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).
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?”
This was the original title of this recent paper of mine. Some people thought it too truculant but even Patrick Honohan – when he wanted, as Governor, to talk about competitiveness – would get his RA’s to calculate the old indicators rather than use the new ones. To keep it eye-catching I dropped the ‘Useless’ and added ‘Pernicious or Merely Otiose?’ but then some (though not the journal, I should point out) complained that they had to reach for the dictionary! But I think the issue is a serious one. I am hoping that Peter Clinch at the National Competitiveness Council will take up the challenge.
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.
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).
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.
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.
Last year we were scrambling around in response to the impact of the 26.3 per cent real GDP growth rate that was the headline from the 2015 National Income and Expenditure Accounts (NIE). So where do we stand one year on? Long post, with too much mind-numbing detail, below the fold.
Continue reading “That 26% growth rate – from startled earwigs to stars in our eyes”
A new working paper from Niall Conroy and Eddie Casey of the Fiscal Council Secretariat.
The Council’s mandate includes endorsing, as it considers appropriate, the official macroeconomic forecasts of the Department of Finance on which the annual Budget and Stability Programme Update are based. As part of the endorsement process and for the purposes of its ongoing monitoring and analysis of the Irish economy, the Council’s Secretariat produces its own Benchmark macroeconomic projections. This paper describes the short-run forecasting models used by the Secretariat for producing these projections. The general forecasting approach can be described as follows. Equations are used to forecast each component of the expenditure side of the Quarterly National Accounts. Multiple models are estimated for most components, with the simple model average used as an initial input into the formulation of the Benchmark projections. The out-of-sample forecasting performance of these models is assessed at each endorsement round. In addition to these model-based projections, other elements are considered. Discussions with the Council and other forecasting agencies help to guide any judgement that may be applied before arriving at the final Benchmark projections.
For more than 30 years, Economic Policy has been publishing papers on pressing European policy issues. Preliminary versions of the papers are first discussed at Panel meetings. The 65th Panel meeting, which starts today in Valletta, features papers on the causes of Brexit, on the consequences of Brexit, on the impact of the 2015 reforms on the Italian labour market, on innovation, on entrepreneurship, on retirement, on monetary policy, and on mobile communications. The papers are available here.