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Budget 2020 : macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department of Finance 27 th September 2019

Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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Page 1: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

Budget 2020: macro-economic outlook and projections

Presentation to Irish Fiscal Advisory Council

Economics team, Department of Finance

27th September 2019

Page 2: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

2 An Roinn Airgeadais | Department of Finance

Birds-eye view

• Developments since SPU

• Methodological approach

• Counterfactual ‘deal’ scenario

• ‘No-deal’ simulations

• Short-term developments and forecasts

• Supply-side estimates

Page 3: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

3 An Roinn Airgeadais | Department of Finance

Developments since SPU

Page 4: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

4 An Roinn Airgeadais | Department of Finance

External environment: mounting evidence of turning point

0

50

100

150

200

250

300

1997

1998

1999

1999

2000

2000

2001

2002

2002

2003

2003

2004

2004

2005

2006

2006

2007

2007

2008

2009

2009

2010

2010

2011

2011

2012

2013

2013

2014

2014

2015

2016

2016

2017

2017

2018

2018

2019

economic policy uncertainty at all-time high

-2

-1

0

1

2

3

4

5

6

20

13

20

14

20

15

20

16

20

17

20

18

United States

Euro area 'Big 3'

India

Other G20 advanced

Other G20 emerging

G20

Global economic policy uncertainty (12mma), 1999=100 Fixed investment in G20 countries: pp cont. to y/y change

uncertainty holding

back investment

lower investment

weighing on

manufacturing

Page 5: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

5 An Roinn Airgeadais | Department of Finance

Weaker investment driving a “manufacturing recession”

45

50

55

60

65

Aug-2

016

Nov-2

016

Fe

b-2

017

May-2

017

Aug-2

017

Nov-2

017

Fe

b-2

018

May-2

018

Aug-2

018

Nov-2

018

Fe

b-2

019

May-2

019

Aug-2

019

manufacturing recession in MTPs?

euro area

UK

US

45

50

55

60

65

Jan-2

012

Jul-2

012

Jan-2

013

Jul-2

013

Jan-2

014

Jul-2

014

Jan-2

015

Jul-2

015

Jan-2

016

Jul-2

016

Jan-2

017

Jul-2

017

Jan-2

018

Jul-2

018

Jan-2

019

Jul-2

019

Manufacturing PMI below

50 since May

(first time since May 2013)

services

PMI_manufacturing: major trading partners (< 50 = contraction) Irish PMIs (< 50 = contraction)

manufacturing

lower investment

weighing on

manufacturing

Irish manufacturing

sector is not immune

Page 6: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

6 An Roinn Airgeadais | Department of Finance

Soft data borne out by hard data in Ireland

Contribution to y/y goods export change, pp Modified domestic demand, y/y per cent change

0

1

2

3

4

5

6

7

20

17

Q1

20

17

Q2

20

17

Q3

20

17

Q4

20

18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

20

19

Q2

20

19

Q3

DoF “nowcast”

-10

-5

0

5

10

15

20

25

201

8M

01

201

8M

02

201

8M

03

201

8M

04

201

8M

05

201

8M

06

201

8M

07

201

8M

08

201

8M

09

201

8M

10

201

8M

11

201

8M

12

201

9M

01

201

9M

02

201

9M

03

201

9M

04

201

9M

05

201

9M

06

201

9M

07

F&B A/Craft Core M&E Chem

Misc Man Fuels Other All

slowing export growth:

outside pharma-chem,

export growth modest

Page 7: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

7 An Roinn Airgeadais | Department of Finance

Not just external sector: household sector increasingly cautious

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

Q1 2

00

0

Q1 2

00

1

Q1 2

00

2

Q1 2

00

3

Q1 2

00

4

Q1 2

00

5

Q1 2

00

6

Q1 2

00

7

Q1 2

00

8

Q1 2

00

9

Q1 2

01

0

Q1 2

01

1

Q1 2

01

2

Q1 2

01

3

Q1 2

01

4

Q1 2

01

5

Q1 2

01

6

Q1 2

01

7

Q1 2

01

8

€m

illio

ns

personal consumer spending

household disposable income

savings

savings rate = 11.4 per cent in Q1 2019

70

75

80

85

90

95

100

105

110

115

Aug

-16

Oct-1

6

Dec-1

6

Fe

b-1

7

Apr-1

7

Jun-1

7

Aug

-17

Oct-1

7

Dec-1

7

Fe

b-1

8

Apr-1

8

Jun-1

8

Aug

-18

Oct-1

8

Dec-1

8

Fe

b-1

9

Apr-1

9

Jun-1

9

Aug

-19

ind

ex

70-month low in August

Consumer sentiment index Savings rate: precautionary behaviour

Page 8: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

8 An Roinn Airgeadais | Department of Finance

Exchange rates (held unchanged at mid-Sept levels)

1.00

1.05

1.10

1.15

1.20

1.25

1.30

2 J

an

17

2 M

ar 1

7

2 M

ay 1

7

2 J

ul 1

7

2 S

ep

17

2 N

ov 1

7

2 J

an

18

2 M

ar 1

8

2 M

ay 1

8

2 J

ul 1

8

2 S

ep

18

2 N

ov 1

8

2 J

an

19

2 M

ar 1

9

2 M

ay 1

9

2 J

ul 1

9

2 S

ep

19

2 N

ov 1

9

2 J

an

20

2 M

ar 2

0

2 M

ay 2

0

2 J

ul 2

0

2 S

ep

20

2 N

ov 2

0

spring: €1 = $1.13

= unchanged from

mid-March

autumn: €1 = $1.10

= unchanged

from mid-Sept

1.2% depreciation

of € in 2020

5.4% depreciation

of € in 2019

= euro appreciation

autumn =

2½% depreciation

vs spring

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

2 J

an

17

2 M

ar 1

7

2 M

ay 1

7

2 J

ul 1

7

2 S

ep

17

2 N

ov 1

7

2 J

an

18

2 M

ar 1

8

2 M

ay 1

8

2 J

ul 1

8

2 S

ep

18

2 N

ov 1

8

2 J

an

19

2 M

ar 1

9

2 M

ay 1

9

2 J

ul 1

9

2 S

ep

19

2 N

ov 1

9

2 J

an

20

2 M

ar 2

0

2 M

ay 2

0

2 J

ul 2

0

2 S

ep

20

2 N

ov 2

0

spring: €1 = £0.86

= unchanged from

mid-March

autumn: €1 = £0.90

= unchanged from

mid-Sept

0.8% appreciation

of € in 2019

1.4% appreciation

of € in 2020= euro appreciation

autumn =

5% appreciation vs

spring

euro-dollar bilateral exchange rate, €1 = $X euro-sterling bilateral exchange rate, €1 = stg£X

Page 9: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

9 An Roinn Airgeadais | Department of Finance

Methodological approach

Page 10: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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10 An Roinn Airgeadais | Department of Finance

Constructing a disorderly exit economic forecast• Government decision:

- budget based on disorderly UK exit

• Need to construct ‘no deal’ economic outlook

• Operationalising this involves:

i) create a counterfactual ‘deal’ scenario

ii) apply COSMO model ‘no-deal’ scenario results to the counterfactual

iii) arrive at ‘no deal’ projection

• Sequencing

Spring (SPU)• Assumption =

‘orderly exit’

Summer• Weaker external

demand

GDP weaker

in 2020• Assumption = ‘orderly

exit’

Assume

‘no deal’• Apply COSMO model

Autumn (Budget)• Assumption =

‘disorderly exit’

Page 11: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

11 An Roinn Airgeadais | Department of Finance

Counterfactual ‘deal’ scenario

Page 12: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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12 An Roinn Airgeadais | Department of Finance

• Deterioration in global outlook

- incorporation of more modest X_G into forecast

• Services exports

- incorporation of stronger X_S into forecast

• Continued weakness in m&e investment, house completions below expectations, IP on-shoring

- lowering of I_m&e forecast

- lowering of I_b&c forecast

- raising of I_r&d forecast

• Labour market slightly stronger than expectations

- raising of employment forecast and CoE / capita

- lowering of unemployment rate forecast

Main changes to the forecasts vs spring in ‘deal’ scenario

Page 13: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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13 An Roinn Airgeadais | Department of Finance

Counterfactual ‘deal scenario’ vs SPU

3.9

0.10.6

0

5.8

17.6

5.9

0

2

4

6

8

10

12

14

16

18

20

SP

U 2

019 (G

DP

)

Pers

on

al c

onsum

ptio

n

Public

consum

ptio

n

Investm

ent

Sto

cks (c

on

tributio

n)

Exports

of g

oods a

nd s

erv

ice

s

Imports

of g

ood

s a

nd s

erv

ices

Budg

et 2

020 c

oun

terfa

ctu

al

dea

l (GD

P)

pp

ch

an

ge

44

2019 2020

3.3

-0.1

0.70

-0.3

-8.9

3.1

-20

-15

-10

-5

0

5

SP

U 2

019 (G

DP

)

Pers

on

al c

onsum

ptio

n

Public

consum

ptio

n

Investm

ent

Sto

cks (c

on

tributio

n)

Exports

of g

oods a

nd s

erv

ice

s

Imports

of g

ood

s a

nd s

erv

ices

Budg

et 2

020 c

oun

terfa

ctu

al d

ea

l (GD

P)

pp

ch

an

ge

27.9

Page 14: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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14 An Roinn Airgeadais | Department of Finance

Counterfactual deal projections – changes vs SPUyear-on-year per cent change 2018 2019 2020 2021 2022 2023

GDP 1.5 2.0 -0.2 0.0 0.0 0.0

GNP 0.6 1.3 -0.1 0.0 0.1 0.0

Nominal GDP 0.8 1.4 0.1 0.2 0.2 -0.2

Personal Consumption 0.5 0.1 -0.1 0.0 0.0 0.0

Govt Consumption -2.0 0.6 0.7 0.0 0.0 0.0

Investment -30.9 44.0 -27.9 0.0 0.0 0.0

Exports 1.5 5.8 -0.2 0.0 0.0 0.0

Imports -9.9 17.5 -8.9 0.0 0.0 0.0

HICP 0.0 0.0 -0.1 -0.2 -0.2 -0.3

GDP Deflator -0.7 -0.6 0.2 0.2 0.1 -0.1

Employment 0.0 0.1 -0.4 0.0 0.0 0.0

Unemployment (rate) 0.1 -0.2 -0.1 -0.2 -0.1 -0.1

contributions to growth (p.p)*

Final Domestic Demand -8.9 10.3 -8.8 -0.1 0.0 -0.2

Change in Stocks -1 0.0 0.0 0.0 0.0 0.0

Net Exports 11.1 -8.4 8.6 0.1 0.1 0.0

Modified Domestic Demand (excl stocks) -0.9 -0.5 -0.3 0.0 -0.1 -0.1

Modified Net Exports 2.1 2.5 0.0 0.0 0.1 0.1

Page 15: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

15 An Roinn Airgeadais | Department of Finance

‘No deal’ scenario

Page 16: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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16 An Roinn Airgeadais | Department of Finance

Modelling approach

• Based on joint DoF-ESRI research

- medium-term focus

- judgement re. short-term impact

• Timing:

- original deadline = Q2 2019

- shock moved to Q4 2019

• FDI channel:

- assumed with a 2-year lag

• Public consumption ‘exogenised’

• Current set of forecasts calibrated s.t. :

- levels of output and employment in T+5 are in line with model output

Page 17: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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17 An Roinn Airgeadais | Department of Finance

Impact of Brexit on Ireland (change from baseline in levels) – real GDP

100

105

110

115

120

125

2018 2019 2020 2021 2022 2023 2024

no brexit

deal baseline

no deal

No deal = 3.8 per cent

below no Brexit

Counterfactual deal =

2 per cent lower

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

2019 2020 2021 2022 2023 2024

No FDI

FDI

Net impact

2-year lag on FDI:

level would be 1¼

per cent lower

without FDI

Level of GDP, 2018=100 Difference to no brexit baseline, pp

Page 18: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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18 An Roinn Airgeadais | Department of Finance

Impact of no-deal Brexit in medium-term

100

105

110

115

120

125

2018 2019 2020 2021 2022 2023 2024

no brexitdeal baselineno deal

No deal = 3.8 per

cent below no Brexit

Counterfactual deal

= 2 per cent lower

100

102

104

106

108

110

112

114

2018 2019 2020 2021 2022 2023 2024

No Brexit

deal baseline

no deal

Employment 2.1 per

cent below ‘no

Brexit’ (c. 53,000)

Counterfactual deal

= 1 per cent below

Level of GDP, 2018=100 Level of employment, 2018=100

Page 19: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

19 An Roinn Airgeadais | Department of Finance

Short-term developments and forecasts

Page 20: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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20 An Roinn Airgeadais | Department of Finance

Q3 2019 ‘now-cast’ estimates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

20

17

Q1

20

17

Q2

20

17

Q3

20

17

Q4

20

18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

20

19

Q2

20

19

Q3

DoF “nowcast”

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

20

17

Q1

20

17

Q2

20

17

Q3

20

17

Q4

20

18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

20

19

Q2

20

19

Q3

DoF “nowcast”

Modified domestic demand, y/y per cent change Personal consumer spending, y/y per cent change

Page 21: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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21 An Roinn Airgeadais | Department of Finance

Consumption

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Aug-1

7

Sep-1

7

Oct-

17

Nov-1

7

Dec-1

7

Jan-1

8

Fe

b-1

8

Mar-

18

Apr-

18

May-1

8

Jun-1

8

Jul-18

Aug-1

8

Sep-1

8

Oct-

18

Nov-1

8

Dec-1

8

Jan-1

9

Fe

b-1

9

Mar-

19

Apr-

19

May-1

9

Jun-1

9

Jul-19

Aug-1

9

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

year-on

-year % ch

angeye

ar o

n y

ear

% c

han

ge

Consumer Sentiment (3mma), rhs

Core' Retail Sales (3mma), lhs

Retail Sales vs Consumer Sentiment Cars licensed (6MMA)

Page 22: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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22 An Roinn Airgeadais | Department of Finance

Consumption model

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

202

4

Consumption Fit

Consumption

Forecast Model

Forecast Actual

C = 0.01 + 0.5*disp_inc - 0.06*unemp - 0.1*ECM

R^2 = 0.58

Page 23: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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23 An Roinn Airgeadais | Department of Finance

Investment

-5

-3

-1

1

3

5

7

9

11

13

15

2018 2019 2020 2021 2022 2023 2024

Contributions to Investment

B&C

Core M&E

Aircraft

Intangibles

Page 24: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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24 An Roinn Airgeadais | Department of Finance

Credit for Investment still fairly subdued

-30

-20

-10

0

10

20

30

40

50

Dec-1

1

Mar-1

2

Jun-1

2

Sep-1

2

Dec-1

2

Mar-1

3

Jun-1

3

Sep-1

3

Dec-1

3

Mar-1

4

Jun-1

4

Sep-1

4

Dec-1

4

Mar-1

5

Jun-1

5

Sep-1

5

Dec-1

5

Mar-1

6

Jun-1

6

Sep-1

6

Dec-1

6

Mar-1

7

Jun-1

7

Sep-1

7

Dec-1

7

Mar-1

8

Jun-1

8

Sep-1

8

Dec-1

8

Mar-1

9

Jun-1

9

Total SME

Core SME

Gross new lending to SMEs, annual per cent change

Note: core = excluding property

Page 25: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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25 An Roinn Airgeadais | Department of Finance

Building and construction: new dwellings underperformed relative to earlier forecasts

0

50

100

150

200

250

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

(F)

20

20

(F)

20

21

(F)

20

22

(F)

20

23

(F)

20

24

(F)

Co

nst

ruct

ion

Em

plo

ymen

t (0

00

's)

Co

mp

leti

on

s

Completions (LHS)

Construction Employment (RHS)

Page 26: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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26 An Roinn Airgeadais | Department of Finance

Downward revisions to trading partner outlook…

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2017 2018 2019 2020 2021 2022 2023 2024

Budget 2020 SPU 2019

Page 27: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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27 An Roinn Airgeadais | Department of Finance

…but export portfolio = source of resilience

0

5

10

15

20

25

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

Goods exports

Services exports

-5%

0%

5%

10%

15%

20%

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

Computer services

Other services

Real export growth, y/y per cent change The importance of services, especially ICT

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28 An Roinn Airgeadais | Department of Finance

Export forecasts guided by model results

Exportst = β1Exportst-1 + β2Foreign Import Demandt + β3REERt + β42015 Dummy (+ β5ECt-1)

-4

-2

0

2

4

6

8

10

12

14

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Forecast range

Average forecast

Actual export growth

Disorderly Forecast

Real export growth, y/y per cent change

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Trade channel: single most important in disorderly Brexit

Real export levels, 2018 = 100

100

105

110

115

120

125

130

135

2018 2019 2020 2021 2022 2023 2024

COSMO output Forecast Deal counterfactual

Exports 5½ pp

below no-Brexit

level in model

simulations

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-20

-15

-10

-5

0

5

10

15

20

25

30

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

Goods imports

Services imports

Strong import growth even excluding IP on-shoring

89%

-43%

Real import growth, y/y per cent change

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31 An Roinn Airgeadais | Department of Finance

Import forecasts guided by model results

Avg R2 = 0.85

-6

-1

4

9

14

19

24

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Forecast range

Average forecast

Actual import growth

Disorderly forecast

Real import growth, y/y per cent change

Importst = β1Final Demandt (+ β22015 Dummy) (+ β3Importst-1) (+ β4ECt-1)

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32 An Roinn Airgeadais | Department of Finance

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2017 2018 2019 2020 2021 2022 2023 2024

Current account surplus to reduce post-Brexit impact

forecasts

Modified current account (CA*) = CA - Profits of firms that have re-domiciled to Ireland -

Depreciation on R&D service imports and trade in intellectual property assets - Depreciation

of aircraft owned by aircraft-leasing companies + Net aircraft imports from the aircraft leasing

sector + Net R&D related intellectual property imports + R&D service imports

-30

-20

-10

0

10

20

30

40

2017 2018 2019 2020 2021 2022 2023 2024

Trade Balance % GDP

Income Balance % GDP

Current Account % GDP

forecasts

Current account, per cent GDPModified current account, per cent GNI*

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33 An Roinn Airgeadais | Department of Finance

Current state of play in labour market

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

13.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2014 2015 2016 2017 2018 2019

un

em

plo

ym

en

t ra

te (

%)

em

plo

ym

en

t g

row

th, y-o

y (

%)

Employment Growth (lhs)

SA unemployment Rate (rhs)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Ad

min

& s

up

port

Tra

nsp

ort/s

tora

ge

Arts

/en

ts/re

cre

atio

n &

oth

er

ICT

Acco

mm

od

atio

n/fo

od

Co

nstru

ctio

n

Fin

/insu

ran

ce

/rea

l esta

te

To

tal e

co

no

my

Wh

ole

sa

le/re

tail

He

alth

& s

ocia

l wo

rk

Ind

ustry

(B to

E)

Ed

uca

tion

Pro

fessio

nal/s

cie

ntific

/tech

nic

al

Pu

blic

ad

min

/de

fen

ce

/co

mp

uls

ory

so

cia

l se

cu

rity

ye

ar-

on

-ye

ar

gro

wth

(p

er

ce

nt)

y-on-y growth, weekly earnings, Q2 2019 (4qma)

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34 An Roinn Airgeadais | Department of Finance

Impacts in main labour market series: COSMO outputs

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2018 2019 2020 2021 2022 2023 2024

deal baseline no deal

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2018 2019 2020 2021 2022 2023 2024

deal baseline no deal

Employment - per cent difference from no Brexit Unemployment rate – pp difference from no Brexit

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35 An Roinn Airgeadais | Department of Finance

Employment projections

2018 2019 2020 2021 2022 2023 2024

SPU 2.9 2.2 2.1 1.5 1.6 1.7

‘original’

fitted2.1 1.1 1.3 1.5 1.6 1.7

COSMO 2.3 1.0 1.0 1.6 1.7 1.7

Budget

forecasts 2.4 0.8 1.1 1.5 1.7 1.9

-12.0

-7.0

-2.0

3.0

8.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

an

nu

al ch

an

ge

Underlying Domestic Demand Employment Growth Fitted Employment Growth

∆𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡_𝑡 = −0.121+0.577( ∆ 𝑈𝐷𝐷) +0.137(∆𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡_(𝑡−1))

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36 An Roinn Airgeadais | Department of Finance

Labour force growth

2018 2019 2020 2021 2022 2023 2024

SPU 1.7 1.9 1.9 1.5 1.5 1.6

COSMO 1.7 1.4 1.4 1.5 1.5 1.6

Budget

forecasts1.7 1.4 1.3 1.4 1.5 1.6

-30

-20

-10

0

10

20

30

40

50

60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2015 2016 2017 2018 2019

pe

rso

ns (

00

0s)

Demographic change Participation change Annual change in labour force

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37 An Roinn Airgeadais | Department of Finance

Unemployment rate

2018 2019 2020 2021 2022 2023 2024

SPU 5.7 5.4 5.2 5.3 5.2 5.1

‘original’

fitted5.7 5.4 5.6 5.7 5.7 5.7 5.6

COSMO 5.2 5.5 5.9 5.8 5.7 5.6

Budget

forecasts 5.2 5.7 5.9 5.9 5.7 5.5

-12.0

-8.0

-4.0

0.0

4.0

8.0

12.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

an

nu

al ch

an

ge

Underlying Domestic Demand (inverse change) Actual change in UR Fitted change in UR

∆𝑈𝑅=0.585 −0.229(∆ 𝑈𝐷𝐷) + 0.222(∆ 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒_(𝑡−1))

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38 An Roinn Airgeadais | Department of Finance

Wage outlook

2018 2019 2020 2021 2022 2023 2024

SPU 2.5 3.0 3.2 3.3 3.4 3.6

‘original’

fitted3.2 3.6 3.6 3.7 4.0 4.2 4.4

COSMO 3.5 3.3 3.7 4.2 4.4 4.3

Budget

forecasts 3.5 3.0 3.2 3.4 3.7 3.9

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

an

nu

al g

row

th (

%)

COE per head outturns fitted values

∆𝐶𝑂𝐸 𝑝𝑒𝑟 ℎ𝑒𝑎𝑑_𝑡 = 4.891 −0.373(𝑈𝑅)+0.727(Δ𝐻𝐼𝐶𝑃)

Page 39: Budget 2020: macro-economic outlook and projections · Budget 2020: macro-economic outlook and projections Presentation to Irish Fiscal Advisory Council Economics team, Department

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39 An Roinn Airgeadais | Department of Finance

Consumer prices: drag from goods prices, while service prices grow strongly…

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2018 2019

NEIG Unprocessed Processed Rents Energy Core Services All-items HICP Core

Average 2018 = 0.7% Average 2019 = 0.9%Average 2017 = 0.3%

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40 An Roinn Airgeadais | Department of Finance

Inflation response to disorderly Brexit…

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2019 2020 2021 2022 2023 2024

Deal - HICP

Disorderly - HICP

HICP rate of inflation, y/y per cent change

Consumer Prices 0.1 p.p. higher than counterfactual

in 2020

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41 An Roinn Airgeadais | Department of Finance

Changes from counterfactual deal scenario to no-deal

20192020

5.9

-0.1

0

-0.5

0.0

-0.8 -0.8

5.5

-2

-1

0

1

2

3

4

5

6

7

Budg

et 2

020 c

oun

terfa

ctu

al d

ea

l (GD

P)

Pers

on

al c

onsum

ptio

n

Public

consum

ptio

n

Investm

ent

Sto

cks (c

on

tributio

n)

Exports

of g

oods a

nd s

erv

ice

s

Imports

of g

ood

s a

nd s

erv

ices

Budg

et 2

020 N

o D

ea

l (GD

P)

pp c

hange

3.1

-1.0

0.1

-1.6

0

-3.3

-2.6

0.7

-4

-3

-2

-1

0

1

2

3

4

Budg

et 2

020 c

oun

terfa

ctu

al d

ea

l (GD

P)

Pers

on

al c

onsum

ptio

n

Public

consum

ptio

n

Investm

ent

Sto

cks (c

on

tributio

n)

Exports

of g

oods a

nd s

erv

ice

s

Imports

of g

ood

s a

nd s

erv

ices

Budg

et 2

020 N

o D

ea

l (GD

P)

pp c

hange

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42 An Roinn Airgeadais | Department of Finance

Key variables: forecast under disorderly Brexit

year-on-year % change 2019 2020 2021 2022 2023 2024

GDP 5.5 0.7 2.5 2.8 2.7 2.6

GNP 4.3 -0.1 2.4 2.5 2.4 2.3

Nominal GDP 5.9 2.4 3.9 4.3 4.1 4.1

Personal Consumption 2.7 1.4 1.9 2.1 2.3 2.4

Govt Consumption 4.5 3.5 2.0 2.0 2.0 2.0

Investment 50.4 -24.0 -3.6 3.9 3.9 3.9

Exports 10.2 0.9 4.2 4.1 4.0 3.9

Imports 22.6 -6.5 2.9 4.4 4.6 4.5

HICP 0.9 1.1 1.4 1.8 2.0 2.1

GDP Deflator 0.4 1.6 1.4 1.4 1.4 1.4

Employment 2.4 0.8 1.1 1.5 1.7 1.9

Unemployment (rate) 5.2 5.7 5.9 5.9 5.7 5.5

contributions to growth (p.p)*

Final Domestic Demand 13.2 -7.2 -0.1 1.8 1.9 2.0

Change in Stocks -0.1 0.0 0.0 0.0 0.0 0.0

Net Exports -7.6 7.9 2.5 1.0 0.8 0.7

Modified Domestic Demand (exc. stocks) 1.7 0.8 1.3 1.4 1.5 1.5

Modified Net Exports 3.8 -0.1 1.2 1.4 1.2 1.1

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43 An Roinn Airgeadais | Department of Finance

Contributions to change in GDP

-2

0

2

4

6

8

10

2018 2019 2020 2021 2022 2023 2024

MNX

Stocks and Statistical Discrepancy

MDD

GDP

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-1.3

0.6

4.0

5.1 5.2

3.3

4.1

2.1 2.1

2.7 3.0 3.1

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Co

ntr

ibu

tio

n to

y-o

-y g

row

th

labour

capital income

Income and wealth taxesincluding Transfer income

PCD

real disposable income

Household income

Change in real personal disposable income

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Higher savings ratio driven by Brexit uncertainty

0

2

4

6

8

10

12

14

16

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

NIE savings rate

LR average

HH Savings Rate

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46 An Roinn Airgeadais | Department of Finance

Risk matrix – firmly tilted to the downside

Downside Upside

Brexit outcome worse than model projection Sectoral strength (ICT, Pharma etc.)

Continued weakness in world demand Brexit – UK exit with a deal

Trade tensions spill over to the EU

Repricing of risk

Oil price – supply shock persists

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47 An Roinn Airgeadais | Department of Finance

Supply side

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Brexit impact on potential output?

Supply-side variable Channel Impact on potential output growth

Labour input Migration - / +

Employment rate ?

Participation rate ?

Capital input Domestic and Foreign Investment - / +

Total Factor Productivity Competition -

Learning by export/import -

Economies of Scale -

R&D investment -

Creative destruction - Short term/+ long term

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• Two estimates produced based on GDP and Domestic GVA

• GDP based models‒ Extended HP with private sector credit growth, employment in construction, core inflation

‒ Extended HP with unemployment rate and net migration

• Domestic GVA based models‒ Univariate KF: Trend; random walk with drift, cycle; AR(2)

‒ Multivariate KF: Univariate Model + Unemployment

‒ Multivariate KF: Univariate Model + Construction employment share

‒ Multivariate KF: Univariate Model + Private sector credit growth

‒ Multivariate KF: Univariate Model + House prices

• Output gap estimates taken as mid point of estimates

Department’s preferred approach

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Explanatory variables and forecast assumptions

• Forecast for 2019 – 2024 taken from demand side- Share of construction in total employment

- Core inflation

- Unemployment rate

- Net migration as share of labour force

- Private sector credit growth: assumed (technical) to return to long-run growth rate by 2024

• Account for end-point bias- extend forecasts to 2027 using ARIMA methodology

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Alternative output gap measure: GDP, Extended HP Average of K and L model estimates

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Output Gap Capital Model

Output Gap Labour Model

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Alternative approaches to assessing the cyclical position

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Alternative output gap measures : Domestic GVA, Kalman filters

Midpoint of range

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

cons_emp house prices u.e. pscg univariate

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No technical changes since SPU 2019

NAWRU

• HP Filter with lambda equal to 10 still used instead of bivariate Kalman Filter

TFP model

• Dummy situation for 2018 still undecided by COM – dummy included in Budget 2020 forecast

Filters run to 2021 in line with the Commission’s approach

Application of harmonised methodology

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2018 2019 2020 2021 2022 2023 2024

Potential output growth 7.42 4.94 3.15 2.63 2.32 2.40 2.46

contribution from:

Labour 2.36 1.91 1.33 0.88 0.50 0.50 0.47

Capital -0.13 1.29 0.17 0.05 0.10 0.15 0.22

TFP 5.08 1.65 1.62 1.69 1.71 1.74 1.76

Real GDP 281.7 297.1 299.3 306.7 313.6 321.0 328.7

Real Potential Output 275.6 289.2 298.3 306.2 313.3 320.8 328.7

Output Gap 2.22 2.73 0.33 0.17 0.11 0.06 0.00

Budget 2020 harmonised methodology

Note: NAWRU or trend unemployment rate based on HP filter with lambda equal to 10 to 2021 with mechanical extension thereafter. Trend TFP

estimated using Bayesian bivariate Kalman filter based on actual TFP including specification of dummy with new CUBS inputs adjusted for 2015

distortion in value added.

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Plausibility of Output Gap Paths

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Harmonised methodology

GDP based models

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56 An Roinn Airgeadais | Department of Finance

Disclaimerand other information:

The cut-off date for these projections wasmid-September 2019.

Exchangerates arebased on the purely assumption that the level remains unchanged at that prevailingat the cut-off date

Outturn data are sourced from a variety of sources including the Department of Finance, Central Statistics Office, European Commission (AMECO and

Eurostat),CentralBank of Ireland, OECD, IMF and policyuncertainty.com.

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