note: The fitted line is a simple quadratic fit function between the two series.

Monetary and Financial Conditions
 New mortgage lending remains in double digits year-on-year
 Q3 2018 saw 17.5% increase in value.
 Lending to SMEs up 11%, particularly for construction which saw
4Q rolling average increase annually by 45%.
 Given pace of acceleration in new lending, careful monitoring
required

Monetary and Financial Conditions
Source: Bank and Payments Federation Ireland
COMPARISON OF ANNUALISED GROWTH RATES FOR ALL LOANS VERSUS HOUSE PURCHASE LOANS (%)
-20
-10
0
10
20
30
40
50
Change in Total Loans Change in Total Value
Change in House Purchase Loans Change in House Purchase Lending

House price and mortgage growth
FIGURE 21 CORRELATION BETWEEN HOUSE PRICE GROWTH AND AVERAGE NEW LENDING
VOLUME GROWTH (%)
Source: Banking and Payments Federation Ireland.

Housing Market
 Large component of domestic sources of growth
 Volume of mortgage drawdowns up 14% YoY Q2
 Completions increased by 34% YoY Q2
 Continued upward pressure on
 Prices – slowing 8.6% August YoY
 Rents – up 9% Dublin and 6% outside Dublin
 Increasing levels of supply & macroprudential rules:
 Broad-based deceleration in growth rates occurring

Assessment of the Public Finances
 Tax revenue to increase by 4.2% in 2018 and 3.9% in
2019. This falls short of GGB expectations, leading to a
different in balance forecasts.
 For the year to October, Corporation tax (+21.7%), Income
tax growth (+6.5%), VAT (+5.2%), Excise Duty (-11.3%)
 General Government deficit in 2018 and 2019
 Public debt set to fall to 62 % of GDP in 2019
(101.2 % of GNI*)

Revenue Items 2019
Total Taxes 4.4%
3.6%
Social contributions 10.8%
7.0%
Property Income -3.3%
-2.6%
Other 5.6%
1.8%
General Government revenue (DoF) 5.4%
General Government revenue (QEC) 3.9%
 Using expenditure of Budget 2019, General
Government Balance (€bn) in deficit
 -€1.5bn in 2018
 -€2.4bn in 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*

 Using GNI*, Irish debt remains high
 Previous commentary advised balanced budget rather
than a surplus given:
1. Infrastructural (housing) deficits and
2. Increased possibility of a no-Brexit deal,
 The QEC commends target of a balanced budget
 From QEC perspective, Budget 2019 is expansionary.
Supposing major windfall in corporation tax did not
occur…

IMPLICATIONS FOR GGB OF DIFFERENT CORPORATION TAX RECEIPT LEVELS
 Should CT receipts meet average growth rate of 9%, the deficit
doubles as a percentage of GDP
 Expansion on this platform appears precarious

External environment
 At present:
 The trade balance makes a significant contribution to growth
 However, significant risks are looming
 US trade policy & Brexit uncertainty
 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
 Revised downwards as cross-border imports surge
 Global risks particularly elevated in 2019
 Public finances:
 Deficit in 2018 and 2019.

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