but cyclical risks ahead 2018 sees lower unemployment, modest wage - PowerPoint PPT Presentation

Ireland: Still growing fast but cyclical risks ahead 2018 sees lower unemployment, modest wage increases and another primary surplus October 2018

Index Page 3: Summary Page 8: Macro Page 24: Fiscal & NTMA funding Page 43: Brexit Page 49: Long-term fundamentals Page 61: Property Page 68: Other Data Page 80: Annex (GDP distortions explainer) 2

Summary Growth continues and debt dynamics improving debt sustainability

Macro picture is positive: Averaging five per cent growth in 2014-17; little sign of inflation Inflation still low – partly True growth healthy, Dramatic drop in but slowing? unemployment rate thanks to Brexit 30% 18 4 25% 16 16.0 3 20% 14 2 15% 12 1 10% 10 0 5% 8 -1 0% 6 -5% -2 5.4 -10% 4 -3 -15% 2 -4 1996 1999 2002 2005 2008 2011 2014 2017 2009 2011 2013 2015 2017 0 GDP Underlying* HICP Ireland HICP Euro Area 1999 2002 2005 2008 20112014 2017 * Underlying series is modified final domestic demand 4

A hat-trick of primary surplus, improving debt dynamics and reduced financing needs Five years of primary Ireland is improving its debt NTMA has reduced near- surplus ( € bn) term issuance needs ( € bns) dynamics by the month 10 30 Debt-to-GNI* 25 5 (105% 2018f, from 166%) 20 0 15 -5 Debt-to-GG Revenue (255% 2018f, from 353%) 10 -10 5 -15 Average interest rate 0 2018 2019 2020 2021 -20 (2.6% 2018f, from 5.1%) Recent Reductions -25 1995 1998 2001 2004 2007 2010 2013 2016 2019f Debt Prefunded in Cash Debt-to-GDP^ Debt (64% 2018f, from 120%) GG Balance Primary Balance End 2013 Debt Profile ^ due to GDP distortions, Debt to GDP is not representative for Ireland, we suggest using other 5 measures listed.

Main risks are external and outside Ireland’s control Late Cycle US Brexit Irela eland is is la later r tha than the the Eur Euro Ireland is still a “high beta” bet “Hard” Brexit could impact Irish Area (EA) in in its its ec economic cy cycl cle on on the the US S ec economy, Growth by y 4%-7% over r a a 4-5 5 thanks tha s to o its its clo close se tie ties s to o US in n par parti ticular r its its ICT sec ector yea ear r peri period Sl Slowdown in invari riably fol ollows s Impact t of of US S Corp Corporate Tax when Ce Centr tral Ba Banks s mak ake reform rm mon oney de dearer and and mor ore scarce 6

Funding environment still favourable for Ireland in 2018 - € 16.5bn issued already at long maturity Green € 16.5bn € 13bn Cash € 3bn bn rai aise sed thr through the the fun unding com ompleted with ithin Over er € 13bn bn exp xpected yea ear end end syndicated sale of Ireland’s first guided ran gui ange of of € 14 14-18bn cas ash bal balance. Irel eland Sovereign Gree So een bon bond. . pr prefu funded he heading in into mor ore Yiel ield of of 1.39 .399% on on 2031 bo bond Average maturi rity 12 yea ears vol olatile tim times Interest t rate of of 1.1% .1% Auc ucti tion in in No November 7

Section 1: Macro Ignore GDP/GNP. Other metrics show Ireland is growing and closer to full employment

Labour market shows growth story most clearly – 390,000 net new jobs in last six years Unemployment rate: 5.4% Total employment back above previous peak in September 2018 as 100K non-construction jobs added on net 18 200 Thousands 2.2m people 16 100 employed 14 0 12 -100 10 -200 8 -300 6 -400 4 2008 2010 2012 2014 2016 2018 Unemployment approaches 2002- 2 Non-Construction Employment 06 average Construction Employment 0 Total Employment vs 2008 peak 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: CSO 9

Employment growth driven by high skill job creation; Full- time employment expanded by over 4% in H1 2018 Employment growth has been driven by high Substantial full-time employment growth skilled jobs in recent years 6.0% 10% 4.0% 5% 2.0% 0.0% 0% -2.0% -5% -4.0% -6.0% New labour -10% survey method -8.0% caused unusual reading -10.0% -15% 2008 2010 2012 2014 2016 2018 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 High Skill Other Employment Growth Full-time Emp (Y-o-Y) Employment (Y-o-Y) Source: Eurostat; CSO 10 High Skill jobs include the ISCO08 defined groupings Managers, Professionals, Technicians and associate professionals

Labour participation has not yet recovered – young reaching labour force later Participation rate hovering around 62% Part. rate down as construction jobs lost and younger people stay in education longer 68% 100 90 67% 80 66% 70 65% 60 64% 50 63% 40 62% 30 61% 20 60% 10 Rate inflated pre-crisis by 59% 0 migrant construction workers 15-19 20-24 25-34 35-44 45-54 55-59 60-64 65+ 58% 2007Q3 Peak 2018Q2 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: CSO 11

Wages growth evident in 2018 but growth uneven across sectors … however disparities remain across Wage growth a driver for increase in compensation of employees… sectors regarding wage growth 8% 6.0% 65 60 5.0% 6% 55 50 4.0% 4% 45 3.0% 40 2% 35 2.0% 30 0% 25 1.0% -2% 20 0.0% 15 -4% IT Prof, science & technical Fin, Insurance & RE Education Accom & Food Total Economy Industry Construction Admin & Support Wholesale/Retail Health Arts & Rec Public admin Transport/Storage -6% -8% -10% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Hours worked Hourly wage Employment COE growth (y-o-y) 4Q average hourly earnings y-o-y 2018 Q2 average annual earnings ( € 000, RHS) Source: CSO 12

Ireland’s labour market is edging closer to full employment - US and UK likely already there Unemployment (%) close to lows in Ireland’s Unemployment rates (%) falling across Europe; falling faster here main trading partners 2012 2016 2017 18Q2 10 Ge Germany 5.4 4.2 3.8 3.4 9 Neth Netherlands 5.8 6.0 4.9 3.9 8 Aus ustria ia 4.9 6.0 5.5 4.7 7 Luxembourg Lux 5.1 6.3 5.6 5.2 6 Slov lovenia ia 8.9 8.0 6.6 5.6 5 Ireland nd 15 15.5 8. 8.4 6. 6.7 5. 5.9 4 Belg lgiu ium 7.6 7.9 7.1 6.0 3 Sweden Sw 8.0 6.9 6.7 6.2 2 EU 28 EU 28 10.5 8.6 7.6 6.9 1 Por ortugal 15.8 11.2 9.0 7.0 0 Eur Euro Area 11.4 10.0 9.1 8.3 US UK Ireland Euro Area France 9.8 10.1 9.4 9.1 Current U rate U Rate (20 yr average) Ital aly 10.7 11.7 11.3 10.8 Lowest U Rate in 20 yrs Spain pain 24.8 19.6 17.2 15.4 13 Source: Eurostat, 15-74 age basis; DataStream 20 year average = 1998 Q3 to 2018 Q2

External environment less helpful for Ireland 2015 2016 2017 2018/19 Less EA Monetary Policy Accommodative Accommodative Accommodative accommodative Accommodative Further tightening: US Monetary Policy Accommodative Accommodative but tightening curve inversion? Stimulative in 2018; US growth Stimulative Less stimulative Stimulative fiscal drag in 2019 Oil price Falling Falling Rising Rising Less favourable; UK growth Stimulative Growth slowing Brexit crunch Brexit impact Euro currency Very Helpful Helpful Headwind Neutral 14

GDP distortions mean we need to look to other metrics; Irish recovery evident when looking at GNI* GNI* was € 181bn in 2017; 9.4% higher than GNI* growth rate averaged 7.5% 2013-2017 in 2007 (current prices) (current prices) 300 40% GNI* is 62% of GDP 250 30% 200 20% 150 10% 100 0% 50 -10% 0 -20% 1995 1999 2003 2007 2011 2015 1996 2000 2004 2008 2012 2016 GDP GNI* GDP Growth GNI* Growth Source: CSO 15 Note: See annex for discussion on the GDP distortions from 2015 onwards

Modified Domestic Demand (MDD) – a reflection of the home economy - is best cyclical indicator Ireland’s PMIs are expanding but down from MDD still growing strongly in 2018 heights of 2016 70 20% 15% 65 10% 60 5% 0% 55 -5% 50 -10% -15% 45 -20% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 40 2010 2011 2012 2013 2014 2015 2016 2017 2018 Modified Dom. Demand (Real) Services Manufacturing Composite Modified Dom. Demand (Nominal) Source: CSO; Markit, Bloomberg, Investec Note MDD measure used here private consumption, government consumption, building investment, 16 elements of machinery & equipment investment, elements of intangible asset investment, value of physical changes in stock. See annex for more detail.

Oil price collapse helped supercharge the economy in 2015; but steady recovery of Brent is a headwind Oil price shock boosted GDP by close to Ireland is a price taker for energy - 0.6% of 1.5% in 2015 GNI* cost increase in last 24 months 1.2 100 8 90 Greece 7 Impact on CPI of 50% rise in oil prices* 1 80 6 70 0.8 5 Germany 60 Spain 0.6 50 4 Euro area 40 3 0.4 Italy 30 2 Ireland 20 significant drop in 0.2 Portugal France import cost in 2015/16 1 10 reversing in 2017/18 0 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -0.2 -1.5 -1 -0.5 0 0.5 Brent Oil € /Barrel Impact on GDP of 50% rise in oil prices* Mineral Fuels Imports (12m rolling, € bns) Source: CEPR: Oil and the Euro Area Economy *impact over 1 year. Oil price shock in 2015 was c.50% implies 1 year impact close to 1.5%. 17 Source: DataStream, CSO