Macroeconomic Context for Budget 2017 David Duffy, Daniel Foley and Kieran McQuinn 17th June 2016

Presentation Roadmap Context for both Short-term: Short-term and more medium-term Short-term: QEC outlook and Nowcasting model Medium-term: Potential output Growth accounting framework Output gap Fiscal Space Population Scenarios

Short-Term Outlook Strong growth set to continue in 2016 Growth of 4.8% Nowcasting indicates 1.32% growth in Q2 2016. Unemployment 8.7% (annual average) Moderated Trade outlook Uncertainty over Brexit a concern Investment still set to contribute strongly 2016 housing supply just over half of 25,000 Consumption growth supported by employment, incomes and positive sentiment

Figure 1 GDP growth expected to continue

Irish economy showing strong growth Real GDP to grow by 4.8% in 2016 and by 4.1% in 2017 Domestic demand accounting for majority of growth.

Employment growth and productivity suggest underlying growth also strong

External Environment While US and UK growth forecast positive. Present growth rates less than previous years. Export growth of 9.3% in 2016. Risk of Brexit. Currency risk Competitiveness Tentative evidence to suggest Uncertainty surrounding Brexit has already impacted

PMI shows signs of lower export growth

Assessment of Public Finances Strong tax receipts in 2015, continuing in 2016 Corporation Tax, Income Tax better than expected General Government deficit -1.1 in 2016 -0.2 in 2017 Target Surplus in 2017? Capital Expenditure Plan Rainy Day fund

Labour Supply using population projections Net migration neutral in 2016 Positive in 2017 Implications for Labour Supply Impact on Potential Growth Cobb Douglas Approach, HP Filter

Alternative Population Forecasts Eurostat: Net negative migration until 2037 Unlikely scenario CSO M1: Net migration positive by 2016 and Rising thereafter to 30,000 p.a. by 2021 CSO M2: Net migration positive by 2018 and Rising thereafter to 10,000 p.a. by 2021 Implications for Fiscal Space vis a vis Potential Growth.

Population Projections

Potential GDP forecasts

Impact on Potential GDP growth 2016 2017 2018 2019 2020 2021 M1 5.1 5.2 4.4 3.8 3.6 3.1 M2 5.0 4.2 3.5 3.3 2.8 Eurostat 4.3 2.5 2.1

Implications for Fiscal Space I Positive Population Scenario Higher Labour Supply M1 scenario increasingly likely Higher Potential GDP growth Increased available fiscal space

Public finances and housing Output gap closing in 2016? Housing Supply 13,500 in 2016 and 17,500 in 2017. Structural demand = 25,000 Unemployment Steadily declining anyway By 2017 less than 7 per cent. Faster rate of housing supply Potential for overheating?

Housing Supply and Unemployment

Implications for Output Gap

Implications for Fiscal Space II Possible overheating Construction picks up Unemployment falls towards 2000 – 2007 rates If overheating occurs May need to run countercyclical budgets Expenditure Benchmark Spending can grow at reference rate potential Less emphasis on the “output gap”

David Duffy, Daniel Foley and Kieran McQuinn 17th June 2016 Thank you  David Duffy, Daniel Foley and Kieran McQuinn 17th June 2016

Spring 2016 themes Forecasts for 2017 International Outlook Lower growth in 2016 Labour Market Domestic Demand Investment Consumption

Schedule 2016 March June September December 2016 Housing 2017 Labour market? September Pre-Budget analysis December Post Budget analysis Distribution impact of Budget (Tim et al)

Outlook GDP to increase 4.8% in 2016 and 4.1% in 2017 Driven by domestic demand, particularly consumption. Unemployment average 8.7% in 2016 and 7.7% in 2017. Deficit of 1.1% in 2016 and 0.2% in 2017. Risks surrounding trade outlook.

External Environment

Labour market

Growth in Personal Consumption to increase

Forecast Summary Real Annual Growth % 2014 2015 2016 2017 Consumption 2.0 3.5 3.8 Govt. Expenditure 4.6 -0.8 1 Investment 14.3 28.2 22.5 22.1 Exports 12.1 13.8 9.3 6.7 Imports 14.7 16.3 12.5 10.7 Gross Domestic Product (GDP) 5.2 7.8 4.8 4.1 Gross National Product (GNP) 6.9 5.7 5 4.3