but risks on horizon Last year saw first budget surplus since 2007 - PowerPoint PPT Presentation

Ireland: Growth momentum but risks on horizon Last year saw first budget surplus since 2007 May 2019

Index Page 3: Summary Page 8: Macro Page 22: Fiscal & NTMA funding Page 40: Brexit Page 46: Long-term fundamentals Page 59: Property Page 68: Other Data Page 78: Annex (GDP distortions explainer) 2

Summary Labour market getting tighter as debt sustainability improves

Domestic economy growing: averaging 4.5 per cent in 2014-18 Dramatic drop in Employment (000s) well True growth healthy unemployment rate above 2008 peak 18.0 30% 200 25% 16.0 16.0 100 20% 14.0 0 15% 12.0 10% -100 10.0 5% -200 8.0 0% -300 -5% 6.0 5.4 -400 -10% 4.0 2008 2011 2014 2017 -15% 2.0 Non-Construction Employment Construction Employment 0.0 GDP Underlying* Total Employment vs 2008 peak 2000 2004 2008 2012 2016 * Underlying series is modified final domestic demand (excludes inventories) 4

Primary surplus, improving debt dynamics and cash balances provide protection Five years of primary Ireland is improving its debt Cash-balance provides surplus ( € bn) near-term protection ( € bn) dynamics by the month 10 20 € Billions 18 Debt-to-GNI* Gap year 5 16 (105% 2018f, from 166%) helpful 14 0 12 -5 Debt-to-GG Revenue 10 (255% 2018f, from 353%) 8 -10 6 4 -15 Average interest rate 2 -20 (2.6% 2018f, from 5.1%) 0 2019 2020 2021 2022 2023 -25 1995 1998 2001 2004 2007 2010 2013 2016 2019f Debt Prefunded Debt-to-GDP^ Expected Remaining 2019 issuance (64% 2018f, from 120%) GG Balance Primary Balance 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 Growth US Brexit Eur Euro Area and and UK K ha have slo lowed: Ireland is still a “high beta” bet “Hard” Brexit could reduce Irish the these se acc account for or hal half f of of on on the the US S ec economy, gr growth by y 4-6 % % poi points ts Ireland’s exports in n par parti ticular r its its ICT sec ector cumulati cum tively y over r tw two yea ears Easier monetary policy: “lower US S is is in in the the la late stag age of of its its Em Empl ployment migh ight t be be up up to o for or lon longer ” is good news for ec economic cy cycl cle , whi , which rai aise ses s 3.5% .5% le less ss tha than in in a a be benign Irela eland, gi given hi higher deb debt qu questions s for or Irela eland sce cenari rio acc according to o Do DoF/ESRI 6

€ 5.5bn issued in 2019 so far; well positioned given prefunding and maturity lengthening 10 years A+/A2/A+ Pre-funded Curr Current t cash ash bal balances s ea easi sily One ne of of the the lon longest t weig eighted Rati tings s from mai ain ag agencies cover r 2019 2019 red edempti tions average maturi riti ties in in Eur Europe Ireland’s debt sustainability is The he rem emainder r of of € 14 14-18bn in in NTM NTMA has has us used QE QE per period to o im improving, g, whi hich sug uggests ts tha that t exp xpected fun unding in in 2019 to o lengthen maturi le riti ties, s, lo lower r rati tings s may ris rise to o dou double-A A fun und 2020 rede edempti tions interest in t cos osts ts an and rep epay its its IMF terri erritory furt urther r barr barring sho hocks debt ea deb earl rly 7

Section 1: Macro Best measures - labour market and GNI* - show Ireland’s economy is in rude health

Labour market best illustrates Ireland’s growth story – 115K non-construction jobs added on net vs. 2008 peak Unemployment rate: down to 5.4% Total employment back above previous peak in April 2019 from peak of 16% as 115K non-construction jobs added on net 18.0 200 Thousands 2.3m people 16.0 100 employed 14.0 0 12.0 -100 10.0 -200 8.0 -300 6.0 -400 4.0 2008 2010 2012 2014 2016 2018 Unemployment above 2002-06 2.0 Non-Construction Employment average Construction Employment 0.0 Total Employment vs 2008 peak 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: CSO 9

High-skill and full-time employment were both expanding strongly for a long period, before recent deceleration High-skill employment has grown sharply Substantial rise in full-time employment 6.0% 10% 4.0% 5% 2.0% 0.0% 0% -2.0% -5% -4.0% -6.0% -10% -8.0% -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 fully 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% 2007Q4 2018Q4 1998 2001 2004 2007 2010 2013 2016 Source: CSO 11

Wages growth evident in 2018 but uneven across sectors … but disparities remain across sectors Wage growth a driver for increase in compensation of employees… 10% 8.0% 65 60 7.0% 8% 55 6.0% 6% 50 5.0% 45 4% 4.0% 40 2% 35 3.0% 0% 30 2.0% 25 -2% 1.0% 20 -4% 0.0% 15 -6% IT Transport/Storage Construction Fin, Insurance & RE Education Admin & Support Accom & Food Total Arts & Rec Prof, science & tech Wholesale/Retail Industry Health Public admin -8% -10% 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Hours worked Hourly wage Employment Other Compensation 4Q average hourly earnings y-o-y COE growth (y-o-y) 2018 average annual earnings ( € 000, RHS) Source: CSO 12

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) 350 40% GNI* is 62% of 300 GDP 30% 250 20% 200 10% 150 0% 100 -10% 50 0 -20% 1995 1999 2003 2007 2011 2015 1996 1999 2002 2005 2008 2011 2014 2017 GDP GNI* GDP Growth GNI* Growth Source: CSO 13 Note: See annex for discussion on the GDP distortions from 2015 onwards

Short-term indicators robust if a little less hot Ireland’s PMIs are still expanding but down Domestic demand grew strongly in 2018 from the heights of 2016 65 20% 15% 60 10% 5% 55 0% 50 -5% -10% 45 -15% -20% 40 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 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, 14 elements of machinery & equipment investment, elements of intangible asset investment, value of physical changes in stock. See annex for more detail.

Crucially the recovery has not been driven by credit so far Lending for house purchase only edging Building investment % of domestic demand is growing – led by non-residential into positive territory recently 40 20% 35 30 16% Economic 25 growth 20 2013-18 12% 15 10 8% 5 0 4% -5 -10 0% -15 1995 1998 2001 2004 2007 2010 2013 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Other Building Investment Credit advanced to Business (y-o-y) Dwellings and improvements Lending for house purchase (y-o-y) Building Investment (% of MDD) Source: CBI; CSO 15 Note: Credit to business series excludes financial intermediation and property related credit Note Modified investment excludes impact of imports of intangible and aircraft leasing assets

Consumer spending growth fuelled by rising incomes rather than recourse to debt Services driving latest growth in spending Private consumption expanded by 3% in 2018 12% 105 12% 9% 95 9% 6% 85 6% 3% 75 3% 0% 65 0% -3% 55 -3% -6% 45 -6% 1997 2000 2003 2006 2009 2012 2015 2018 1997 2000 2003 2006 2009 2012 2015 2018 Consumption Growth (4Q Y-o-Y) Services Durables Consumption ( € bns, RHS) Non-Durables Consumption Source: CSO; Eurostat 16

Private debt remains elevated but stock has fallen by a third in a decade Household debt ratio has decreased due to Debt to after-tax income* improving deleveraging and increasing incomes (123%) but among highest in Europe 220 250% 200 180 200% 160 150% 140 120 100% 100 80 50% 60 40 0% 20 0 Debt ( € Bns) Disposable Income Debt-to-Income ( € Bns) Ratio (%) 2008 2013 2018 Household Debt (% of Disposable income) Source: CBI (Q3 2018 data used) Source: Eurostat (Q4 2018) *Measure excludes “other liabilities” from household debt. 17