SPU 2020: macro-economic outlook and projections · SPU projections Pre-pandemic forecast. Body Level One Body Level Two Body Level Three Body Level Four Body Level Five 23 An Roinn

SPU 2020: macro-economic outlook and projections

Economics Division

Presentation to IFAC

8 April 2020

2 An Roinn Airgeadais | Department of Finance

Overview

• Recent backdrop

• Forecast framework

• National income

• National expenditure

• Supply-side estimates


Recent backdrop


COVID-19 – state of play in selected trading partners

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1 4 7 10 13 16 19 22 25 28 31 34

DE

ES

FR

IT

IE

UK

US

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

31/12/2019 31/01/2020 29/02/2020 31/03/2020

Cumulative number of Covid-19 cases worldwide Changes in fatalities per 100k persons – 7 day avg (days since 10 fatalities recorded)


‘Soft’ data point to severe & rapid downturn

25

30

35

40

45

50

55

60

Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20

Euro Area

U.K.

U.S.

China

Ireland

25

30

35

40

45

50

55

60

65

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

Manufacturing PMI

Services PMI

Construction PMI

Global composite Purchasing Managers Index Ireland: Purchasing Managers Indices


Q1_2020 ‘nowcast’ estimates: driven by L/R and PMIs

Modified Domestic Demand

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

20

00

M0

3

20

01

M0

3

20

02

M0

3

20

03

M0

3

20

04

M0

3

20

05

M0

3

20

06

M0

3

20

07

M0

3

20

08

M0

3

20

09

M0

3

20

10

M0

3

20

11

M0

3

20

12

M0

3

20

13

M0

3

20

14

M0

3

20

15

M0

3

20

16

M0

3

20

17

M0

3

20

18

M0

3

20

19

M0

3

20

20

M0

3

Underlying Domestic Economic Activity

-4.3

-6

-4

-2

0

2

4

6

8

201

8Q

1

201

8Q

2

201

8Q

3

201

8Q

4

201

9Q

1

201

9Q

2

201

9Q

3

201

9Q

4

202

0Q

1


Forecast framework


Wrenn-Lewis analysis / approach

• Pandemic assumed to only last one quarter

• Severe scenario: infection rate of 50%, fatality rate of 2.5%

• Direct absenteeism due to illness – average of 7 work days lost

• Indirect absenteeism via school closures (lasting 13 weeks)

• Change in consumption patterns - e.g. 100% fall in hotel & restaurant sector, durables postponed

Severe scenario:

2019 2020 2021

Percent deviation from baseline level:

Gross domestic product at basic prices 0.0 -6.1 1.0

Personal consumption of goods and services 0.0 -5.7 -1.0

Total investment 0.0 -4.1 0.4

Inflation 0.0 1.1 -0.2


COSMO ScenarioExternal shock

• Scaled up version of the OECD broader contagion scenario (domestic demand down 8% in AEs)

Domestic shocks

• A shock that reduces consumption by 25% over two quarters

• An additional investment shock, 20% reduction over two quarters.

• An immediate shock to employment of 280,000.

• An immediate 28% reduction in activity by non-traded firms.

2019 2020 2021

Percent deviation from Baseline Level:

Gross domestic product at basic prices 0.0 -10.7 -7.6

Gross value added at basic prices, Non-traded sector 0.0 -20.5 -14.0

Personal consumption of goods and services 0.0 -18.4 -9.3

Export of goods and services 0.0 -8.0 -6.9

Deviation from Baseline:

Unemployment rate 0.0 10.2 11.8


Output/production approach

• Similar approach to CBI and OECD – in these scenarios output is down 11% to 15%.

• Make use of ‘non essential sectors’ classification from public health guidelines issued 28 March2020.

• ‘Non-essential’ sectors represented one third of total GVA in 2018 – an ‘upper bound’ forIrish economic activity closed off due to containment measures.

Selected Sectors % of GVA in 2018

Professional, Admin and Support Services 10.3

Wholesale and retail trade, repair of motor vehicles and motorcycles 7.5

Real estate activities 6.4

Construction 2.8

Accommodation and food services activities 1.8

Arts, entertainment and recreation 0.9


National Income

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Labour market – unprecedented unemployment shock

8.7%

9.0%

8.5%

7.2%

7.0%

6.9%

6.9%

6.1%

5.6%

6.0%

5.9%

5.3%

4.7%

5.4%

5.2%

4.5%

9.1%

21.9%

13.5%

10.9%

10.2%9.8%

9.5%

9.1%

0%

5%

10%

15%

20%

25%

Q1 2

016

Q2 2

016

Q3 2

016

Q4 2

016

Q1 2

017

Q2 2

017

Q3 2

017

Q4 2

017

Q1 2

018

Q2 2

018

Q3 2

018

Q4 2

018

Q1 2

019

Q2 2

019

Q3 2

019

Q4 2

019

Q1 2

020

Q2 2

020

Q3 2

020

Q4 2

020

Q1 2

021

Q2 2

021

Q3 2

021

Q4 2

021

Peak 22%

SPU 2020

Projections

Unemployment rate, % of labour force

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-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2018 2019 2020 2021

% o

f la

bo

ur

forc

e

y-o

-y g

row

thEmployment growth (lhs) Unemployment rate (rhs)

Labour market – employment and unemployment

2020 UR:

13.9%

2020 employment

growth: -9.3%

2021 employment

growth: 5.5%

2021 UR:

9.7%

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

Q1 2

016

Q2 2

01

6

Q3 2

01

6

Q4 2

016

Q1 2

017

Q2 2

017

Q3 2

017

Q4 2

017

Q1 2

018

Q2 2

018

Q3 2

018

Q4 2

018

Q1 2

019

Q2 2

019

Q3 2

019

Q4 2

019

Q1 2

020

Q2 2

020

Q3 2

020

Q4 2

020

Q1 2

021

Q2 2

021

Q3 2

021

Q4 2

021

SPU 2020

Projections

Employment, 000 Employment growth and unemployment rate

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Labour market – pay (labour income)

• Macro thought process grounded in

movements of private sector wages:

2009-2011: down €9bn.

2020: assume ‘deeper and faster’ (c

€12.4bn).

• Overall wage bill decline driven by steep

falls in both volumes and pay rates.

• Rebound in 2021 (incl. base effect).

• Movements in pay per head linked to

(non-ag) employees.

• Hours per worker falls further than pay

per head (weekly earnings).-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2018 2019 2020 2021

Employees

Pay per employee

Wage bill

2020 wage bill:

-13.7%

2021 wage bill:

+9.1%

Pay-bill by component, y/y per cent change

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Change in national income

• National income falls sharply in 2020

• Profits take biggest hit, followed by COE

• Profit and labour income both contributing

positively in 2021

Contribution to change in national income , pp

2.1

-3.9

2.5

1.5

-4.5

1.7

2.2

1.2

1.3

7.2

-9.1

7.1

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2019 2020 2021

Co

ntr

ibu

tio

n to

y-o

-y g

row

th

Labour Profit Depreciation Taxes/subsidies Statistical discrepency National Income

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Flow of funds (S-I perspective)

• Government dis-saving in 2020

– flow of funds to other sectors

• Corporate and HH sectors

rapidly reduce investment

• HH savings rate increases

along with corporate savings

rate (reduced pay-out ratio)

• Investment increases during

recovery period with gradual

reduction in savings

Modified S-I, per cent of GNI*

3.5 9.2 3.4

2.2

6.7

5.80.6

-11.3

-4.6

6.3 4.7 4.5

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2019 2020 2021

Modified Corporate S-I Household S-I Government S-I Modified S-I

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Household disposable income and savings rateReal personal disposable income, contribution to y/y change, pp Household savings rate, per cent of disposable income

5.1 5.2

3.32.7

-10.1

7.6

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2016 2017 2018 2019 2020 2021

Co

ntr

ibu

tio

n to

y-o

-y g

row

th

labour capital income net cash transfers PCD real disposable income

8.0

10.5 10.310.6

15.4

14.4

0

2

4

6

8

10

12

14

16

18

20

16

20

17

20

18

20

19

20

20

20

21


National expenditure

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Expenditure side – methodological approach

• Assume containment measures last for at least one quarter

• Recovery from Q3 onwards very gradual –o gradual easing of containment measures;o uncertainty on virus path;o behavioural change;o scarring effects;o lasting effects of supply and financial disruption (=> confidence effects and risk aversion).

• Over-arching assumption – output does not return to Q4 2019 level until at least 2022

• Components of expenditure (C, I, X) and labour market built from bottom-up

• Approach informed by:o “Wrenn-Lewis” framework;o COSMO (macro-model) results;o expert judgement.

• Significant consultation with third party experts (IMF, OECD, ESRI, Central Bank)

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Key assumptions

• Baseline:

- broadly in line with January 2020 medium term fiscal strategy

• Brexit:- assumed to be akin to ‘deal’ scenario in 2019 ESRI/DOF research

- baseline level roughly ½ to 1 per cent below no-Brexit ‘counterfactual’ in 2020 and 2021

• Labour market:- as per Thursday 2nd April Live Register release

• Oil and currency- assumptions as per Commission

• Trading partner demand

- as per IMF October 2019 WEO,

- reduced to -6% to -9% based on consultations with IMF

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Baseline forecasts (pre-Covid)

Year-on-year % change 2019 2020 2021

GDP 5.5 3.9 2.9

Modified Domestic Demand 3.0 3.2 3.2

Modified gross national income 4.1 4.6 3.6

Personal consumption 2.8 2.8 2.8

Govt consumption 5.6 3.6 3.0

Modified investment 1.3 3.6 4.2

Exports 11.1 5.2 3.9

Modified imports 11.9 5.4 4.6

Employment 2.9 2.1 1.7

Unemployment (rate) 5.0 4.7 4.6

Modified current account 6.3 5.5 4.6

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Consumer spending

2.8

-14.2

8.7

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2019 2020 2021

Retail Sales Housing

Fuel Transport

Communications Recreation, entertainment and education

Professional Services Misc Goods

Misc Services FISIM

Expenditure outside the State Expenditure by non-residents

Personal consumption expenditure

Contribution to y/y per cent change Quarterly profile for consumption, 2018q4 = 100

20

40

60

80

100

120

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

2018 2019 2020 2021

SPU projections Pre-pandemic forecast

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Modified Investment

1.3

-37.2

22.5

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2019 2020 2021

Building & construction

Core M&E

IE aircraft

Non imported intangibles

Modified investment

Contribution to y/y per cent change Quarterly profile for modified investment, 2018q4 = 100

20

40

60

80

100

120

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

2018 2019 2020 2021


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ExportsContribution to y/y per cent change Quarterly profile for exports, 2018q4 = 100

12.3

-7.7

7.5

-10

-5

0

5

10

15

2019 2020 2021

Pharma ICT Aircraft leasing Contract manuf

Tourism Other Total

20

40

60

80

100

120

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

2018 2019 2020 2021


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Imports

11.9

-9.3

9.7

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2019 2020 2021

Modified imports y/y per cent change Quarterly profile for modified imports, q42018 = 100

20

40

60

80

100

120

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

2018 2019 2020 2021


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External account

Modified current account, per cent of GNI*

6.6

6.3

4.74.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2018 2019 2020 2021

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Inflation developments

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.02

01

9Q

1

20

19

Q2

20

19

Q3

20

19

Q4

20

20

Q1

20

20

Q2

20

20

Q3

20

20

Q4

20

21

Q1

20

21

Q2

20

21

Q3

20

21

Q4

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

Contribution to annual rate of HICP inflation, pp

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GDP by quarter

Contribution to q/q per cent change Quarterly profile for GDP, q42018 = 100

-4.5

-17.5

7.7 7.2

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

Q1 Q2 Q3 Q4

C G Mod-I X Mod-M GDP

60

70

80

90

100

110

120

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

2018 2019 2020 2021


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Contributions to GDP and MDD

Contribution to y/y change in GDP Contribution to y/y change in MDD

3.0

-15.1

7.8

-25

-20

-15

-10

-5

0

5

10

15

2019 2020 2021

Co

ntr

ibu

tio

n t

o y

-o-y

gro

wth

Personal consumption Public consumption

Housing Other B&C

Core M&E (exludes all aircraft) Modified M&E (exludes leased aircraft)

Modified Intangibles Modified domestic demand

5.5

-10.5

5.8

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2019 2020 2021

Contribution to change in GDP

MNX Stocks and Statistical Discrepancy MDD GDP

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Year-on-year % change 2019 2020 2021

GDP 5.5 -10.5 5.8

Modified Domestic Demand 3.0 -15.1 7.8

Modified gross national income 4.1 -15.1 8.6

Personal consumption 2.8 -14.2 8.7

Govt consumption 5.6 9.3 -4.7

Modified investment 1.3 -37.3 22.5

Exports 11.1 -7.7 7.5

Modified imports 11.9 -9.3 9.7

Employment 2.9 -9.3 5.5

Unemployment (rate) 5.0 13.9 9.7

Modified current account 6.3 4.7 4.5

Final (COVID-19) forecasts

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Downside Upside

Second wave of virus Early vaccination

Larger outbreaks globally (emerging markets) Sectoral export upside (pharma, medical devices)

Permanent moves towards de-globalisation

Further financial market disruption (corporate and

banking sectors and feedback loops)

Brexit – risk of no-deal

Risk matrix

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Sources used

• CSO

• Central Bank of Ireland

• IMF

• OECD

• Eurostat

• AMECO

• European Centre for Disease Prevention and Control (ECDC)

Documents

SPU 2020: macro-economic outlook and projections · SPU projections Pre-pandemic forecast. Body Level One Body Level Two Body Level Three Body Level Four Body Level Five 23 An Roinn