Growth

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
• Services the star
performer during
the recession
• [Sustainability?]
• Goods in 2014 …
lots going on –
difficult to know
long-term
implications of
H1 2014 trends
Annual percentage change
Export composition
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
2000
2012
2000
World Ireland World Ireland
euro area
UK
Goods
80.9
82.1
80.5
50.2
80.8 78.0
Pharmaceuticals
1.4
5.3
2.2
13.5
1.8 1.6
Office machinery and electrical
12.1
26.9
7.3
3.2
9.7 13.5
Other
67.5
49.9
71.0
33.4
69.3 62.8
Services
Computer and information
Insurance and other financial
Other
Source: World Trade Organsisation Statistics Database
19.1
0.6
0.0
18.5
17.9
5.8
0.0
12.0
19.5
1.2
1.8
16.5
49.8
19.7
8.8
21.3
Imports
US
85.4
1.0
14.3
70.2
2012
euro area
UK US
79.0 78.3 84.1
3.6 3.4 2.4
5.8 6.9 10.9
69.6 68.0 70.8
19.2 22.0 14.6
0.5 0.3 0.4
0.9 1.2 1.5
17.7 20.6 12.7
21.0 21.7 15.9
0.9 0.8 0.9
1.5 1.9 2.5
18.6 19.0 12.5
Domestic demand - investment
• Take a long-run
view
• Abstract from SR
variation
Figure 1. Business Investment to GDP Ratio
8
7
6
8
Private machinery &
equipment
7
6
5
5
• … & planes
4
4
• Long investment
cycles with
large up/downswings
3
3
2
2
1
Private building and
construction
0
1
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Investment – dwellings (B&C)
•
1997-2007 = 45% total B&C investment
•
2012-2013 = 16%
House completitions
100,000
100,000
90,000
90,000
10
80,000
80,000
5
70,000
70,000
0
60,000
60,000
-5
50,000
50,000
-10
40,000
40,000
30,000
30,000
20,000
20,000
10,000
10,000
See Bulletin 3, 2014.
Population growth as the main driver
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
-
1996
-
Contributions to Investment Growth
15
15
10
5
0
-5
-10
-15
-15
-20
-20
-25
-30
-25
2007
2008
2009
Building & Construction
Aircraft
2010
2011
2012
2013
2014f 2015f
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.
Volume of Retail Sales
15
% Change Year-on-Year 3 Month Moving Average
10
5
0
-5
-10
-15
-20
-25
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)
Labour market
–
•
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
–
•
Full-time employment growing; parttime now falling (y-on-y)
Not surprising given characteristics of
employment collapse post 2007.
Migration moderating
–
–
–
out migration slowing, in migration
picking up
Immigrants now very likely to have 3rd
level qualifications
Emigrants increasingly likely to be
employed before departure.
y-on-y growth rate, per cent
Strong employment growth in 2013
giving way to more gradual expansion
over forecast horizon.
15
10
5
0
-5
-10
-15
-20
-25
Unemployment rate, per cent
•
20
Labour force
Employment
Part time
Potential labour force
16
14
12
10
8
6
4
2
0
Long-term
Short-term
Full time
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 labour force
150
60.0
100
40.0
20.0
50
'000s
'000s
Annual change in Q2 active age population
0
0.0
-20.0
-50
-40.0
-100
2008
2009
2010
2011
2012
2013
2014
-60.0
2008
Natural increase
Immigration
Emigration
Active age population
2009
Demographic effect
2010
2011
2012
Participation effect
2013
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
2014
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
15
15
•
10
Credit boom –
growth all about
capital (property)
and labour quantity 5
(cons, services,
domestic demand)
10
With hindsight (and
foresight, of some)
… clearly
unsustainable
0
•
‘Tech growth in
2000s largely
benefitted
consumers as
opposed to
producers’
0
-5
Labour quantity
NonICT capital
Productivity
Labour composition
ICT capital
GDP growth
-10
-5
-10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
•
5
• 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…
Age dependency ratios are (relatively) strong over the medium term
80
80
EU (28 countries)
70
60
Belgium
Portugal
Germany
70
60
France
50
40
Italy
Portugal
Ireland
50
40
30
30
20
20
10
10
0
0
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
•
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