Ireland. Eurozone rebalancing. EY Eurozone Forecast June Portugal Slovakia Slovenia Spain. Latvia Lithuania Luxembourg Malta Netherlands

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1 EY Forecast June 2015 rebalancing recovery

2 Outlook for Rising domestic demand improves prospects for 2015 Published in collaboration with

3 Highlights The Irish economy grew by 4.8% last year, which was the fastest growth rate in the European Union (EU). Some of this strength was due to a statistical quirk, but data revisions and a solid end to the year revealed that the recovery was more broad-based than it had previously appeared. Consumption and investment both posted strong outturns during Q4, with annual growth rates of 1.2% and 11.7% respectively. Short-term indicators suggest that domestic demand has maintained its momentum into this year. Q1 saw retail sales volumes up by 4.8% compared with a year earlier, while new car registrations rose by 24% over the same period. Admittedly, debt levels are continued labor market improvements growth remaining strong relative to recent years. We expect consumption to grow by 2.5% this year. Notwithstanding domestic improvements, the export sector will continue to play the key role in the Irish recovery. Overseas sales will be boosted in 2015 by the weak euro a result, in part, of the quantitative easing program from the European Central Bank (ECB). Although the Irish economy is not without its vulnerabilities (its reliance on net trade leaves it particularly exposed to shocks in its trading partners, for example), we now expect GDP growth of 3.7% this year, up slightly from our March forecast of 3.4%, with a similar outturn of 3.8% forecast for The participation rate has yet to show much improvement and is still well below pre-crisis levels. However, the labor market continues to improve, with to single digits falling to 9.8% in April from.1% in January. GDP growth % GDP growth % year on the output side. Building- and construction-related investment posted strong gains in 2014, growing by around 9%. This rebound is likely to cool somewhat in the year ahead, as red tape in the planning process and tight credit conditions curtail supply. Indeed, the construction Purchasing Managers Index (PMI) has fallen from 63.1 at the end of last year to 57.2 in April. But at that level, the index still signals solid expansion in the sector. And a faster pace of growth in new orders should underpin continued activity in the coming months Unemployment 9. 6% Consumer prices % EY Forecast June

4 Rising domestic demand improves prospects for 2015 GDP growth in 2015 now expected at 3.8% Last year saw robust GDP growth of 4.8%, the strongest in the EU. Admittedly, some of this was down to a statistical quirk. Contract manufacturing where production occurs abroad but sales are included in Irish output is estimated to have accounted for 40% of the rise in GDP in the first half of the year. However, data revisions and a strong end to the year revealed that the recovery was more broad-based than it had previously appeared. Rising consumer confidence, along with a strong rebound in the construction sector, saw annual consumption and investment growth of 1.2% and 11.7% respectively. As there are good reasons to expect that recovery in these sectors will continue, we have raised our forecast for GDP growth this year to 3.7% from 3.4% in our March report. with consumer spending on the rise Following three very sluggish quarters, consumption ended the year on a positive note, pulling annual growth up to 1.2%. Credit constraints are continuing to act as a drag on spending, with household debt currently at around 200% of GDP. But low oil prices, rising confidence levels and improvements in the labor market have helped spur higher spending. The short-term indicators suggest that spending growth has persisted into The seasonally adjusted volume of retail sales in Q1 was up 4.8% from a year earlier. Moreover, new car registrations were up by 24% over the same period. And the three-month moving average of the Economic and Social Research Institute/KCB consumer survey remains on an upward trend, despite slipping slightly to 97.6 in April from 98.3 in March. Indeed, in both January and March, the proportion of respondents expecting the economic situation to get better in the next 12 months was over 60%, the first two occasions this has occurred in the past 20 years. The steady improvements in the labor market are also continuing, with the unemployment rate falling to 9.9% in Q As confidence builds in line with the wider economic recovery, we expect solid consumption growth to continue in the coming years. Table 1 (annual percentage changes unless specified) GDP Private consumption Fixed investment Stockbuilding (% of GDP) Government consumption Exports of goods and services Imports of goods and services Consumer prices Unemployment rate (level) Current account balance (% of GDP) Government budget (% of GDP) Government debt (% of GDP) Euro effective exchange rate (1995 = 0) Exchange rate (US$ per ) EY Forecast June 2015

5 The economy entered deflationary territory in December and has remained there ever since. The annual EU-harmonized inflation rate averaged 0.4% in Q1 and stayed at this level in April. But this has been largely driven by falling oil prices, which are acting as the equivalent of a tax cut and are prompting further spending. As the year continues, oil price and exchange rate dynamics should counter some of this deflationary pressure, but the net effect should see inflation staying very low. We expect inflation to average just 0.3% this year providing scope for real terms growth in disposable incomes before rising to 1.8% in Investment cooled somewhat during Q4 2014, but its annual growth was still strong at around 12%. Much of this was due to a rebound in the property market, with building and constructionrelated investment which made up around a third of total investment last year growing by approximately 9%. We expect investment growth to continue this year, albeit at a slower pace, as the rebound in construction shows signs of cooling. Housing demand is high, but excessive red tape in the planning process and tight credit conditions are likely to constrain supply. Indeed, the construction PMI averaged around the low 50s during Q1, compared with figures of over 60 recorded at the end of last year. But the PMI rose again in April to 57.2, still signaling solid expansion in the sector. And a faster pace of growth in new orders should underpin continued activity in the coming months. Planning permissions also increased in 2014 for the first time since the property crash, a further sign of rising activity. A particularly encouraging feature of investment s performance in 2014 was the strength in machinery and equipment investment. Excluding the volatile transport component, equipment-related investment expanded by more than a third in the second half of This is a strong indicator of growing investor confidence, as firms take to replenishing capital stock levels. Moreover, survey data continues to show a high level of business confidence in Figure 1 Contributions to GDP Figure 2 Consumption and investment % year 15 Forecast % year 40 Forecast Investment 9 6 GDP Net exports Consumption 9 Domestic demand Table 2 Forecast for by sector (annual percentage changes in gross added value) GDP Manufacturing Agriculture Construction Utilities Trade Financial and business services Communications Non market services EY Forecast June

6 Rising domestic demand improves prospects for 2015 On a less positive note, tight credit conditions remain a key obstacle to all forms of investment growth. The latest business lending survey showed that while loan demand increased across all forms of enterprise, credit supply remained unchanged. But as the banks return to health, increased confidence is likely to translate gradually into more lending. Weighing up the impact of credit constraints against the otherwise mostly positive picture, we expect solid investment growth in the near term. We have raised our forecast for investment growth to 8.4% this year from the 4.5% seen in our March report. Exports retain key role in economy Notwithstanding the positive outlook for domestic demand, as a small open economy remains reliant on its trade sector to drive its recovery. Despite a weaker end to 2014, exports surged 12.6% last year. However, much of the reported strength during the first half of last year was due to a statistical quirk. Assuming that no further statistical discrepancies arise, we expect that exports will grow more in line with the performances of s main trading partners in the near to medium term. Vulnerabilities remain, but outlook is largely positive Despite the mostly positive developments, some key downside risks persist. In particular, reliance on net trade is a mixed blessing, because it leaves vulnerable to a slowdown in global growth. Destabilization within the, perhaps triggered by further problems in, could derail the export-led recovery. And closer to home, with 17% of all Irish exports currently going to the UK, the possibility of the latter leaving the EU may leave some investors nervous. Overall, though, we believe that the positives outweigh the negatives, now that domestic demand is beginning to support the recovery. So although we expect slower GDP growth this year than in 2014, the growing contribution of domestic demand means that this growth will be built on a more stable base. As a result, we see solid growth continuing in 2016, at 3.8%, before a modest slowdown to just under 3% a year in This outlook is positive, as is expected to benefit from robust growth in the UK and the US. In particular, is likely to benefit from the ECB s program of quantitative easing. The resulting weaker euro should boost Irish exports over the course of the year, as the US and the UK together receive more than a third of Irish exports. We forecast exports to grow by a healthy 5.5% this year. Figure 3 Exports and imports % year 16 Forecast Exports Imports Figure 4 Credit growth % year Source: Central Statistics Of ce of ; Haver Analytics. 4 EY Forecast June 2015

7 in ia l Macroeconomic data and analysis Learn more about the EY Forecast at ey.com/eurozone: Download the latest EY Forecast and individual forecasts for the 19 member states. Use our dynamic Eurochart to compare country Use the trend analysis tool to compare forecasts 19 nations. EY Forecast June 2015 rebalancing recovery EY Forecast June 2015 rebalancing recovery ry Forecast March 2015 You can select multiple countries to display on the chart. Country EY Forecast June 2015 rebalancing recovery y Current Account Balance Government Budget Unemployment rate Government Debt GDP rebalancing ng recovery ry Private Consumption EY Forecast June 2015 Trend analysis Fixed Investment Stockbuilding Government Consumption C Clear selection Consumer Prices Exports of Goods and Services Imports of Goods and Services Select a year to compare: EY Forecast Spring 2015 EY s attractiveness survey Europe 2015 Comeback time Outlook for EY Forecast: outlook for Spring 2015 EY s attractiveness survey: Europe 2015 The explores the implications of the latest economic forecasts for banks, asset managers and insurers. Our latest forecast sees improving GDP, growth in consumer spending and falling unemployment across the. Learn more and download the report at ey.com/ fseurozone. are annual reports that examine the attractiveness of selected nations and regions to foreign investors. Europe remains the world s top destination for foreign direct investment. Learn more and download the report at ey.com/ attractiveness.

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