Potential Output and Output Gaps

 

Happy new year to all. In case some of you missed it, the Department of Finance published two working papers (by Gavin Murphy, Martina Nacheva and Luke Daly) just prior to Christmas looking at the ever topical issue of Ireland’s output gap. Both papers can be accessed at this link. The first paper takes a detailed look and review of the main methods used to estimate the cyclical position of an economy. The authors highlight the diversity of modelling approaches used across institutions both within Ireland and abroad. The second paper outlines in detail the methodology used by the Department to produce estimates of the output gap for Ireland. To date, the Department has used the European Commission’s harmonised approach (i.e. common to all EU Member States), which has at times resulted in counterintuitive estimates of Ireland’s cyclical position. This research seeks to develop more plausible estimates taking better account of the nature of Ireland’s small open economy. Such work will enable the Department to better evaluate the appropriate fiscal stance and the sustainability of public finances over the medium term.  For those with an interest in macroeconomic modelling and forecasting as well as fiscal policy related issues, the papers offer an invaluable source of information into what can be a complex area.

 

New Central Bank Quarterly Bulletin

Today, the Bank published its fourth quarterly bulletin of the year (Quarterly Bulletin (QB4 – October 2018), containing new projections to 2020.

The economy continues to grow at a robust pace and momentum has picked up since our last set of published forecasts (July). Economic activity remains underpinned by robust and broad based growth in employment and incomes. In turn, underlying domestic spending has gained further momentum reflecting strong consumption and (underlying) investment expenditures. Overall, we see underlying domestic demand growing by 5.6 per cent this year, before moderating to 4.2 per cent in 2019 and 3.6 per cent in 2020. In GDP terms, we expect growth of 6.7 per cent this year, 4.8 per cent in 2019 and 3.7 per cent in 2020. The labour market continues to move towards full employment with the headline unemployment rate expected to be below 5 per cent in 2019 and 2020.

While the outlook remains favourable, a number of significant downside risks remain. On the domestic side, the main vulnerabilities relate to the cyclical strength of the recovery. On the external side, risks centre on Brexit and any further disruptive changes to international tax and trading regimes given the openness of the Irish economy.

Aside from the normal outlook and commentary, the Bulletin contains a number of Boxes highlighting research on some key issues. These include pieces on Brexit, the international economy and risks relating to Corporation Tax flows. The Bulletin also contains a chapter on financing developments in the economy and a signed article examining financial risks and buffers in the Central Bank.

Boxes

  • Macroeconomic Implications of the UK Government Brexit White Paper: A Preliminary Analysis (Box A – page 13)
  • International economic outlook (Box B – page 17)
  • Risk related to Corporation Tax Flows (Box C – page 33)

On the financing side of the economy, there are pieces on:

  • Income Statement Statistics and Ireland’s Banking System (Box A – page 48)
  • Retrocession: Reinsuring the Reinsurer (Box B – page 52).

Signed Articles

The Bulletin includes a signed article by Doran, Gleeson, Kilkenny and Ramanauskas (2018), on “Assessing the Financial Risks and Buffers of the Central Bank.”

 

New Central Bank Quarterly Bulletin

The Bank released its third quarterly bulletin of the year this week (Quarterly Bulletin (QB3 – July 2018). The outlook for growth remains favourable despite significant downside risks.  The economy is expected to grow (in GDP terms) by 4.5 per cent this year and by 4.2 per cent in 2019. Most of the impetus to growth is likely to continue coming from domestic sources with the unemployment rate averaging 4.8 per cent next year on the back of solid and sustained gains in employment.

A number of significant downside risks remain. These predominantly relate to the vulnerability of the economy to external shocks, namely Brexit, further increases in protectionist trade policies and any changes to international tax regimes (that could affect FDI flows). Domestically, while inflationary pressures remain contained, the gradual erosion of spare capacity increases the prospects of overheating. In particular, in the labour market, unemployment is fast approaching levels that in the past have triggered an acceleration in wage inflation.

Aside from the normal outlook for the economy, the Bulletin contains a number of Boxes on a diverse range of topics. These include pieces on the National Accounts, a new economic indicator, trade, inflation, credit and debit card returns and mortgage arrears. The Bulletin also has a signed article that looks at Irish Government investment, financing and the capital stock.

Boxes

  • International economic outlook (Box A – page 13)
  • Revisions to the CSO National Accounts (Box B – page 15)
  • A new monthly indicator of economic activity (Box C – page 21)
  • Irish exports and world demand (Box D – page 29)
  • Consumer prices in Ireland (Box E – page 38)

On the financing side of the economy, there are pieces on:

  • Credit and Debit Card Return (Box A – page 51)
  • Mortgage Arrears Statistics (Box B – page 59).

Signed Articles

The Bulletin includes a signed article by Hickey, Lozej and Smyth (2018), on “Irish Government Investment, Financing and the Public Capital Stock

New Central Bank Quarterly Bulletin Published

The Central Bank published the Quarterly Bulletin (QB 2 – April 2018) today. The economy continues to perform well with the growth outlook revised upwards by close to half a percentage point to 4.5 per cent on average in 2018/19 (relative to the last set of forecasts in January). This outlook is underpinned by robust domestic demand, solid prospects for the labour market and a supportive international environment. At the same time however, a number of significant tail risks remain. These predominantly relate to the vulnerability of the economy to external shocks, namely Brexit related exposures, any increase in protectionist trade policies, changes to international tax regimes (that could affect FDI decisions) and disruptive exchange rate movements.

Some of the forecast highlights within the Bulletin include:

  • labour market – we now see the unemployment rate falling below 5 per cent to average 4.8 per cent in 2019, with close to 99,000 additional jobs being created this year and next. Annual employment growth is expected to average 2.2 per cent in 2018 and 2019, moderating from growth rates of close to 3 per cent in recent years
  • domestic spending – underlying domestic demand (which attempts to strip out much of the noise in some of the components of investment) is forecast to grow by 4.3 per cent per annum in both 2018 and 2019
  • trade – net exports are expected to support growth over the forecast horizon.
  • inflation – consumer prices were subdued last year but we expect some pick-up towards closer to 1 per cent in 2018 and 2019, as the effects of past sterling weakness unwind coupled with strong domestic demand.

Aside from the normal commentary and forecasts for the economy, the Bulletin contains Boxes on:

  • International economic outlook (Box A – page 11)
  • Sterling depreciation (Box B – page 14)
  • Leading indicators of new housing output (Box C – page 17)
  • Vacancies and wage growth (Box D – page 22).

On the financing side of the economy, there are pieces on:

  • Trends in Bank Lending to SMEs (Box A – page 35)
  • Exposures of Irish-Resident Investors to Offshore Financial Centres (Box B – page 40).

Signed Articles

The Bulletin includes two signed articles by Donnery, Fitzpatrick, Greaney, McCann and O’Keeffe (2018), on “Resolving Non-Performing Loans in Ireland 2010-2018” and one by Conefrey and McIndoe-Calder (2018) on “Where are Ireland’s Construction Workers?”

New SSISI journal (170th!) published

The proceedings of the 170th session of the Statistical and Social Inquiry Society of Ireland can now be accessed online. Links to the articles are listed below. The hard copy of the publication will be available from Spring 2018.

·         Dublin House Prices: A History of Booms and Busts from 1708-1949

Deeter, Karl; Quinn, Frank; Duffy, David (SSISI, 2017)

·         Towards an Irish Recorded Crime Index

Linehan, Timothy (SSISI, 2017)

·         Barrington Lecture – Seventy Years of Personal Disposable Income and Consumption in Ireland

Stuart, Rebecca (SSISI, 2017)

·         The Irish Single-Currency Debate of the 1990s in Retrospect

Barry, Frank (SSISI, 2017)

·         Income-Tested Health Entitlements: Microsimulation Modelling Using SILC

Callan, T.; Colgan, B.; Keane, C.; Logue, C.; Walsh, J.R.(SSISI, 2017)

·         Symposium – Globalisation, Inequality and Populism

Nolan, Brian (SSISI, 2017)

·         Symposium – Who is the Populist Irish Voter?

Reidy, Theresa; Suiter, Jane (SSISI, 2017)

·         Symposium – Globalisation, Inequality and Populism

Layte, Richard; Landy, David (SSISI, 2017)

·         The Recovery in the Public Finances in Ireland following the Financial Crisis

Smyth, Diarmaid (SSISI, 2017)

·         Using Administrative Data to Change Perception about Caregiving and Improve the Evidence Base Related to Volunteering

O’Reilly, Dermot; Rosato, Michael (SSISI, 2017)

·         Memoriam: Thomas Kenneth Whitaker

·         Proceedings of the Statistical and Social Inquiry of Ireland One Hundred and Seventieth Session: 2016/2017

 

Central Bank Quarterly Bulletin (QB 1 2018) published

Today, the Bank published its first Quarterly Bulletin (QB 1 – January 2018) of the year, including forecasts to 2019. The outlook remains robust with GDP forecast to grow by 4.4 and 3.9 per cent in 2018 and 2019, respectively. This forecast is underpinned by strong domestic demand and broad based employment gains.

Some of the highlights include:

  • the increasing prospect of full employment – we see the unemployment rate falling towards 5 per cent by next year with an additional 89,000 persons in employment.
  • the composition of employment is likely to differ markedly relative to the previous employment peak (in 2007). Back then, 1 in 9 persons were directly employed in construction relative to 1 in 16 expected in 2019.
  • Inflationary pressures remaining subdued but picking up from 0.7 per cent this year to 0.9 per cent in 2019. This partly reflects an unwinding of the negative impact on goods prices from recent euro/sterling exchange rate movements. (For more on exchange rate pass through, see Reddan and Rice (2017)).
  • The main risks relate to Brexit, the global trade and taxation environment as well as domestic overheating.

As regards the latter, a key question at present is the extent of remaining slack within the economy and prospects for wages and employment. Recent research within the Bank (Linehan et al., (2017) and Byrne and Conefrey (2017)) have addressed some of these issues. Further, the newly published labour market data (documented in the Bulletin) indicate that broader measures of labour supply signal that that there is still additional labour supply available. All of this suggests that while labour market conditions are tightening, there is still scope for unemployment to fall further before more significant wage pressures emerge.

Irish Economy

In terms of the Irish economy, the Bulletin contains short Boxes on:

  • international economic outlook (Box A – page 12)
  • the recovery in personal consumption expenditure (Box B – page 15)
  • trade deflators dynamics (Box C – page 21)
  • the new labour force survey (Box D – page 24).

Financing Developments

On the financing side of the economy, there are short pieces on:

  • household debt and disposable income (Box A – page 38)
  • the statistical treatment of new bank holding company structures (Box B – page 44 )
  • holders of Irish resident investment funds shares across the Euro Area (Box C – page 46).

Finally, the Bulletin also includes a signed article by Kelly and Osborne-Kinch (2018) looking at new quarterly statistics on insurance corporations.

Household Credit Market Report 2017 H2

The Bank published the 2017 H2 edition of the Household Credit Market Report last week. The report collates information from a wide range of internal Central Bank and external sources into one document to give an up-to-date picture of developments in the household credit market in Ireland.  It covers both mortgage and consumer credit. Among the highlights in this edition, mortgage credit grew at an annual rate of 1.4 per cent for private dwelling homes in Q2 2017 but remains negative for Buy-to-Let purposes (-8.6 per cent).  New mortgage approvals and drawdowns continued to increase in Q2 2017, with First Time Buyers continuing to account for roughly half of all approvals and drawdowns.  For the period January to June 2017, the average originating loan-to-value (OLTV) ratio on new lending for FTBs was 79.4 per cent and the average originating loan-to-income (OLTI) ratio was 3.0. The corresponding figures for Second and Subsequent Borrowers (SSBs) were 67.6 per cent and 2.5 respectively. These ratios increased slightly in comparison to the second half of 2016. On average, FTBs and SSBs borrowed €199,414 and €229,332 respectively during the period January to June 2017. In terms of consumer credit, growth remains positive at 5.4 per cent year-on-year in August 2017, reflecting growth in loans of a maturity of between 1 and 5 years.  More details from the Report can be found here.

The Irish labour market and wages

The robust performance of the Irish labour market over the past number of years offers the most tangible evidence of the recovery in the Irish economy. With unemployment falling and vacancies rising, an obvious question that arises is the extent to which the current pace of growth can be maintained. Today, colleagues in the Central Bank published a paper examining this very issue, bringing together a range of labour market indicators to assess the current state of play including prospects for wages over the short-term. We also revisit Okun’s law and the Phillips curve drawing on the latest Irish data. We hope that this research proves useful as 2017 draws to a close. The paper is titled ‘The Labour Market and Wage Growth after a Crisis’ and can also be accessed by clicking this link.

Upcoming Conference: Macroeconomic Effects of Policy Announcements, 5 and 6 October

The Central Bank of Ireland is organising a workshop on the effects macroeconomic policy announcements have on agents’ expectations and their actions. The main focus is on the Dynamic, Stochastic General Equilibrium (DSGE) macroeconomic models used for policy analysis. The workshop will take place on 5 and 6 October, 2017 in Dublin.

Expectations of households and firms regarding future monetary and fiscal policies have been at the heart of macroeconomic policy debates at least since the 1970s, most notably in the context of how to limit the costs of disinflations. Since the financial crisis and the European sovereign debt crisis, policymakers aiming to stabilise inflation and economic activity had to rely even more on their ability to influence the expectations of the private sector. As short term interest rates hit the zero lower bound, some central banks aimed to influence long term rates by announcing the future path of the policy rate, and also tried to affect long term rates more directly by means of asset purchases. Similarly, the key rationale behind fiscal policy measures taken during the crisis and the accompanying structural reforms was that their favourable effect on the expectations of households and firms would counterbalance direct contractionary effects. This workshop aims to be a forum for recent contributions analysing the current macroeconomic effects of future policy changes or long term plans.

 The programme can be found here:

 Programme – Macroeconomic Effects of Policy Announcements FINAL.

 

Paper on the recovery in the public finances following the crisis

Next Thursday (May 25) I will present a paper to The Statistical and Social Inquiry Society of Ireland (SSISI) on the recovery in the public finances following the financial crisis. The meeting takes place at the Royal Irish Academy on Dawson Street at 5.30pm. Details (including the paper) are available on the SSISI website here.

 

Housing-related taxation receipts

In recent years, the summer period has become a boom time for those with an interest in the public finances. The past few weeks have seen a number of releases in the area including the Government’s Summer Economic Statement and IFAC’s Fiscal Assessment Report. The upcoming National Economic Dialogue will also spur debate in advance of Budget 2017.

With this in mind, readers might be interested in recent work published by myself and Kieran McQuinn (ESRI) in the Journal of European Real Estate Research examining the sustainable nature of housing related taxes in Ireland. Using a 3 pronged modelling approach we quantify the extent of housing related tax windfall gains and losses over a 30 year period as a result of disequilibrium in the housing market. We find that the fiscal position compatible with equilibrium in the housing market has at times diverged greatly from actual outturns both during the boom, the collapse and in the subsequent recovery.

The paper highlights the role played by the housing market in influencing the tax take and above all points to the need for a more granular approach to be taken in tax forecasting within Ireland. A link to the paper can be found here: http://www.emeraldinsight.com/doi/pdfplus/10.1108/JERER-01-2016-0004 with an older working paper version available here: http://www.esri.ie/publications/assessing-the-sustainable-nature-of-housing-related-taxation-receipts-the-case-of-ireland/.