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Budget 2020: macro-economic outlook and projections
Presentation to Irish Fiscal Advisory Council
Economics team, Department of Finance
27th September 2019
2 An Roinn Airgeadais | Department of Finance
Birds-eye view
• Developments since SPU
• Methodological approach
• Counterfactual ‘deal’ scenario
• ‘No-deal’ simulations
• Short-term developments and forecasts
• Supply-side estimates
3 An Roinn Airgeadais | Department of Finance
Developments since SPU
4 An Roinn Airgeadais | Department of Finance
External environment: mounting evidence of turning point
0
50
100
150
200
250
300
1997
1998
1999
1999
2000
2000
2001
2002
2002
2003
2003
2004
2004
2005
2006
2006
2007
2007
2008
2009
2009
2010
2010
2011
2011
2012
2013
2013
2014
2014
2015
2016
2016
2017
2017
2018
2018
2019
economic policy uncertainty at all-time high
-2
-1
0
1
2
3
4
5
6
20
13
20
14
20
15
20
16
20
17
20
18
United States
Euro area 'Big 3'
India
Other G20 advanced
Other G20 emerging
G20
Global economic policy uncertainty (12mma), 1999=100 Fixed investment in G20 countries: pp cont. to y/y change
uncertainty holding
back investment
lower investment
weighing on
manufacturing
5 An Roinn Airgeadais | Department of Finance
Weaker investment driving a “manufacturing recession”
45
50
55
60
65
Aug-2
016
Nov-2
016
Fe
b-2
017
May-2
017
Aug-2
017
Nov-2
017
Fe
b-2
018
May-2
018
Aug-2
018
Nov-2
018
Fe
b-2
019
May-2
019
Aug-2
019
manufacturing recession in MTPs?
euro area
UK
US
45
50
55
60
65
Jan-2
012
Jul-2
012
Jan-2
013
Jul-2
013
Jan-2
014
Jul-2
014
Jan-2
015
Jul-2
015
Jan-2
016
Jul-2
016
Jan-2
017
Jul-2
017
Jan-2
018
Jul-2
018
Jan-2
019
Jul-2
019
Manufacturing PMI below
50 since May
(first time since May 2013)
services
PMI_manufacturing: major trading partners (< 50 = contraction) Irish PMIs (< 50 = contraction)
manufacturing
lower investment
weighing on
manufacturing
Irish manufacturing
sector is not immune
6 An Roinn Airgeadais | Department of Finance
Soft data borne out by hard data in Ireland
Contribution to y/y goods export change, pp Modified domestic demand, y/y per cent change
0
1
2
3
4
5
6
7
20
17
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
18
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
19
Q1
20
19
Q2
20
19
Q3
DoF “nowcast”
-10
-5
0
5
10
15
20
25
201
8M
01
201
8M
02
201
8M
03
201
8M
04
201
8M
05
201
8M
06
201
8M
07
201
8M
08
201
8M
09
201
8M
10
201
8M
11
201
8M
12
201
9M
01
201
9M
02
201
9M
03
201
9M
04
201
9M
05
201
9M
06
201
9M
07
F&B A/Craft Core M&E Chem
Misc Man Fuels Other All
slowing export growth:
outside pharma-chem,
export growth modest
7 An Roinn Airgeadais | Department of Finance
Not just external sector: household sector increasingly cautious
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
Q1 2
00
0
Q1 2
00
1
Q1 2
00
2
Q1 2
00
3
Q1 2
00
4
Q1 2
00
5
Q1 2
00
6
Q1 2
00
7
Q1 2
00
8
Q1 2
00
9
Q1 2
01
0
Q1 2
01
1
Q1 2
01
2
Q1 2
01
3
Q1 2
01
4
Q1 2
01
5
Q1 2
01
6
Q1 2
01
7
Q1 2
01
8
€m
illio
ns
personal consumer spending
household disposable income
savings
savings rate = 11.4 per cent in Q1 2019
70
75
80
85
90
95
100
105
110
115
Aug
-16
Oct-1
6
Dec-1
6
Fe
b-1
7
Apr-1
7
Jun-1
7
Aug
-17
Oct-1
7
Dec-1
7
Fe
b-1
8
Apr-1
8
Jun-1
8
Aug
-18
Oct-1
8
Dec-1
8
Fe
b-1
9
Apr-1
9
Jun-1
9
Aug
-19
ind
ex
70-month low in August
Consumer sentiment index Savings rate: precautionary behaviour
8 An Roinn Airgeadais | Department of Finance
Exchange rates (held unchanged at mid-Sept levels)
1.00
1.05
1.10
1.15
1.20
1.25
1.30
2 J
an
17
2 M
ar 1
7
2 M
ay 1
7
2 J
ul 1
7
2 S
ep
17
2 N
ov 1
7
2 J
an
18
2 M
ar 1
8
2 M
ay 1
8
2 J
ul 1
8
2 S
ep
18
2 N
ov 1
8
2 J
an
19
2 M
ar 1
9
2 M
ay 1
9
2 J
ul 1
9
2 S
ep
19
2 N
ov 1
9
2 J
an
20
2 M
ar 2
0
2 M
ay 2
0
2 J
ul 2
0
2 S
ep
20
2 N
ov 2
0
spring: €1 = $1.13
= unchanged from
mid-March
autumn: €1 = $1.10
= unchanged
from mid-Sept
1.2% depreciation
of € in 2020
5.4% depreciation
of € in 2019
= euro appreciation
autumn =
2½% depreciation
vs spring
0.82
0.84
0.86
0.88
0.90
0.92
0.94
0.96
2 J
an
17
2 M
ar 1
7
2 M
ay 1
7
2 J
ul 1
7
2 S
ep
17
2 N
ov 1
7
2 J
an
18
2 M
ar 1
8
2 M
ay 1
8
2 J
ul 1
8
2 S
ep
18
2 N
ov 1
8
2 J
an
19
2 M
ar 1
9
2 M
ay 1
9
2 J
ul 1
9
2 S
ep
19
2 N
ov 1
9
2 J
an
20
2 M
ar 2
0
2 M
ay 2
0
2 J
ul 2
0
2 S
ep
20
2 N
ov 2
0
spring: €1 = £0.86
= unchanged from
mid-March
autumn: €1 = £0.90
= unchanged from
mid-Sept
0.8% appreciation
of € in 2019
1.4% appreciation
of € in 2020= euro appreciation
autumn =
5% appreciation vs
spring
euro-dollar bilateral exchange rate, €1 = $X euro-sterling bilateral exchange rate, €1 = stg£X
9 An Roinn Airgeadais | Department of Finance
Methodological approach
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10 An Roinn Airgeadais | Department of Finance
Constructing a disorderly exit economic forecast• Government decision:
- budget based on disorderly UK exit
• Need to construct ‘no deal’ economic outlook
• Operationalising this involves:
i) create a counterfactual ‘deal’ scenario
ii) apply COSMO model ‘no-deal’ scenario results to the counterfactual
iii) arrive at ‘no deal’ projection
• Sequencing
Spring (SPU)• Assumption =
‘orderly exit’
Summer• Weaker external
demand
GDP weaker
in 2020• Assumption = ‘orderly
exit’
Assume
‘no deal’• Apply COSMO model
Autumn (Budget)• Assumption =
‘disorderly exit’
11 An Roinn Airgeadais | Department of Finance
Counterfactual ‘deal’ scenario
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12 An Roinn Airgeadais | Department of Finance
• Deterioration in global outlook
- incorporation of more modest X_G into forecast
• Services exports
- incorporation of stronger X_S into forecast
• Continued weakness in m&e investment, house completions below expectations, IP on-shoring
- lowering of I_m&e forecast
- lowering of I_b&c forecast
- raising of I_r&d forecast
• Labour market slightly stronger than expectations
- raising of employment forecast and CoE / capita
- lowering of unemployment rate forecast
Main changes to the forecasts vs spring in ‘deal’ scenario
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13 An Roinn Airgeadais | Department of Finance
Counterfactual ‘deal scenario’ vs SPU
3.9
0.10.6
0
5.8
17.6
5.9
0
2
4
6
8
10
12
14
16
18
20
SP
U 2
019 (G
DP
)
Pers
on
al c
onsum
ptio
n
Public
consum
ptio
n
Investm
ent
Sto
cks (c
on
tributio
n)
Exports
of g
oods a
nd s
erv
ice
s
Imports
of g
ood
s a
nd s
erv
ices
Budg
et 2
020 c
oun
terfa
ctu
al
dea
l (GD
P)
pp
ch
an
ge
44
2019 2020
3.3
-0.1
0.70
-0.3
-8.9
3.1
-20
-15
-10
-5
0
5
SP
U 2
019 (G
DP
)
Pers
on
al c
onsum
ptio
n
Public
consum
ptio
n
Investm
ent
Sto
cks (c
on
tributio
n)
Exports
of g
oods a
nd s
erv
ice
s
Imports
of g
ood
s a
nd s
erv
ices
Budg
et 2
020 c
oun
terfa
ctu
al d
ea
l (GD
P)
pp
ch
an
ge
27.9
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14 An Roinn Airgeadais | Department of Finance
Counterfactual deal projections – changes vs SPUyear-on-year per cent change 2018 2019 2020 2021 2022 2023
GDP 1.5 2.0 -0.2 0.0 0.0 0.0
GNP 0.6 1.3 -0.1 0.0 0.1 0.0
Nominal GDP 0.8 1.4 0.1 0.2 0.2 -0.2
Personal Consumption 0.5 0.1 -0.1 0.0 0.0 0.0
Govt Consumption -2.0 0.6 0.7 0.0 0.0 0.0
Investment -30.9 44.0 -27.9 0.0 0.0 0.0
Exports 1.5 5.8 -0.2 0.0 0.0 0.0
Imports -9.9 17.5 -8.9 0.0 0.0 0.0
HICP 0.0 0.0 -0.1 -0.2 -0.2 -0.3
GDP Deflator -0.7 -0.6 0.2 0.2 0.1 -0.1
Employment 0.0 0.1 -0.4 0.0 0.0 0.0
Unemployment (rate) 0.1 -0.2 -0.1 -0.2 -0.1 -0.1
contributions to growth (p.p)*
Final Domestic Demand -8.9 10.3 -8.8 -0.1 0.0 -0.2
Change in Stocks -1 0.0 0.0 0.0 0.0 0.0
Net Exports 11.1 -8.4 8.6 0.1 0.1 0.0
Modified Domestic Demand (excl stocks) -0.9 -0.5 -0.3 0.0 -0.1 -0.1
Modified Net Exports 2.1 2.5 0.0 0.0 0.1 0.1
15 An Roinn Airgeadais | Department of Finance
‘No deal’ scenario
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16 An Roinn Airgeadais | Department of Finance
Modelling approach
• Based on joint DoF-ESRI research
- medium-term focus
- judgement re. short-term impact
• Timing:
- original deadline = Q2 2019
- shock moved to Q4 2019
• FDI channel:
- assumed with a 2-year lag
• Public consumption ‘exogenised’
• Current set of forecasts calibrated s.t. :
- levels of output and employment in T+5 are in line with model output
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17 An Roinn Airgeadais | Department of Finance
Impact of Brexit on Ireland (change from baseline in levels) – real GDP
100
105
110
115
120
125
2018 2019 2020 2021 2022 2023 2024
no brexit
deal baseline
no deal
No deal = 3.8 per cent
below no Brexit
Counterfactual deal =
2 per cent lower
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2019 2020 2021 2022 2023 2024
No FDI
FDI
Net impact
2-year lag on FDI:
level would be 1¼
per cent lower
without FDI
Level of GDP, 2018=100 Difference to no brexit baseline, pp
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18 An Roinn Airgeadais | Department of Finance
Impact of no-deal Brexit in medium-term
100
105
110
115
120
125
2018 2019 2020 2021 2022 2023 2024
no brexitdeal baselineno deal
No deal = 3.8 per
cent below no Brexit
Counterfactual deal
= 2 per cent lower
100
102
104
106
108
110
112
114
2018 2019 2020 2021 2022 2023 2024
No Brexit
deal baseline
no deal
Employment 2.1 per
cent below ‘no
Brexit’ (c. 53,000)
Counterfactual deal
= 1 per cent below
Level of GDP, 2018=100 Level of employment, 2018=100
19 An Roinn Airgeadais | Department of Finance
Short-term developments and forecasts
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20 An Roinn Airgeadais | Department of Finance
Q3 2019 ‘now-cast’ estimates
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
20
17
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
18
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
19
Q1
20
19
Q2
20
19
Q3
DoF “nowcast”
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
20
17
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
18
Q1
20
18
Q2
20
18
Q3
20
18
Q4
20
19
Q1
20
19
Q2
20
19
Q3
DoF “nowcast”
Modified domestic demand, y/y per cent change Personal consumer spending, y/y per cent change
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21 An Roinn Airgeadais | Department of Finance
Consumption
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Aug-1
7
Sep-1
7
Oct-
17
Nov-1
7
Dec-1
7
Jan-1
8
Fe
b-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Aug-1
8
Sep-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan-1
9
Fe
b-1
9
Mar-
19
Apr-
19
May-1
9
Jun-1
9
Jul-19
Aug-1
9
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-1
8
Jan
-19
Mar
-19
May
-19
Jul-
19
year-on
-year % ch
angeye
ar o
n y
ear
% c
han
ge
Consumer Sentiment (3mma), rhs
Core' Retail Sales (3mma), lhs
Retail Sales vs Consumer Sentiment Cars licensed (6MMA)
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22 An Roinn Airgeadais | Department of Finance
Consumption model
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0
202
1
202
2
202
3
202
4
Consumption Fit
Consumption
Forecast Model
Forecast Actual
C = 0.01 + 0.5*disp_inc - 0.06*unemp - 0.1*ECM
R^2 = 0.58
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23 An Roinn Airgeadais | Department of Finance
Investment
-5
-3
-1
1
3
5
7
9
11
13
15
2018 2019 2020 2021 2022 2023 2024
Contributions to Investment
B&C
Core M&E
Aircraft
Intangibles
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24 An Roinn Airgeadais | Department of Finance
Credit for Investment still fairly subdued
-30
-20
-10
0
10
20
30
40
50
Dec-1
1
Mar-1
2
Jun-1
2
Sep-1
2
Dec-1
2
Mar-1
3
Jun-1
3
Sep-1
3
Dec-1
3
Mar-1
4
Jun-1
4
Sep-1
4
Dec-1
4
Mar-1
5
Jun-1
5
Sep-1
5
Dec-1
5
Mar-1
6
Jun-1
6
Sep-1
6
Dec-1
6
Mar-1
7
Jun-1
7
Sep-1
7
Dec-1
7
Mar-1
8
Jun-1
8
Sep-1
8
Dec-1
8
Mar-1
9
Jun-1
9
Total SME
Core SME
Gross new lending to SMEs, annual per cent change
Note: core = excluding property
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25 An Roinn Airgeadais | Department of Finance
Building and construction: new dwellings underperformed relative to earlier forecasts
0
50
100
150
200
250
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
(F)
20
20
(F)
20
21
(F)
20
22
(F)
20
23
(F)
20
24
(F)
Co
nst
ruct
ion
Em
plo
ymen
t (0
00
's)
Co
mp
leti
on
s
Completions (LHS)
Construction Employment (RHS)
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26 An Roinn Airgeadais | Department of Finance
Downward revisions to trading partner outlook…
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2017 2018 2019 2020 2021 2022 2023 2024
Budget 2020 SPU 2019
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27 An Roinn Airgeadais | Department of Finance
…but export portfolio = source of resilience
0
5
10
15
20
25
2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2
Goods exports
Services exports
-5%
0%
5%
10%
15%
20%
2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2
Computer services
Other services
Real export growth, y/y per cent change The importance of services, especially ICT
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28 An Roinn Airgeadais | Department of Finance
Export forecasts guided by model results
Exportst = β1Exportst-1 + β2Foreign Import Demandt + β3REERt + β42015 Dummy (+ β5ECt-1)
-4
-2
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Forecast range
Average forecast
Actual export growth
Disorderly Forecast
Real export growth, y/y per cent change
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29 An Roinn Airgeadais | Department of Finance
Trade channel: single most important in disorderly Brexit
Real export levels, 2018 = 100
100
105
110
115
120
125
130
135
2018 2019 2020 2021 2022 2023 2024
COSMO output Forecast Deal counterfactual
Exports 5½ pp
below no-Brexit
level in model
simulations
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30 An Roinn Airgeadais | Department of Finance
-20
-15
-10
-5
0
5
10
15
20
25
30
2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2
Goods imports
Services imports
Strong import growth even excluding IP on-shoring
89%
-43%
Real import growth, y/y per cent change
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31 An Roinn Airgeadais | Department of Finance
Import forecasts guided by model results
Avg R2 = 0.85
-6
-1
4
9
14
19
24
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Forecast range
Average forecast
Actual import growth
Disorderly forecast
Real import growth, y/y per cent change
Importst = β1Final Demandt (+ β22015 Dummy) (+ β3Importst-1) (+ β4ECt-1)
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32 An Roinn Airgeadais | Department of Finance
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2017 2018 2019 2020 2021 2022 2023 2024
Current account surplus to reduce post-Brexit impact
forecasts
Modified current account (CA*) = CA - Profits of firms that have re-domiciled to Ireland -
Depreciation on R&D service imports and trade in intellectual property assets - Depreciation
of aircraft owned by aircraft-leasing companies + Net aircraft imports from the aircraft leasing
sector + Net R&D related intellectual property imports + R&D service imports
-30
-20
-10
0
10
20
30
40
2017 2018 2019 2020 2021 2022 2023 2024
Trade Balance % GDP
Income Balance % GDP
Current Account % GDP
forecasts
Current account, per cent GDPModified current account, per cent GNI*
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33 An Roinn Airgeadais | Department of Finance
Current state of play in labour market
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2014 2015 2016 2017 2018 2019
un
em
plo
ym
en
t ra
te (
%)
em
plo
ym
en
t g
row
th, y-o
y (
%)
Employment Growth (lhs)
SA unemployment Rate (rhs)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Ad
min
& s
up
port
Tra
nsp
ort/s
tora
ge
Arts
/en
ts/re
cre
atio
n &
oth
er
ICT
Acco
mm
od
atio
n/fo
od
Co
nstru
ctio
n
Fin
/insu
ran
ce
/rea
l esta
te
To
tal e
co
no
my
Wh
ole
sa
le/re
tail
He
alth
& s
ocia
l wo
rk
Ind
ustry
(B to
E)
Ed
uca
tion
Pro
fessio
nal/s
cie
ntific
/tech
nic
al
Pu
blic
ad
min
/de
fen
ce
/co
mp
uls
ory
so
cia
l se
cu
rity
ye
ar-
on
-ye
ar
gro
wth
(p
er
ce
nt)
y-on-y growth, weekly earnings, Q2 2019 (4qma)
Body Level One
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Body Level Five
34 An Roinn Airgeadais | Department of Finance
Impacts in main labour market series: COSMO outputs
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
2018 2019 2020 2021 2022 2023 2024
deal baseline no deal
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2018 2019 2020 2021 2022 2023 2024
deal baseline no deal
Employment - per cent difference from no Brexit Unemployment rate – pp difference from no Brexit
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35 An Roinn Airgeadais | Department of Finance
Employment projections
2018 2019 2020 2021 2022 2023 2024
SPU 2.9 2.2 2.1 1.5 1.6 1.7
‘original’
fitted2.1 1.1 1.3 1.5 1.6 1.7
COSMO 2.3 1.0 1.0 1.6 1.7 1.7
Budget
forecasts 2.4 0.8 1.1 1.5 1.7 1.9
-12.0
-7.0
-2.0
3.0
8.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
an
nu
al ch
an
ge
Underlying Domestic Demand Employment Growth Fitted Employment Growth
∆𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡_𝑡 = −0.121+0.577( ∆ 𝑈𝐷𝐷) +0.137(∆𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡_(𝑡−1))
Body Level One
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Body Level Four
Body Level Five
36 An Roinn Airgeadais | Department of Finance
Labour force growth
2018 2019 2020 2021 2022 2023 2024
SPU 1.7 1.9 1.9 1.5 1.5 1.6
COSMO 1.7 1.4 1.4 1.5 1.5 1.6
Budget
forecasts1.7 1.4 1.3 1.4 1.5 1.6
-30
-20
-10
0
10
20
30
40
50
60
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017 2018 2019
pe
rso
ns (
00
0s)
Demographic change Participation change Annual change in labour force
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37 An Roinn Airgeadais | Department of Finance
Unemployment rate
2018 2019 2020 2021 2022 2023 2024
SPU 5.7 5.4 5.2 5.3 5.2 5.1
‘original’
fitted5.7 5.4 5.6 5.7 5.7 5.7 5.6
COSMO 5.2 5.5 5.9 5.8 5.7 5.6
Budget
forecasts 5.2 5.7 5.9 5.9 5.7 5.5
-12.0
-8.0
-4.0
0.0
4.0
8.0
12.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
an
nu
al ch
an
ge
Underlying Domestic Demand (inverse change) Actual change in UR Fitted change in UR
∆𝑈𝑅=0.585 −0.229(∆ 𝑈𝐷𝐷) + 0.222(∆ 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒_(𝑡−1))
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38 An Roinn Airgeadais | Department of Finance
Wage outlook
2018 2019 2020 2021 2022 2023 2024
SPU 2.5 3.0 3.2 3.3 3.4 3.6
‘original’
fitted3.2 3.6 3.6 3.7 4.0 4.2 4.4
COSMO 3.5 3.3 3.7 4.2 4.4 4.3
Budget
forecasts 3.5 3.0 3.2 3.4 3.7 3.9
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
an
nu
al g
row
th (
%)
COE per head outturns fitted values
∆𝐶𝑂𝐸 𝑝𝑒𝑟 ℎ𝑒𝑎𝑑_𝑡 = 4.891 −0.373(𝑈𝑅)+0.727(Δ𝐻𝐼𝐶𝑃)
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39 An Roinn Airgeadais | Department of Finance
Consumer prices: drag from goods prices, while service prices grow strongly…
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2017 2018 2019
NEIG Unprocessed Processed Rents Energy Core Services All-items HICP Core
Average 2018 = 0.7% Average 2019 = 0.9%Average 2017 = 0.3%
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40 An Roinn Airgeadais | Department of Finance
Inflation response to disorderly Brexit…
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2019 2020 2021 2022 2023 2024
Deal - HICP
Disorderly - HICP
HICP rate of inflation, y/y per cent change
Consumer Prices 0.1 p.p. higher than counterfactual
in 2020
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41 An Roinn Airgeadais | Department of Finance
Changes from counterfactual deal scenario to no-deal
20192020
5.9
-0.1
0
-0.5
0.0
-0.8 -0.8
5.5
-2
-1
0
1
2
3
4
5
6
7
Budg
et 2
020 c
oun
terfa
ctu
al d
ea
l (GD
P)
Pers
on
al c
onsum
ptio
n
Public
consum
ptio
n
Investm
ent
Sto
cks (c
on
tributio
n)
Exports
of g
oods a
nd s
erv
ice
s
Imports
of g
ood
s a
nd s
erv
ices
Budg
et 2
020 N
o D
ea
l (GD
P)
pp c
hange
3.1
-1.0
0.1
-1.6
0
-3.3
-2.6
0.7
-4
-3
-2
-1
0
1
2
3
4
Budg
et 2
020 c
oun
terfa
ctu
al d
ea
l (GD
P)
Pers
on
al c
onsum
ptio
n
Public
consum
ptio
n
Investm
ent
Sto
cks (c
on
tributio
n)
Exports
of g
oods a
nd s
erv
ice
s
Imports
of g
ood
s a
nd s
erv
ices
Budg
et 2
020 N
o D
ea
l (GD
P)
pp c
hange
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42 An Roinn Airgeadais | Department of Finance
Key variables: forecast under disorderly Brexit
year-on-year % change 2019 2020 2021 2022 2023 2024
GDP 5.5 0.7 2.5 2.8 2.7 2.6
GNP 4.3 -0.1 2.4 2.5 2.4 2.3
Nominal GDP 5.9 2.4 3.9 4.3 4.1 4.1
Personal Consumption 2.7 1.4 1.9 2.1 2.3 2.4
Govt Consumption 4.5 3.5 2.0 2.0 2.0 2.0
Investment 50.4 -24.0 -3.6 3.9 3.9 3.9
Exports 10.2 0.9 4.2 4.1 4.0 3.9
Imports 22.6 -6.5 2.9 4.4 4.6 4.5
HICP 0.9 1.1 1.4 1.8 2.0 2.1
GDP Deflator 0.4 1.6 1.4 1.4 1.4 1.4
Employment 2.4 0.8 1.1 1.5 1.7 1.9
Unemployment (rate) 5.2 5.7 5.9 5.9 5.7 5.5
contributions to growth (p.p)*
Final Domestic Demand 13.2 -7.2 -0.1 1.8 1.9 2.0
Change in Stocks -0.1 0.0 0.0 0.0 0.0 0.0
Net Exports -7.6 7.9 2.5 1.0 0.8 0.7
Modified Domestic Demand (exc. stocks) 1.7 0.8 1.3 1.4 1.5 1.5
Modified Net Exports 3.8 -0.1 1.2 1.4 1.2 1.1
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43 An Roinn Airgeadais | Department of Finance
Contributions to change in GDP
-2
0
2
4
6
8
10
2018 2019 2020 2021 2022 2023 2024
MNX
Stocks and Statistical Discrepancy
MDD
GDP
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44 An Roinn Airgeadais | Department of Finance
-1.3
0.6
4.0
5.1 5.2
3.3
4.1
2.1 2.1
2.7 3.0 3.1
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Co
ntr
ibu
tio
n to
y-o
-y g
row
th
labour
capital income
Income and wealth taxesincluding Transfer income
PCD
real disposable income
Household income
Change in real personal disposable income
Body Level One
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45 An Roinn Airgeadais | Department of Finance
Higher savings ratio driven by Brexit uncertainty
0
2
4
6
8
10
12
14
16
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
NIE savings rate
LR average
HH Savings Rate
46 An Roinn Airgeadais | Department of Finance
Risk matrix – firmly tilted to the downside
Downside Upside
Brexit outcome worse than model projection Sectoral strength (ICT, Pharma etc.)
Continued weakness in world demand Brexit – UK exit with a deal
Trade tensions spill over to the EU
Repricing of risk
Oil price – supply shock persists
47 An Roinn Airgeadais | Department of Finance
Supply side
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48 An Roinn Airgeadais | Department of Finance
Brexit impact on potential output?
Supply-side variable Channel Impact on potential output growth
Labour input Migration - / +
Employment rate ?
Participation rate ?
Capital input Domestic and Foreign Investment - / +
Total Factor Productivity Competition -
Learning by export/import -
Economies of Scale -
R&D investment -
Creative destruction - Short term/+ long term
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49 An Roinn Airgeadais | Department of Finance
• Two estimates produced based on GDP and Domestic GVA
• GDP based models‒ Extended HP with private sector credit growth, employment in construction, core inflation
‒ Extended HP with unemployment rate and net migration
• Domestic GVA based models‒ Univariate KF: Trend; random walk with drift, cycle; AR(2)
‒ Multivariate KF: Univariate Model + Unemployment
‒ Multivariate KF: Univariate Model + Construction employment share
‒ Multivariate KF: Univariate Model + Private sector credit growth
‒ Multivariate KF: Univariate Model + House prices
• Output gap estimates taken as mid point of estimates
Department’s preferred approach
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50 An Roinn Airgeadais | Department of Finance
Explanatory variables and forecast assumptions
• Forecast for 2019 – 2024 taken from demand side- Share of construction in total employment
- Core inflation
- Unemployment rate
- Net migration as share of labour force
- Private sector credit growth: assumed (technical) to return to long-run growth rate by 2024
• Account for end-point bias- extend forecasts to 2027 using ARIMA methodology
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51 An Roinn Airgeadais | Department of Finance
Alternative output gap measure: GDP, Extended HP Average of K and L model estimates
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Output Gap Capital Model
Output Gap Labour Model
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Alternative approaches to assessing the cyclical position
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52 An Roinn Airgeadais | Department of Finance
Alternative output gap measures : Domestic GVA, Kalman filters
Midpoint of range
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
cons_emp house prices u.e. pscg univariate
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53 An Roinn Airgeadais | Department of Finance
No technical changes since SPU 2019
NAWRU
• HP Filter with lambda equal to 10 still used instead of bivariate Kalman Filter
TFP model
• Dummy situation for 2018 still undecided by COM – dummy included in Budget 2020 forecast
Filters run to 2021 in line with the Commission’s approach
Application of harmonised methodology
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54 An Roinn Airgeadais | Department of Finance
2018 2019 2020 2021 2022 2023 2024
Potential output growth 7.42 4.94 3.15 2.63 2.32 2.40 2.46
contribution from:
Labour 2.36 1.91 1.33 0.88 0.50 0.50 0.47
Capital -0.13 1.29 0.17 0.05 0.10 0.15 0.22
TFP 5.08 1.65 1.62 1.69 1.71 1.74 1.76
Real GDP 281.7 297.1 299.3 306.7 313.6 321.0 328.7
Real Potential Output 275.6 289.2 298.3 306.2 313.3 320.8 328.7
Output Gap 2.22 2.73 0.33 0.17 0.11 0.06 0.00
Budget 2020 harmonised methodology
Note: NAWRU or trend unemployment rate based on HP filter with lambda equal to 10 to 2021 with mechanical extension thereafter. Trend TFP
estimated using Bayesian bivariate Kalman filter based on actual TFP including specification of dummy with new CUBS inputs adjusted for 2015
distortion in value added.
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55 An Roinn Airgeadais | Department of Finance
Plausibility of Output Gap Paths
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Harmonised methodology
GDP based models
56 An Roinn Airgeadais | Department of Finance
Disclaimerand other information:
The cut-off date for these projections wasmid-September 2019.
Exchangerates arebased on the purely assumption that the level remains unchanged at that prevailingat the cut-off date
Outturn data are sourced from a variety of sources including the Department of Finance, Central Statistics Office, European Commission (AMECO and
Eurostat),CentralBank of Ireland, OECD, IMF and policyuncertainty.com.
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