Ireland GDP Likely to Be Up +5.5% in 2018:4Q and +4.5% in 2019:4Q

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1 November 14, 2018 Economics Weekly International Highlights Dick Rippe Ed Hyman Francesca Ponziani Morgan Smith Jaewoo Nakajima Sean Zhang Ireland GDP Likely to Be Up +5.5% in 2018:4Q and +4.5% in 2019:4Q

2 2 Ireland GDP Likely to Be Up +5.5% in 2018:4Q and +4.5% in 2019:4Q IRELAND REAL GDP Y/Y % 2018:2Q 9.1% Fo 201 recas 9:4 t Q + : 4.5 % Ireland real GDP is on track to increase +5.5% y/y in 2018:4Q, and this regression model projects it increases +4.5% y/y in 2019:4Q. The lagged effects of the ongoing increase in Eurozone GDP and improved consumer confidence have been pluses. data revisions model Massive have made estimation and forecasting difficult (see page 4). The model does not capture fiscal policy, but it s only a small drag in both years, so we have made no adjustment. Private consensus estimates seem much too low at +2.0% and +2.6%, respectively. The potential impacts from Brexit changes Oct (IMF) Fiscal policy in Ireland is estimated to be a drag of 0.1% of GDP in 2018 and 0.2% in and corporate are the uncertainties (see page 4). tax key

3 3 Ireland Indicators Mostly Favorable Since it left the international bailout program in Dec 2013, economic results for Ireland have been strong. Current indicators remain generally favorable: The composite PMI is down from its high but still in strong territory at 56.1% in Oct. The unemployment rate has come down substantially to 5.3% from its peak of 16.0%. Real retail sales are in a rising trend and are up +6.5% y/y in Sep. However, OECD s leading indicator for Ireland has hooked down, a cautionary sign for the near term outlook. June 2018 (IMF) Ireland has made remarkable strides in recovering from the 2008 bust of the credit driven real estate bubble. The economy continues to grow at a rapid pace, well above the EU average. The broad recovery of domestic demand underpins the expansion.

4 4 Update on Three Issues for Ireland Brexit. A draft agreement between the UK and the EU was announced today, but uncertainties about the Irish border persist with important implications for Ireland depending on the final outcome: Ireland s trade with the UK is substantial (see page 7). There is a commitment by both the UK and the EU to avoid a hard border from being established. As of yet there is no agreement on how to do this. Just how to do this will not be addressed until the UK formally exits the EU and the transition period begins. The UK has agreed to a controversial backstop to remain in a customs union with the EU if Irish border talks fail. Apple Tax Ruling and US Tax Reform. The decision of the EU to require Ireland to impose $15b in profits taxes on Apple has been appealed by both Ireland and the company. It could take several years for a final resolution in the courts. Apple has paid the tax bill to the Irish govt, and the money is being held in escrow until the legal issue is settled. The low corporate tax rate has been a significant inducement to locate capital especially intellectual property in Ireland. A number of other US technology companies also have a presence in Ireland. This tax dispute and the reduction in the US corporate tax rate both reduce the appeal of booking business in Ireland. Massive Revision in GDP Data. In July 2016, Ireland revised its 2015 real GDP growth from a rapid +7.8% to an incredible +25.4% (see the chart on page 2). This reflects, in large part, activities of multinational enterprises including some corporate inversions. The IMF recommended that Ireland develop additional statistical measures that provide a more realistic picture of its economic performance. Ireland has responded with several new measures. June 2018 (IMF) The Central Statistics Office has produced a complementary metric the Modified Gross National Income or GNI which excludes the profits of re domiciled companies, the depreciation of intellectual property (IP) products, and aircraft leasing. The new indicator shows that the Irish domestic economy is about 30 percent smaller than measured by GDP.

5 5 Irish Consumer Spending Likely to Increase +4.0% in Both 2018 and 2019 Irish employment continues to increase at a solid pace, consumer confidence is high although down from its peak and real compensation has risen significantly. Consumer spending has accelerated recently, and these fundamentals suggest good gains ahead, probably about +4.0% y/y in 2018:4Q and another +4.0% in 2019:4Q. July 12 (EC) Real disposable income continues to grow, driven by robust growth in full time employment, rising wages, and low inflation.

6 6 Irish Capex Likely to Reaccelerate Capex plunged in 2017 after an incredible surge during This is one of the sectors substantially impacted by the GDP data revisions (see page 4) the revised data are reflected in the chart below. Most fundamentals and signs remain positive with the new orders PMI at 57.7% in Oct. Company earnings are up from their lows, although they have flattened out recently. IP has been very volatile but has turned up. Concerns about the impact of Brexit lurk in the background as do uncertainties about taxes on some foreign cos. But overall, we expect capex to increase about +7.0% y/y in 2018:4Q and +5.0% in 2019:4Q. July 12 (EC) Investment in construction is forecast to expand at a brisk pace driven by the housing shortage and various government policy measures.

7 7 Irish Trade Likely to Remain a Plus for GDP Irish trade data have also been impacted in a major way by recent revisions to the GDP accounts. The ongoing global expansion will provide some lift to exports, while the prior increase in the euro is a restraint working with a lag. There is a long run risk to Irish trade when the UK the second largest destination for Irish exports leaves the EU (see page 4). Overall, net exports are likely to be a plus for GDP in 2018 and Oct 9 (WSJ) In a July report, the IMF estimated Ireland s economy would be 2.5% smaller if the UK does agree to a new free trade agreement with the EU and 4% smaller if it doesn t.

8 8 Irish Financial Conditions Mostly Positive Irish bond yields have declined to record lows due to low inflation and the ECB s QE. Yields are now substantially lower than those in the US. Ireland s credit rating was boosted several times in 2014 and Ireland moved early to rescue its banks, although NPLs remain high. Rapid increases in house prices may pose some problems. Stocks are up +159% from their 2011 low but are down 12.8% ytd. See Rich Ross s technical comments on the Irish stock market (page 10). +159% Investors can obtain exposure to Ireland stocks long or short through ishares EIRL ETF. June 2018 (IMF) Banks have strengthened their capital buffers and improved asset quality, but the ratio of NPLs remains well above the EU average. June 2018 (IMF) While there are no immediate financial stability risks, house price increases are likely to persist over the medium term as demand growth is likely to continue outpacing supply.

9 9 Irish Structural Conditions Have Improved Ireland s ULCs gap with Germany, Italy, France, and Spain has reversed, boosting its competitiveness. The large current account surplus is a related positive, although it has been volatile. Ireland ranks fairly well internationally in surveys of competitiveness, ease of doing business, and related measures. Its controversial low tax rate on corporate profits is a major attraction for foreign companies, but that is put in jeopardy by the EU decision on Apple taxes as well as the sharp cut in US corporate taxes. On the negative side, Ireland has high debt ratios especially for corporations both absolutely and relative to other Eurozone countries. There are some debt issues in other sectors too. June 2018 (IMF) Alternative metrics, which provide a more accurate measure of the size of the domestic economy than nominal GDP, show that Ireland s public debt remains elevated compared to peers. Households have significantly reduced their indebtedness yet remain overleveraged.

10 10 Rich Ross: Technical Perspective on the Ireland Stock Market The Benchmark Index is down 12.8% ytd and has broken beneath its 200 week moving average for the first time in almost 7 years.

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