Outlook for the Irish Economy Reamonn Lydon Irish Institute of Pensions Management October 2014
A caveat these are my views only Not mine
Overview Latest projections, 2014 Bulletin 4 Short- / Medium-term view: broadly positive, risks? Longer-term Look at some standard models of economic growth how does Ireland stack-up?
Bulletin Oct 2014 Domestic demand, long-time-no-see Consumption and investment (in particular), combining with positive net exports to boost overall output growth Labour market recovery taking a different trajectory to 2013 but unemployment falling and employment growth still positive.
Bulletin No. 4 2014: Main points Large upward revision to GDP growth for 2014 following positive H1 surprise. Domestic demand benefitting from both stronger consumption and investment; Net exports stronger due to offshore activity; Recent trends indicative of structural change or transitory? Further upside potential. Labour market less buoyant than previously forecast, but unemployment rate expected to fall more than in the last Bulletin. Recovery taking on a different trajectory in 2014. Changes in labour force participation key to understanding our revised outlook. Projections for 2015 revised up, due mainly to carryover from higher 2014. Assume historical norms re-establish themselves in key relationships; High degree of uncertainty around net exports and investment. Potential upside from current fiscal assumptions Inflation remains muted over forecast horizon, but marginally higher than in previous Bulletin, as drag of external factors is expected to ease.
Trade Focus on exports (world demand), Import content of export output, consumption & investment derived from periodic inputoutput tables Structure of exports, lots of MNC, pharma MNCs now 25% of gross value added*. 50/50 Goods/services exports Note: GVA + taxes on products - subsidies on products = GDP
Changing relationship with world demand 10% rise in world demand => 7.5% rise in Irish exports
Annual percentage change Export composition Services the star performer during the recession [Sustainability?] Goods in 2014 lots going on difficult to know long-term implications of H1 2014 trends
Goods and services trade how do we compare? Box A Table 1: Share of nominal exports (World and Ireland) and imports (euro area, UK, US) - 2000 and 2012 Exports Imports 2000 2012 2000 2012 World Ireland World Ireland euro area UK US euro area UK US Goods 80.9 82.1 80.5 50.2 80.8 78.0 85.4 79.0 78.3 84.1 Pharmaceuticals 1.4 5.3 2.2 13.5 1.8 1.6 1.0 3.6 3.4 2.4 Office machinery and electrical 12.1 26.9 7.3 3.2 9.7 13.5 14.3 5.8 6.9 10.9 Other 67.5 49.9 71.0 33.4 69.3 62.8 70.2 69.6 68.0 70.8 Services 19.1 17.9 19.5 49.8 19.2 22.0 14.6 21.0 21.7 15.9 Computer and information 0.6 5.8 1.2 19.7 0.5 0.3 0.4 0.9 0.8 0.9 Insurance and other financial 0.0 0.0 1.8 8.8 0.9 1.2 1.5 1.5 1.9 2.5 Other 18.5 12.0 16.5 21.3 17.7 20.6 12.7 18.6 19.0 12.5 Source: World Trade Organsisation Statistics Database
Domestic demand - investment Take a long-run view Abstract from SR variation 8 7 6 5 Figure 1. Business Investment to GDP Ratio Private machinery & equipment 8 7 6 5 & planes 4 4 Long investment cycles with large up/downswings 3 2 1 0 Private building and construction 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 3 2 1 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Investment dwellings (B&C) 1997-2007 = 45% total B&C investment 2012-2013 = 16% 100,000 90,000 House completitions 100,000 90,000 15 10 Contributions to Investment Growth 15 10 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000-80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000-5 0-5 -10-15 -20-25 -30 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 5 0-5 -10-15 -20-25 See Bulletin 3, 2014. Population growth as the main driver Building & Construction Aircraft Machinery & Equipment (ex aircraft) Other
Consumption Growth in personal consumption to be positive for first time since 2010. Strong influence of car purchases on overall consumption growth. Divergence between QNA and Retail Sales also due to weak volume growth in services (health, education, insurance, housing). Forecast personal consumption growth supported by rising compensation, marginal reduction in savings rate and higher level of housing market activity. Net Gen Gov consumption impacted in H1 by Haddington Road and ELG fee income. Potential base effect for 2015. 15 10 5 0-5 -10-15 -20-25 Volume of Retail Sales % Change Year-on-Year 3 Month Moving Average J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J 2008 2009 2010 2011 2012 2013 2014 All Businesses Core (excluding Motor Trades)
Unemployment rate, per cent y-on-y growth rate, per cent Labour market Strong employment growth in 2013 giving way to more gradual expansion over forecast horizon. Full-time employment growing; parttime now falling (y-on-y) Unemployment contracting strongly, as in 2013. Long-term falling proportionately more quickly. Labour force contracting slightly (participation rate effects rather than demographic migration effects). Labour market gains predominantly accruing to men Not surprising given characteristics of employment collapse post 2007. Migration moderating out migration slowing, in migration picking up Immigrants now very likely to have 3 rd level qualifications Emigrants increasingly likely to be employed before departure. 20 15 10 5 0-5 -10-15 -20-25 16 14 12 10 8 6 4 2 0 Labour force Employment Full time Part time Potential labour force Long-term Short-term
'000s '000s Box X Fig 1a: Annual change in active age population* Box X Fig 1b: Annual change in the labour force* What is driving slower employment growth? Annual change in Q2 active age population 150 100 50 Annual change in Q2 labour force 60.0 40.0 20.0 0-50 -100 2008 2009 2010 2011 2012 2013 2014 Natural increase Immigration Emigration Active age population 0.0-20.0-40.0-60.0 2008 2009 2010 2011 2012 2013 2014 Demographic effect Participation effect Labour force Our downward revisions to employment growth driven by a lower than anticipated participation rate. Dynamics of recovery in 2013 were unconventional, unlikely to be repeated Cohorts who entered employment and the types of jobs created Job creation has slowed, move to inactivity returning to pre-crisis levels Link to output and compensation growth
Labour market transitions unemployed to employed and inactive
Labour market - pay Total compensation is growing. Hours and full time employment are growing. Compensation per employee (CPE) is growing (nominal) Due to increased hours (probably) Rather than upward pressure on wages (in some sectors this may be happening) Data on wages very poor no link between EHECS and National Accounts CPE forecast to grow into 2015 Based on: Labour market dynamics, Compensation growth seen to date.
House prices a work in progress
Growth the long run Previous short-/medium-term, limited role for policy Labour and Investment as the drivers of growth Over the long-run, other factors come into play more scope for policy to influence outcomes (maybe) Productivity growth (Van Ark, 2014) sustainable source of long-term economic growth compounding measure, with small annual improvements adding up over time represents so-called spillovers or externalities societal benefits that arise from technological progress and innovation
Productivity (TFP) important during 1990s/early 2000s Credit boom growth all about capital (property) and labour quantity (cons, services, domestic demand) 15 10 5 15 10 5 With hindsight (and foresight, of some) clearly unsustainable Tech growth in 2000s largely benefitted consumers as opposed to producers 0-5 -10 Labour quantity NonICT capital Productivity Labour composition ICT capital GDP growth 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0-5 -10
It is these sort of concerns that feed into the secular stagnation arguments Economic growth in the future may need to rely more on financial factors (credit), which bring with them inherent instability problems (Krugman, the demand side) Gordon (the supply side) have we already seen/experienced the productivity/growth benefits that technological progress inherent in ICT has to offer? For Ireland, and obvious question in this context is: how sustainable is an increasingly large reliance on services exports? Productivity growth is historically much weaker in market services vs goods. But the outlook is not all gloomy
1991 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2020 2030 2040 2050 2060 2070 2080 Age dependency ratios are (relatively) strong over the medium term 80 70 60 50 EU (28 countries) Belgium Germany France Italy Portugal 80 70 60 50 40 Portugal Ireland 40 30 30 20 20 10 10 0 0 Eurostat
Policy options available to promote productivity growth? Encourage adoption of technology and innovation in production ICT growth, like all technology advances, impacts on the economy in 3 ways Technology effects in ICT-producing sectors Investment effects from ICT-using sectors Network effects/ spillovers from ICT use in non-ict sectors Encouraging the right kind of investment (i.e. productivity enhancing, innovative), and maximising (societal) returns by enabling it to be used in the most efficient manner Existing mix of inputs (capital and labour), quality & quantity Competition policy Tax policy Access to finance
Thank you reamonn.lydon@centralbank.ie