global economic developments...1/17 2/17 8 /18 /18 8 /18 /18 /18 8 /18 /18 8 /18 /18 /18 0/18 1/18...

Global economic developments- implications for Irish economy

John McCarthy

Chief Economist, Department of Finance

Presentation to IDA Executive Committee

25th February 2019

2 An Roinn Airgeadais | Department of Finance

Birds-eye view

• Global economy: headwinds picking up- high frequency data have disappointed

- factors at work: mature phase of cycle?

: structural?

- longer term issues: de-globalisation / re-shoring

: slowing “trend growth” in advanced economies

• All eyes on Brexit- transmission channels

- quantifying the impact

• Short-term outlook for the Irish economy

• Horizon scanning: medium- and longer-term challenges

• Conclusion


Global economy: headwinds picking up


Increased risk aversion : trade tensions, concerns re. Chinese economy, EMEs

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100 =

“neutr

al”

Goldman Sachs US Financial Conditions Index

tighter financial conditions

looser financial conditions


Possible spill-overs from slowdown in China – direct exposure limited

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250

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per

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of G

DP

private (=household and corporate) debt

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year-

on-y

ear

per

cent

change

China: GDP growth [4qma]

higher leverage post-2010

weighing on I, C


Trade-tensions: de-globalisation and re-shoring?

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World trade intensity= ([X + M] / Y) per cent

wave of globalisation

After modest pick-up in

2017, slowdown in 2018Δ_(2007-1986) = 3½%

Δ_(2018-2011) = 1¼%

EU single market


Yield curve “near-inversion” in the US

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perc

enta

ge p

oin

ts

US recessions

10Yr-2Yr Yield Spread

no “type I” errors

avg. lead-in = c. 5 quarters


Some concerns re. euro area architecture have re-surfaced

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per

cent

Cost of borrowing 10-year money for Italian sovereign

r - g < 0 ?


Scope for macroeconomic policy (fiscal, monetary) to respond?

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US

D B

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ns

Central bank balance sheets have expanded

ECB

Bank of Japan

US Federal Reserve

Bank of England

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per

cent

of G

DP

Public debt has risen sharply since crisis, limiting fiscal capacity

UK

US

Euro Area

c.1/5th of sovereign

debt owned by NCBs


All eyes on Brexit


UK business slamming on the brakes

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per

cent

change

investment and output, y/y growth in the UK economy

investment

uncertainty

firms postponing investment

GDP


€ / stg£ bilateral exchange rate = key transmission channel

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stg

£ p

er

€

UK referendum vote

Theresa May PM

Art. 50 legal challenge

Art. 50 triggered

Next round of talks begin & position papers published

Negotiations beginUK general election

EU endorses “withdrawal agreement”

White Paper on Future EU-UK relations published

UK publishes no-deal

planning papers

“meaningful vote”


Export channel but also the import channel

-5.0% -3.0% -1.0% 1.0% 3.0% 5.0%

Food and live animals

Beverages and tobacco

Crude materials, except fuels

Mineral fuels, lubricants

veg oils, fats and waxes

Chemicals

goods classified by material

Machinery and transport

misc

Commodities nec

External trade balance by sector, per cent of GDP [average 2015-2018]

UK EU 27 (excl UK) Extra-EU

Deficit Surplus

off scale


Other transmission channels

• exports trade costs- tariff barriers

: WTO in ‘disorderly’ exit

- non-tariff barriers: rules-of-origin / certification / labelling / etc.

• consumption import prices- imposition of tariffs on imports

- supply chain disruption

: c. ¼ of imported goods sourced from UK = consumer and intermediate goods

- partly offset by ER effects

- precautionary saving

• investment- uncertainty

- input prices

- cost of capital

- offset by FDI inflows


Short-term outlook for the Irish economy


Exports continue to lead the way, less-so in labour-intensive sectors

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

€m

illio

n

increase in exports (nominal): 2012-present

exports: 2012q1 pharma exports "under contract"other_goods computer services aircraft leasing royalties other services exports: 2018q3

level of exports has doubled since low-point


Investment in IP and aircraft continue to boost capital stock

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

200

0

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2

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9

201

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1

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201

5

201

6

201

7

€m

illio

ns

dwellings, exc land

other buildings, including roads

m&e inc office machinery and hardware

cultivated assets

computer software

other

total

includes IP assets and aircraft

owned by leasing companies


Growth continues to pay dividends in the labour market

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

‘000s

increase in total employment (4qma) from low point of crisis

employment: 2012q2 employment: 2018q4agriculture manufacturing construction private services public sector


Rising incomes and fading deleveraging supporting consumption

-300

-100

100

300

500

700

900

20

02

Q1

20

02

Q3

20

03

Q1

20

03

Q3

20

04

Q1

20

04

Q3

20

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12

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Q1

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Q1

20

17

Q3

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18

Q1

20

18

Q3

€b

illio

ns

household net worth

financial

housing

liabilities

net worth

increase in household net worth

of €340 bn. since low-point


Forecasting in a highly uncertain environment

85

90

95

100

105

110

115

120

125

2016

2017

2018

2019

2020

2021

2022

2023

2018 =

100

Illustrative path for GDP under different Brexit scenarios

no exit

smooth exit

hard exit

“Best” case under ‘hard’ exit =

c. 6 pp lower than under no exit

2018 2019 2020

GDP 7.5 4.2 3.6

BoP (% GDP) 12.0 11.7 11.5

Inflation 0.7 1.5 1.7

Employment (% change) 3.0 2.8 2.2

Unemployment (%) 5.8 5.2 5.0

GGB (% GDP) -0.1 0.0 0.3

GG debt (% GNI*) 105.2 101.0 93.1

range of outcomes = wide


Horizon scanning: medium- and longer-term challenges


Ageing: supply-side constraints increasingly binding

-1

0

1

2

3

4

5

6

2000-2

01

0

2011-2

02

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03

0

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05

0

2051-2

06

0

2061-2

07

0

annual avera

ge g

row

th r

ate

, per

cent

Employment

Hours worked

TFP

Capital deepening

Potential GDP

marked slowdown in potential

growth in next decade


Age-related public expenditure set to increase, esp. pensions

0

5

10

15

20

25

30

35

2016

2020

2030

2040

2050

2060

2070

pe

r ce

nt o

f G

NI*

Pension Expenditure

Health Care Expenditure

Long-term Care Expenditure

Education Expenditure

Unemployment Benefit Expenditure

Total Age Related Expenditure

∆_2050/2020 = c. 7 pp of GNI*


Importance of productivity – need for greater diffusion

∆_2050/2020 = c. 7 pp of GNI*

50

100

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450

20

00

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20

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20

16

2000 =

100

labour productivity levels by ownership

trend productivity growth rates vastly different

(even allowing for distortion in 2015)


Conclusion


Main take-aways

• Global economy- momentum has softened

- maturing cycle

• Secular forces may also be at play

- “peak globalisation”???

• Brexit casts a long shadow

• Need to look beyond the short-term


Disclaimerand other information:

The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the Department of Finance, the Minister

for Finance or the Government of Ireland.

Outturn data are sourced from a variety of sources including the Department of Finance, Central Statistics Office, European Commission (AMECO) and

CentralBank of Ireland.

For the latest publication’s followthe Departmentof Financeon socialmedia:

@IRLDeptFinance Department of Finance Ireland

https://twitter.com/IRLDeptFinance https://www.linkedin.com/company/department-of-finance-ireland/

https://twitter.com/IRLDeptFinance

https://www.linkedin.com/company/department-of-finance-ireland/

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