The Domestic Economy. Overview

Transcription

1 9 The Domestic Ecoomy Overview Chart 1: Cotributios to GDP The ecoomy is projected to grow i GDP terms by 5.1 per cet i 2016 ad by 4.2 per cet i 2017 o the back of exceptioally strog rates of growth i domestic demad. The outlook for 2016 has bee revised upwards followig a very strog ed to 2015 with overall growth of 7.8 per cet recorded. This was the fastest rate of growth recorded sice 2000 ad early five times the average rate of growth i the Euro Area. I effect, may of the upside risks to growth alluded to i previous Bulletis appear to have materialised. Percetage chage The GDP deflator also icreased sharply i 2015 helped by favourable terms of trade developmets. As a result, the level of omial GDP icreased by a estimated 13.5 per cet to just over 214 billio i 2015, which will further reduce headlie geeral govermet deficit ad debt ratios Cosumptio Net Exports Gov Cosumptio Ivetories F 2017F Ivestmet GDP Both GDP ad GNP as measured by iteratioal covetio have become less reflective of the growth i uderlyig domestic activity. As a cosequece it is useful to cosider recet developmets i the growth of uderlyig domestic demad excludig ivestmet i aircraft ad itagibles. This measure is estimated to have icreased by 3.8 per cet i 2015, with a similar pace of expasio expected i 2016 before easig back to 3.2 per cet i Domestic demad compoets (cosumptio ad total ivestmet) are expected to agai drive GDP growth over the forecast horizo reflectig i part pet up demad i the ecoomy ad a broad based labour market recovery. The stregth of the reboud i domestic expediture is also evidet i a ew macroecoomic heat map idicator developed by the Bak (see Box A). Persoal cosumptio expediture is projected to grow by 2.8 per cet this year ad by 2.0 per cet i This pace of expasio is below that recorded i 2015 (3.5 per cet) ad reflects i part a uwidig of some of the factors (e.g. the boost from lower eergy prices) that supported demad i Ivestmet has become a much larger compoet of GDP, i part followig methodological chages to the Natioal Icome ad Expediture Accouts. Due to the size ad difficulty i predictig itellectual property (IP) ad aircraft ivestmet flows (both of which are largely offset o the import side), our focus is icreasigly Source: CSO ad Cetral Bak of Irelad. o the other compoets of ivestmet spedig as referred to i previous Bulletis. Overall buildig ad costructio ad uderlyig machiery ad equipmet ivestmet are expected to record further large gais i 2016 ad 2017, partly reflectig a catch up from weak ivestmet durig the years of the fiacial crisis. Export ad import growth were particularly robust i 2015 led by the activities of the multiatioal sector. Services exports have surprised o the upside supported i part by icreased royalties related to the sigificat amout of IP assets ow domiciled i Irelad. Idigeous exportig sectors have beefitted from a relatively competitive exchage rate, although the recet depreciatio of sterlig provides a less supportive eviromet for some i the ear-term. Exteral market coditios are weaker for 2016 ad relatively uchaged i 2017 whe compared to the previous Bulleti. However the strog positive impact of firm ad sector specific factors uderlyig the strog export performace of 2015 are likely to persist to a certai degree ad support cotiued robust growth i exports over the forecast horizo. Iflatioary pressures are expected to remai muted this year ad below projectios made at the time of the previous Bulleti. This largely reflects dowward pressures from global oil ad

2 10 The Domestic Ecoomy Table 1: Expediture o Gross Natioal Product 2015, 2016 f ad 2017 f 2015 % chage i 2016 f % chage i 2017 f EUR volume price EUR millios millios volume price EUR millios Persoal Cosumptio Expediture 92, , ,303 Public Net Curret Expediture 27, , ,368 Gross Domestic Fixed Capital Formatio 47, , ,265 Buildig ad Costructio 13, , ,600 Machiery ad Equipmet 12, , ,480 Itagibles 20, , ,185 Value of Physical Chages i Stocks 2,651 2,651 2,651 TOTAL DOMESTIC DEMAND 170, , ,587 Exports of Goods & Services 260, , ,151 FINAL DEMAND 425, , ,467 Imports of Goods & Services -215, , ,620 Statistical Discrepacy GROSS DOMESTIC PRODUCT 214, , ,847 Net Factor Icome from Rest of the World -33, , ,436 GROSS NATIONAL PRODUCT 181, , ,411 commodity prices. While domestically drive services prices are expected to icrease by 2.5 per cet this year, egative goods price iflatio meas that overall HICP iflatio is projected to register a icrease of 0.6 per cet. For ext year, with goods iflatio projected to tur mildly positive, iflatio is forecast to icrease to 1.7 per cet. The labour market cotiued to perform strogly i 2015, with a additioal 50,000 persos at work (represetig employmet growth of 2.5 per cet). For 2016 ad 2017, employmet growth averagig 2.0 per cet per aum is forecast, with gais expected to be strogest i the services sector. The uemploymet rate has bee o a sharp dowward trajectory sice 2012 (whe it peaked at 15.1 per cet). For the forecast period, the average uemploymet rate is forecast to declie further to 8.2 per cet i 2016 ad 7.5 per cet i The declie i uemploymet is tempered somewhat by stroger labour force growth. Risks to the projectios are deemed to be to the dowside. While cosumptio growth surprised o the upside i 2015, further large gais are ulikely give the limited scope for reductios i the savigs rate. O the exteral side, ucertaity as to the outcome of the upcomig UK referedum o EU membership, emergig market cocers as well as broader geo-political factors have the potetial to act as a drag o exteral demad ad to weigh o ivestor ad cosumer setimet.

3 The Domestic Ecoomy Chart 2: Idex of Volume of Retail Sales % Chage Year-o-Year 3 Moth Movig Average J A J O J A J O J A J O J A J O J A J O J A J O J A J O J A J O J All Busiesses Source: CSO. Demad Core (excludig Motor Trades) Domestic Demad Overview Domestic demad is agai expected to drive growth over the forecast horizo, reflectig the robust outlook for cosumptio ad ivestmet. As referred to i previous Bulletis, methodological chages to the Natioal Icome ad Expediture Accouts (NIE) have complicated the iterpretatio of some of the sub-compoets of ivestmet spedig. For these reasos, we pay particularly close attetio to uderlyig domestic demad 1, defied as domestic demad less ivestmet spedig o itagibles ad aircraft. Uderlyig demad is estimated to have icreased by 3.8 per cet i For 2016 ad 2017, this measure of demad is projected to grow strogly, albeit more moderately at a average rate of 3.5 per cet per aum. The depth ad breadth of the recovery i domestic expediture is also evidet i a ew macroecoomic heat map idicator developed by the Bak (see Box A). Cosumptio I 2016, persoal cosumptio expediture is forecast to grow robustly for a third cosecutive year by 2.8 per cet, before moderatig to 2 per cet i These forecasts are i large part drive by the favourable outlook for the labour market, disposable icomes ad overall cosumer setimet. I particular, the stregth i the labour market is supportig cosumptio (see Box B). These forecasts represet a moderatio i the pace of cosumptio expediture from growth of 3.5 per cet i This i part reflects a uwidig of some of the factors that supported demad i 2015, amely the boost to real disposable icome from weaker cosumer prices ad a elemet of pet up demad. The latest idicators for 2016 show cotiued mometum i cosumer spedig. New vehicle liceces i the first two moths of the year were up 29 per cet (with ew car liceces up by over a third). The volume of retail sales i the year to uary icreased by 10.3 per cet, with core sales (i.e. excludig motor trades) up 6.4 per cet. 1 See Box B: Likig Employmet to Uderlyig Ecoomic Activity, i the Domestic Ecoomy Chapter of the Cetral Bak of Irelad Quarterly Bulleti No.1, 2016.

4 12 The Domestic Ecoomy Box A: A Macroecoomic Heat Map for Irelad By Stephe Byre ad Diarmaid Smyth 2 I assessig ecoomic developmet ad i preparig forecasts, ecoomists eed to moitor a wide rage of data releases of various frequecy. To assist with this, this Box outlies a first attempt at costructig a macroecoomic heat map for Irelad. These maps have become icreasigly popular as a meas of visually depictig a wide rage of data i a fast ad coveiet maer, particularly durig the fiacial crisis. 3 I buildig the heat map, we choose high frequecy data series which bear direct relevace to growth, iflatio ad the labour market. The map is subdivided ito 5 mai blocks. These are: 1. Expediture Cosumptio - retail sales (total, core, motor trades), vehicle registratios, VAT receipts Ivestmet - house completios, plaig permissios, capital goods imports Setimet - cosumer setimet idicator (CSI), ISEQ stock market idex. Taxatio - Exchequer tax receipts. 2. Output Idustrial productio (total maufacturig, moder ad traditioal sectors). Purchasig Maagers Idices (PMI) for costructio, maufacturig ad services. House completios 3. Trade Merchadise exports ad imports 4. Labour market Uemploymet rate, employmet ad vacacies 5. Prices Iflatio - HICP Competitiveess - the Harmoised Competitiveess Idicator (HCI). Whe costructig a heat map, a clear ad cosistet approach is eeded to determie the rules or thresholds by which the shadig for a observatio is decided. These rules ca be based o ecoomic theory, historical treds, judgemet or a combiatio of all three. I certai cases, rules already exist that allow a clear settig of a threshold. I our case, we let the data speak for itself, that is, for each variable; we take the logest time series available usig stadardised year o year growth rates. I the heat map, the shadigs are determied by the umber of stadard deviatios from the mea. A growth rate two stadard deviatios below the mea is assiged the darkest red, while the growth rate two stadard deviatios above the mea is shaded the darkest gree. Observatios withi a stadard deviatio of the mea are shaded white. To see how the heat map is costructed, we take the example of core retail sales (Figure 1) with the uderlyig heat map thresholds depicted i the lower part of the pael. A clear picture emerges. Durig the latter years of the housig boom (2007), we ca see rapid growth i the idex; this is replicated by the heat idices turig a darker shade of gree over this period. Throughout the dowtur (from 2008), the series first reverts to a eutral shade before turig red as cosumer spedig fell sharply. From 2014 owards, we ca see the series turig from more eutral shades to gree as domestic demad rebouded. 2 Irish Ecoomic Aalysis Divisio. 3 For recet work o Heat Maps, see McGillicuddy, J ad Ricketts L. (2015), Is Iflatio Ruig Hot or Cold?, Ecoomic Syopses, 2015 Number 16.

5 The Domestic Ecoomy 13 Box A: A Macroecoomic Heat Map for Irelad By Stephe Byre ad Diarmaid Smyth Retail Sales - Core For the ecoomy wide heat map, we replicate the approach described above for our aforemetioed list of variables. We examie the period from 2006 to early This is a rich period of aalysis ecompassig the ed of the housig bubble period, the fiacial crisis ad the subsequet recovery. The results i Figure 2 reveal three distict phases ragig from the latter part of the housig boom ( ), the balace sheet recessio ( ) ad the subsequet reboud (2013- preset). The latter part of the housig boom ( ) I the years immediately prior to the crisis, the stregth i domestic demad variables (much of which was fuelled by credit ad related to housig) is apparet. However as the ecoomy eared a sharp turig poit, a umber of saliet features emerged otably the weakesses i setimet idicators PMI series as well as the cosumer setimet ad ISEQ idices. Balace sheet recessio ( ) Over this period, growth i the ecoomy was aaemic with domestic demad particularly subdued. I the heat map, early all series were flashig red to varyig degrees but particularly labour market ad domestic demad variables (retail sales, setimet idicators ad taxes). The sudde reversal i taxes (from gree to red) is otable, thereby illustratig the very sharp uwidig i the fiscal positio. The extesiveess of the colour red i the heat map i the early years of the recessio is also strikig. This gives a good visual sese of how deep ad widespread the recessio was a period i which growth forecasts were cosistetly revised dowwards.

6 14 The Domestic Ecoomy Box A: A Macroecoomic Heat Map for Irelad By Stephe Byre ad Diarmaid Smyth Recovery post-crisis (2013-preset) Sigs of a recovery i the ecoomy bega to icreasigly maifest themselves i the heat map from mid-2013 owards. Iitially this was led by output ad labour market variables. Gais i employmet (ad falls i uemploymet) also became icreasigly pervasive over this period. Durig the course of 2014, most idicators had chaged colour poitig to a icipiet recovery i the ecoomy otably domestic demad (icludig tax) variables tured gree after a umber of years of weakess. The broad based ature of the recovery is clearly visible as is the absece of ay sigificat iflatioary pressures. The stregth of the reboud i domestic demad was oly officially cofirmed by the CSO with the release of the 2014 Natioal Icome ad Expediture (NIE) Accouts i y Full Heat Map Expediture Retail Sales - Total Retail Sales - Core Retail Sales - Motor Trades New Private Vehicles Year o Year ISEQ Growth Rate Cosumer Setimet Idex VAT Receipts Total Taxes Output House Completios PMI - Costructio PMI - Maufacturig PMI - Services Id Prod - Maufacturig Id Prod - Moder Id Prod - Traditioal Trade Trade Surplus Labour ket Uemploymet Rate - ILO Employmet Number % Chage Prices HICP HCI Note: Gree idicates higher growth. Red idicates egative growth (uless otherwise stated) Stadard Deviatios from mea This Box is a first attempt at geeratig a macroecoomic heat map for Irelad. This is a tool that operates outside of more formal modellig approaches that exist withi the Bak. It is hoped that the map will be further refied ad regularly updated to help our uderstadig of ecoomic developmets. It is a fast ad efficiet meas of assessig data both i the shortterm as well as over loger time periods. The heat map could also be easily adapted to focus o more specific areas of the ecoomy for example, sub-compoets of iflatio, fiscal aggregates, housig market developmets, ad so o.

7 The Domestic Ecoomy 15 Ivestmet As idicated i the previous Bulleti, the iclusio of itellectual property (IP) assets ad the chage i aircraft leasig arragemets i gross fixed capital formatio adds cosiderably to the upredictability i published ivestmet figures. Ivestmet i itagible assets (geerally i the form of a purchase of a licece or patet) amouted to over 20 billio i 2015 a icrease of over 100 per cet i the year. While this was most likely related to the reorgaisatio of activities by a limited umber of multiatioals, it represets a o-egligible proportio of overall ivestmet (approximately 44 per cet) ad is likely to add cosiderable oise to the overall ivestmet figures i the future. With this i mid, while the headlie level of gross fixed capital formatio almost reached its previous peak levels of 2006/2007, with growth of 28.2 per cet i 2015, uderlyig ivestmet, et of the impact of ivestmet itagibles ad aircraft leasig ad purchases, is still registerig solid growth as capital restockig cotiues. Quarterly Natioal Accouts data for 2015 idicate that, o the buildig ad costructio side, ew housig completios icreased by 15 per cet year-o-year (there were 12,666 completios i 2015). However, this icrease is comig from a very low base ad further icreases will be eeded to satisfy curret ad future demad. Housig output is expected to icrease to 15,000 ad 18,000 uits i 2016 ad 2017, respectively. O the o-housig side, buildig ad costructio registered a icrease of almost 10 per cet i 2015 (followig a revisio to previously published QNA data). With curret available supply of commercial space dwidlig, ad a strog pipelie of icomig ivestmets, ivestmet i commercial real estate costructio is also projected to be strog. Takig all of these factors ito accout, overall buildig ad costructio ivestmet is projected to icrease by close to 9 per cet i 2016 ad O the machiery ad equipmet side, the tred et of aircraft cotiues to be oe of re-stockig ad ew ivestmet, with projected icreases of approximately 14.5 ad 10 per cet for 2016 ad 2017 forecast. I cojuctio with the forecasts for buildig ad costructio, uderlyig ivestmet, excludig itagibles ad aircraft, is forecast to icrease by approximately 11 ad 9 per cet i 2016 ad 2017, respectively. While these growth rates are high, the level of ivestmet at approximately 12 per cet of GDP (et of aircraft ad itagibles) is still well below what is idicated by historical ad iteratioal orms (geerally about 20 per cet of GDP). The impact of the protracted period of low ivestmet sice the crisis is evidet i curret housig ad ifrastructural deficits. Govermet Cosumptio Prelimiary estimates for 2015 show that the volume of govermet cosumptio cotracted by 0.8 per cet. Cosumptio was particularly weak i the latter half of the year perhaps reflectig stroger tha expected govermet receipts (etted off cosumptio). I value terms however, govermet cosumptio spedig icreased by 2.3 per cet i The precise split betwee value ad volume figures for govermet cosumptio i 2015 will be published i the Natioal Icome ad Expediture Accouts later i the year. For 2016 ad 2017, real govermet cosumptio is forecast to grow at a rate of 1.5 per cet per aum.

8 16 The Domestic Ecoomy Box B: Drivers of Persoal Cosumptio A BVAR Approach By Stephe Byre & ti O Brie 4 Oe of the mai issues i aalysig cosumptio is the degree to which it develops i lie with gross disposable icome. I examiig this, the Bak has a rage of tools at its disposal; oe of these is a reduced form Bayesia Vector Autoregressio (BVAR). I this Box, we use a BVAR 5 which icludes private cosumptio, ad a disaggregatio of gross disposable icome ito average employee compesatio, the umber of people employed ad o-labour icome. We also iclude the persoal cosumptio deflator. The BVAR estimates allow us to capture the historical relatioship betwee these variables. Usig the model, we ca illustrate the varyig degrees to which the growth i the volume of cosumptio i recet quarters has bee drive by developmets i employmet, labour ad o-labour icomes. 6 I Figure 1, 7 we illustrate i-sample forecasts of private cosumptio (PCR) startig i the secod quarter of 2013 ad coditioal o the realised values of other variables i the model. The left had side chart shows observed cosumptio growth (black lie) compared with that implied by our model whe coditioig o the realised values of the cosumptio deflator, average employee compesatio ad o-labour icome. I this istace, the model captures developmets i cosumptio over the early part of the coditioig period (2013 ad early 2014). I 2015 however, the model udershoots relative to the outtur by approximately 2 percetage poits. O the right had side we show the i sample forecast whe the realised values of employmet are also icluded i the coditioig iformatio. I this case, the model overshoots the outtur i cosumptio i , but is more accurate i most recet quarters. Droppig average compesatio per employee or o-labour icome respectively from the coditioig iformatio does ot chage the i-sample forecasts sigificatly compared with those which iclude all the coditioig variables. Combied these results suggest that employmet growth has bee a sigificat driver of icreases i persoal cosumptio sice late Whe lookig at the decompositio of aggregate disposable icome growth however, the rise i employmet has ot bee as promiet. Actual gross disposable icome over the period is estimated to have icreased i omial terms by approximately 10.8 per cet, with o-labour icome growig by 24.9 per cet, employmet growig by 4.8 per cet ad average employee compesatio growig by 2.6 per cet. Takig these developmets together with the results from our BVAR estimatio suggests that aggregate cosumptio growth is much less sesitive to chages i o-labour icome. Whe the growth i disposable icome is more cocetrated i the o-labour icome compoet the margial propesity to cosume out of disposable icome is lower ad would ted to lead to icreases i the savigs rate. I the recet Irish experiece, the growth i employmet up to mid-2014 was ot sufficiet to support stroger cosumptio growth, despite the strog icreases i o-labour icome. With employmet growth expected to ease over the forecast horizo i this Bulleti, it is less likely that cosumptio growth of levels see i recet quarters would be sustaied. These fidigs support the curret cetral forecast for cosumptio growth also easig over this year ad ext. 4 Irish Ecoomic Aalysis Divisio. 5 We thak ta Babura for sharig code used i this aalysis. 6 No-labour icome icludes et taxes ad trasfers ad icome from property or self-employmet. 7 The fa charts illustrate a estimate of the probability distributio of future outcomes as projected by the model; the red shadig illustrates the media (most likely) outcome.

9 The Domestic Ecoomy 17 Box B: Drivers of Persoal Cosumptio A BVAR Approach By Stephe Byre & ti O Brie Exteral Demad ad the Balace of Paymets Exports ad Imports Prelimiary estimates for 2015 from the Quarterly Natioal Accouts cofirm that both export ad import growth were particularly robust last year. The outsize icrease i imports durig 2015 due to itellectual property (IP) purchases meat that the cotributio of et exports to GDP growth was egligible. However these imports provide the potetial for future export growth ad support the stroger cotributio from et exports to GDP growth expected both this year ad ext. Goods exports have bee the mai cotributor to overall export growth i recet quarters. However services export growth has bee above expectatios supported i part by icreased royalties icome related to the sigificat amout of IP assets domiciled i Irelad durig 2014 ad Chart 3: Volume of Exports % Chage Year-o-Year Goods Services Source: CSO Quarterly Natioal Accouts.

10 18 The Domestic Ecoomy Table 2: Goods ad Services Trade 2015, 2016 f, 2017 f 2015 % chage i EUR millios volume price EUR millios 2016 f % chage i 2017 f volume price EUR millios Exports 260, , ,151 Goods 143, , ,638 Services 116, , ,513 Imports 215, , ,620 Goods 79, , ,840 Services 136, , ,780 Pharmaceuticals ad medical apparatus exports cotiue to perform strogly, as do computer, busiess ad fiacial services. Idigeous exportig sectors have beefitted from a relatively competitive exchage rate over the past year, although the recet depreciatio of sterlig may pose challeges for some i the ear-term. Regardig the outlook, coditios for exteral factors are slightly weaker for 2016 ad relatively uchaged for 2017 whe compared to the previous Bulleti. However the strog positive impact of firm ad sector specific issues uderlyig the export performace of 2015 are likely to persist to a certai degree ad support cotiued robust growth i exports over the forecast horizo. Setimet idicators for both maufacturig ad services idustries cotiue to be positive i their outlook for exports, despite beig slightly less positive tha at the time of the last Bulleti. The outlook for demad i our major tradig parters i 2017 based o the most recet exteral demad assumptios from the ECB is broadly uchaged from our last forecast ad the strog performace of exports i the fial quarter of 2015 brigs with it very positive carry-over effects whe cosiderig the prospects for With these factors i mid, the latest projectio is for overall export growth of 6.8 per cet for 2016 i volume terms, ad 5.5 per cet i Our cetral assumptio is that Irish export growth will coverge towards growth i tradig parter demad through While goods exports are expected to cotiue growig at a faster pace tha services over the forecast horizo, the upward revisio to total exports is cocetrated i our outlook for services. This is due to a icreased expectatio of further royalties exports from IP assets residet i Irelad. The fudametal factors uderpiig import growth remai strog, but are expected to ease somewhat over this year ad ext. Domestic demad ad export growth are aticipated to slow over the forecast horizo. Cosequetly, a 7.5 per cet icrease i the volume of imports is expected i 2016 followed by a 5.4 per cet rise i There remais a sigificat amout of ucertaity aroud the imports projectio give the impact ad importace of IP related imports ad how these will evolve give past experiece ad the re-structurig of multi-atioal firms activities i light of global measures o corporatios profit tax. Combied with the export outlook this implies a higher et export cotributio to overall GDP growth compared with 2015, risig to 0.7 percetage poits ad 1.2 percetage poits i 2016 ad 2017 respectively. Net Trade, Factor Icomes ad Iteratioal Trasfers The trade balace is estimated to have icreased to over 20.9 per cet of omial GDP i 2015, as the growth i the volume of

11 The Domestic Ecoomy 19 Table 3: Balace of Paymets 2015, 2016 f, 2017 f millio f 2017 f Trade Balace 44,764 47,972 52,531 Goods 64,566 69,415 74,798 Services -19,802-21,444-22,267 Net Factor Icome from the Rest of the World -32,356-36,459-39,436 Curret Iteratioal Trasfers -2,859-2,859-2,859 Balace o Curret Accout 9,549 8,653 10,236 (% of GDP) exports ad a strog improvemet i the terms of trade more tha offset the faster pace of growth i the volume of imports. Give the outlook for et exports ad the terms of trade, it is expected that the trade balace will rise further over this year ad ext but at a slower pace, to just below 22 per cet of GDP Chart 4: Volume of Idustrial Productio % Chage Year-o-Year Followig three years of becomig persistetly less egative due to risig ivestmet icome iflows for multi-atioal eterprises ow headquartered i Irelad, et factor icome flows for 2015 moved more i lie with historical experiece. There was a sigificat impact of multi-atioal corporate restructurig evidet i the curret ad fiacial accouts of the balace of paymets i 2015, ad future activity i this space which will likely lead to larger gross factor icome flows to Irelad over the forecast horizo. With both domestic ad global policy iitiatives o corporatios profit tax for multi-atioals progressig, there is a icreased possibility of higher factor icome outflows i terms of divideds ad retaied earigs i future years. While a sigificat amout of ucertaity attaches to the outlook for factor icome flows, the cetral projectio i this Bulleti is for developmets i these ad i the et trade flows to lead to the curret accout surplus averagig 4 per cet of GDP this year ad ext Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q Maufacturig Idustries Traditioal Sector Source: CSO. Supply Moder Sector The latest Quarterly Natioal Accouts show robust growth i most sectors of the ecoomy i I particular, idustrial output expaded by 13.7 per cet over the course of the year, helped i part by growth i the costructio sector. Output however was largely drive by the activities of the multiatioal sector, also evidet i export, corporatio tax ad employmet data.

12 20 The Domestic Ecoomy Table 4: Employmet, Labour Force ad Uemploymet 2015, 2016 f ad 2017 f f 2017 f Agriculture Idustry (icludig costructio) Services 1,481 1,513 1,539 Total Employmet 1,964 2,010 2,046 Uemploymet Labour Force 2,167 2,189 2,211 Uemploymet Rate (%) Note: Figures may ot sum due to roudig. Services related sectors cotiued to expad with the distributio, trasport, software ad commuicatios sector growig by 8.7 per cet ad with the broad other services sector growig by 4.3 per cet. The agricultural sector registered growth of 6.4 per cet, helped i part by exchage rate developmets. More timely survey data poit towards more moderate growth over the forecast period. I the services sector, the Ivestec Purchasig Maager s Idex (PMI) declied to 62.1 i February from 64.0 i uary. Similarly, the PMI for the maufacturig sector also declied (to 52.9) i February. However, both idices declied from high levels, with the declie perhaps reflectig fiacial market ucertaities at the start of the year. The CSO s Mothly Services Idex expaded by 2.1 per cet moth-o-moth i uary, drive pricipally by wholesale trade, accommodatio ad food, ad ICT related services. Fially, the latest KBC Irelad/ESRI Cosumer Setimet Idex poited to a more cautious outlook from cosumers at the start of the year. The idex declied to i February from i uary, followig large gais i previous moths. The Labour ket The level of employmet i the ecoomy is forecast to grow by 2.3 per cet i 2016 ad by 1.7 per cet i This outlook builds o a robust labour market performace i 2015 as cofirmed by the latest Quarterly Natioal Household Survey (QNHS). The latter reported that umbers at work icreased by 2.5 per cet last year, traslatig ito a additioal 50,000 persos i employmet. These gais were broad-based across the sectors ad cocetrated i full-time jobs. Employmet growth did however moderate as the year progressed, with the seasoally adjusted quarter-o-quarter growth rate halvig to 0.4 per cet i the secod half of The forecasts for the labour market imply that employmet will surpass the 2 millio threshold later this year, with umbers at work icreasig by close to 40,000 persos per aum i 2016 ad The vast bulk of these jobs are expected to materialise i the broad services sector helped by the outlook for cosumptio ad exports. Numbers at work i the costructio sector are also expected to icrease followig robust gais i 2015 ad drive by further large icreases i costructio ivestmet spedig. The labour force is expected to grow by 1 per cet per aum i 2016 ad 2017, with a small icrease i the participatio rate beig accompaied by a rise i the active-age populatio as et migratio turs positive. This rate of growth coupled with the outlook for employmet should result i the uemploymet rate decliig further towards a average rate of 8.2 per cet i 2016 ad 7.5 per cet i 2017.

13 The Domestic Ecoomy 21 Table 5: Iflatio Measures - Aual Averages, Per Cet Measure HICP HICP excludig Eergy Services a Goods a CPI e f f a Goods ad services iflatio refers to the HICP goods ad services compoets. Chart 5: Cosumer Prices Chart 6: Services Sector Iflatio 6 % Chage Year-o-Year 7 % Chage Year-o-Year FAJ A N F A J A N F A J A N F A J A N F A J A N F A J A N F A J A N F A J A N F -2 FAJ A N F A J A N F A J A N F A J A N F A J A N F A J A N F A J A N F A J A N F Irelad: Cosumer Price Idex Irelad: Harmoised Idex of Cosumer Prices (HICP) EA-19: Moetary Uio Idex of Cosumer Prices (MUICP) HICP Services (Overall) HICP Core Services Note: Core ket Services equals HICP services excludig telecommuicatios, alcohol ad admiistered services. Source: CSO. Source: CSO. Pay Iflatio I 2016 ad 2017, wages are expected to rise by a average of 2.5 per cet per aum reflectig a tighteig labour market. I the cotext of a weak price eviromet, these icreases costitute sigificat gais i real terms. This outlook coupled with the forecast for employmet should see ecoomy wide compesatio levels growig by close to 5 per cet i 2016 ad closer to 4.5 per cet i 2017 ledig sigificat support to disposable icome ad cosumptio. Despite the stregth i the domestic ecoomy, headlie iflatio remais subdued. However, ear zero headlie iflatio masks the uderlyig divergece i goods ad services price developmets. As expected, low global commodity prices cotiue to feed through to lower goods price iflatio. Services iflatio, o the other had, which is maily drive by domestic demad, is registerig cotiued couter-balacig icreases.

14 22 The Domestic Ecoomy The Cosumer Price Idex (CPI) recorded a declie of 0.3 per cet i 2015 as declies i clothig, household furishig ad trasport more tha offset icreases i educatio, health ad other services prices. The latest available iflatio data idicate that cosumer prices declied by 0.1 per cet year-o-year o a CPI basis i February Low global commodity, ad i particular, oil prices cotiue to drive developmets o the exteral frot; Bret Crude oil prices at the time of writig were $39 per barrel. O the currecy frot, the euro was tradig slightly stroger agaist the poud sterlig ad the US dollar (our mai tradig parters) compared to the previous Bulleti. All else beig equal, a rise i the value of the euro serves to decrease the euro price that foreig producers sellig i Irelad eed to charge to maitai profits i their ow currecy. Sice the last Bulleti, the techical assumptios uderlyig the forecasts with regard to the poud sterlig ad the US dollar are approximately 6.2 ad 1.4 per cet higher, respectively. This could be expected to add to the deflatioary impact of low global commodity prices. Followig o from flat iflatio i 2015, ad o the basis of curretly available iformatio ad prevailig oil futures prices, CPI ad HICP iflatio is expected to icrease to 0.7 ad 0.6 per cet respectively i 2016, a dowward revisio of 0.3 ad 0.4 per cet compared with the previous Bulleti attributable maily to the lower outtur for the opeig moths of the year, cotiued weakess i global commodity prices ad a stroger euro exchage rate. Reflectig stregth i domestic demad, services iflatio is projected to icrease by 2.5 per cet, while goods price iflatio, o the other had, is expected to declie by 1.5 per cet drive i the mai by lower eergy, idustrial goods ad processed food prices. Lookig to 2017, some pick-up i headlie HICP iflatio is evisaged, drive maily by a recovery i the goods compoet, as the moderatig ifluece of exteral factors seems set to wae; HICP iflatio is forecast to icrease by 1.7 per cet i Box C: What is happeig to producer prices i Irelad? By Joh Scally 8 The Producer Price Idex (PPI), or Wholesale Price Idex, measures the average chage over time i the sellig prices received by domestic producers of goods ad services; it is ofte referred to as the factory gate price. It covers both goods produced ad sold i Irelad ad good produced here for export. While oe might expect movemets i the PPI to lead movemets i the Cosumer Price Idex (CPI) this is ot always the case, reflectig the importat compositioal ad methodological differeces i the costructio of the two idices. With these methodological differeces i mid, it is istructive to look at comparative developmets i the PPI ad CPI. Figure 1 illustrates that the PPI exhibited greater fluctuatio compared to the CPI over the 2010 to 2015 period. It is evidet that the growth rate i the PPI sharply reversed its dowward tred i early 2015, with the aual rate of icrease risig to 10 per cet a tred that is ot reflected i the CPI which maitais a more stable trajectory. 8 Irish Ecoomic Aalysis Divisio.

15 The Domestic Ecoomy 23 Box C: What is happeig to producer prices i Irelad? By Joh Scally Box C Fig 1: Producer ad Cosumer Price Iflatio Box C Fig 2: Export Sales Prices ad the Nomial Effective Exchage Rate 15 Per cet CPI PPI Export PPI Domestic Source: CSO. Maufacturig idustries (export sales) Nomial Effective Exchage Rate (NEER) Source: CSO ad Cetral Bak of Irelad. Lookig at the export compoet of the PPI (the price of goods produced here destied for export) we ca see that developmets closely mirror the iverse of currecy movemets, suggestig that maufacturig exporters from Irelad are effective price-takers. Whe the euro depreciates agaist the dollar ad poud sterlig, they geerally maitai the dollar or sterlig value of the product by icreasig the euro deomiated price. To assess more formally the cotributios to PPI iflatio, the followig equatio is estimated: PPI t = α + β 1 ΔPPI t-1 + β 2 ΔOil t + β 3 ΔNooil t + β 4 ΔNEER t + β 5 Gap t + ε t (1) Usig mothly data from 2010 to 2015, the model relates the year-o-year chages i PPI iflatio to its ow lags (ΔPPI t-1 ), oil price chages (ΔOil t ), o-eergy global commodity price growth (ΔNooil t ),chages i the omial effective exchage rate (NEER) ad a measure of ecoomic slack (Gap t ). 9 The results are summarised i Table 1. We ca see that PPI iflatio is determied by its lag, o-oil commodity prices ad the effective exchage rate; for domestic PPI iflatio the price of oil was more of a factor tha for producer goods destied for export. As expected, goods destied for export have a higher exchage rate coefficiet (ad sigificace level) tha goods sold domestically. These results cofirm the importace of the exchage rate i the determiatio of producer prices i Irelad ad the domiace of export maufactures o the overall PPI. I cotrast, the domestic PPI is more closely related to cosumer prices. Box C, Table 1: Coefficiets for Producer Price Iflatio PPI PPI Export PPI Domestic ΔPPI t *** 0.626*** 0.588*** ΔOil t *** ΔNooil t 0.099*** * ΔNEER t *** *** * Gap t 0.017* 0.022* Source: Iteral calculatios. *, **, *** deote sigificace at the 10, 5 ad 1 per cet levels. 9 The mothly slack idicator uses the deviatio of idustrial productio from tred usig a HP filter o the Idustrial productio series (CSO).

16 24 The Domestic Ecoomy Chart 7: Residetial Property Price Idices Chart 8: MSCI/IPD Irish Commercial Property Idex 30 % Chage Year-o-Year 40 % Chage i Capital Values Year-o-Year Natioal All Residetial Properties Office Retail Idustrial Natioal Excludig Dubli All Residetial Properties Dubli All Residetial Properties Source: MSCI/IPD. Source: CSO. Residetial Property Growth i residetial property prices moderated sigificatly through 2015, although data for uary 2016 saw the year-o-year rate of icrease risig to 7.6 per cet from 6.6 per cet i December Diverse regioal patters persist i the dyamics of residetial property prices, with prices i Dubli curretly icreasig at less tha 4 per cet while prices outside Dubli risig almost cosistetly above 10 per cet i recet moths. Risig housig demad, reflectig demographic factors ad the cotiuig icrease i employmet ad disposable icomes, combied with a muted respose of housig supply is cotributig to upward pressure o house prices. The stroger icrease i prices outside Dubli reflects some degree of catch-up o Dubli prices as the improvemet i household s ecoomic coditios spreads across the coutry. Commercial Property The latest data from the MSCI/IPD show that commercial property prices cotiued to grow at a robust pace i the fourth quarter of O a aual basis growth was strogest i the office ad retail sectors, at 21.3 ad 14.2 per cet, respectively. I the idustrial sector, aual growth of 12.4 per cet was recorded i Overall commercial property prices expaded by 18.7 per cet over the year. The Bak s latest Macro Fiacial Review (December 2015) coducts a detailed aalysis of recet developmets i the commercial property sector. Competitiveess By mid-ch 2016, the euro had appreciated relative to the US dollar ad the poud sterlig sice the begiig of the year. While the appreciatio agaist the dollar had bee relatively small i year-o-year terms at approximately 1 per cet, with the bulk of this occurrig sice the start of The situatio is more proouced for the euro agaist the poud as the pace of appreciatio by mid- ch had rise to over 5 per cet from ed Ucertaity relatig to the forthcomig UK referedum o EU membership is commoly cited as a factor i the recet

17 The Domestic Ecoomy 25 performace of sterlig, while a expectatio of slower moetary policy ormalisatio i the Uited States also features i commetary o the developmets i the euro/dollar exchage rate. The latest Harmoised Competitiveess Idex (HCI) data for uary 2016 show that the omial HCI depreciated by 0.9 per cet o a year-o-year basis. Whe deflated by cosumer prices ad producer prices, the real HCI decreased by 2.0 per cet ad 1.6 per cet, respectively, over the same period. These HCI developmets idicate a much slower pace of competitiveess gai tha evidet i previous years ad cotiue a tred that developmets i competitiveess o these measures have bee domiated by omial exchage rate movemets as opposed to ay sigificat improvemet i the relative cost base ad prices of Irish exporters. O the basis of the covetioal GDP per worker measure, productivity icreased by 5 per cet i Lookig ahead, average aual productivity growth of 2.7 ad 2.3 per cet is forecast for 2016 ad 2017, respectively. Factorig i the projected icreases i compesatio of employees over the forecast horizo, uit labour costs are expected to remai relatively uchaged. Exchequer Returs 10 Exchequer data is curretly available for the first two moths of the year. It reveals cotiued strog tax growth ad fallig expediture at the begiig of 2016, with the outtur broadly i lie with expectatios (see Table 6). This follows a sigificat Exchequer over performace last year, which was largely drive by the rapid growth i corporatio taxes. Takig a closer look, tax reveue grew by 7.1 per cet o a aual basis i the year to February, agaist the backdrop of positive developmets i icome tax ad excise duties. The former was 8.7 per cet higher relative to the same period i 2015, as the labour market cotiued to stregthe, while the latter icreased by over 20 per cet. VAT receipts, by compariso, were somewhat lower tha expected. While o-tax reveue recorded a otable year-o-year declie, this was fully aticipated ad primarily reflected lower divided receipts at the start of the year. O the spedig side all of the major compoets curret primary, capital ad debt iterest were lower, although with regard to voted expediture timig factors appear to have played a role. Iterest o the atioal debt declied by 150 millio i aual terms, but is expected to be broadly uchaged for the year as a whole. The Public Fiaces Overview The first official estimate of last year s geeral govermet deficit ad debt will be released ext moth. These are expected to show that fiscal targets were met comfortably oce agai, ad should cofirm Irelad s move from the corrective to the prevetive arm of the Stability ad Growth Pact. Ideed, both key metrics appear to have performed much better tha had bee aticipated at Budget time, whe a deficit of 2.1 per cet of GDP was forecast. The latest data poits to a cotiuatio of these fiscal treds, with robust tax reveue growth i the first moths of the year. Fudig ad Other Developmets The Natioal Treasury Maagemet Agecy (NTMA) raised 4 billio through the sale of 10- year bods i the first quarter of 2016, ad as a result is comfortably o target to achieve its rage of 6-10 billio for the year as a whole. The Agecy also cacelled close to 1.5 billio i outstadig bods durig this period. I February, the ratigs agecy Fitch upgraded Irelad s log-term sovereig credit ratig to A (from A-). 10 The figures i this sectio exclude trasactios with o geeral govermet impact, givig a closer approximatio to the geeral govermet balace. These figures are provided by the Departmet of Fiace i its Aalytical Exchequer Statemet.

18 26 The Domestic Ecoomy Table 6: Aalytical Exchequer Statemet for February 2016 ( millios) -Feb 2016 m -Feb 2015 m Aual Chage (%) Outtur vs Profile Reveue 9,087 8, Tax reveue 7,215 6, Appropriatios-i-aid 1,778 1, Other Reveue Expediture 9,175 9, Curret Primary Expediture 8,482 8, Capital Expediture Iterest o Natioal Debt Exchequer Balace (%) Source: Departmet of Fiace Note: The figures i the Table exclude trasactios with o geeral govermet impact, givig a closer approximatio to the geeral govermet balace.