external risks Employment growth driving economy as Government is - PowerPoint PPT Presentation

Ireland: Steady progress amid external risks Employment growth driving economy as Government is nearing EU fiscal target October 2017

Index Page 3: Summary Page 7: Macro Page 27: Fiscal & NTMA funding Page 46: Brexit Page 53: Long-term fundamentals Page 61: Property Page 68: Other Data Page 79: Annex 2

Summary Growth is strong and Ireland is living within its means

Macro picture is positive even if some metrics are skewed …but Ireland running a Cleaner GNI* highlights Appropriate debt analysis rapid recovery ( € bn) is needed… primary surplus ( € bn) 10 300 250 5 Debt-to-GDP (72.8%, from 120%) 200 0 Debt-to-GNI* 150 -5 (106%, from 158%) 100 Debt-to-GG Revenue -10 (274%, from 353%) 50 -15 Average interest rate (3.1%, from 5.1%) 0 -20 1995 1999 2003 2007 2011 2015 1995 1999 2003 2007 2011 2015 GDP GNI* Underlying Primary Balance 4

More than € 15bn in funding in 2017 as potential IMF early repayment deal sees NTMA exceed original funding plan € 15bn A 37% 37% > € 15bn of of fun unding All ll maj ajor r cr cred edit rati ting ag agencies s of of buy buyers s in in the the la last fiv ive com ompleted YT YTD have Ireland firmly in “A” grade syn yndications were from following Moody’s upgrade in Conti Co tinental Eur Europe Average maturi rity of of is issu suance Sept 2017 Se 12.2 .2 yea ears Interest t rate of of 0.85 .85% 5

Challenges remain for Ireland Debt US Brexit Irela eland has has us used the the QE QE peri period Ireland is still a “high beta” bet For or every ry 1% % dr drop in in UK K GDP DP, to o del deleverage ; ; he health thiest on the on the US S ec economy, Ireland’s output may fall by dem demographics s in in Eur Europe mea eans s in n par parti ticular r its its ICT sec ector an anywhere be between 0.3 .3-0.8%. . that tha t the the cou ountry try can an cop ope wit ith higher hi r deb debt US S Corp Corporate Tax reform 6

Section 1: Macro GDP/GNP mislead; GNI*, employment and consumption best reflect reality

Distortions to GDP/GNP make them sub-optimal indicators of economic performance 30 Substantial activity from % multinationals in 2015/16 25 distorted the national accounts 20 (see Annex for reasons) 15 10 5 0 -5 -10 -15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f Domestic Demand Net Exports Change in Inventories GDP Change Forecast Source: CSO; Department of Finance 8

New GNI* metric is a better measure of underlying economic activity; grew by 9.4% nominally in 2016 National Account – Current Prices 2015 2016 • GDP headline numbers do not reflect the “true” ( € Billions, y-o-y growth rates) growth of Ireland’s incomes due to MNCs. Gross Domestic Product (GDP) 262bn 275.6bn (34.7%) (5.2%) • Reasons for 2015/16 MNC distortions: minus Net Factor Income from rest Re-domiciling/inversions of several  of the world multinational companies = Gross National Product (GNP) 206bn 226.7bn The “onshoring” of IP assets into Ireland  (25.0%) (10.1%) by multinationals add EU subsidies minus EU taxes 1.2bn 1.0bn The movement of aircraft leasing assets  in Ireland. = Gross National Income (GNI) 207.2bn 227.7bn (24.9%) (9.9%) • By modifying GNI to take account of these factors, minus retained earnings of re- -4.6bn -5.8bn GNI* gives us a better understanding of the domiciled firms underlying economy. minus depreciation on foreign -25.0bn -27.8bn owned IP assets • GNI* only available in nominal terms at present. minus depreciation on aircraft -4.6bn -5.0bn • In time, GNI* will be published on a constant leasing price basis as well as at a quarterly frequency. = GNI* 172.9bn 189.2bn (11.9%) (9.4%) Source: CSO 9

Irish recovery more realistic when looking at GNI* GNI* was € 189bn in 2016; 12% higher than in GNI* growth rate averaged 7.6% since 2011 2007 (current prices) (current prices) 300 40% 250 30% 200 20% 150 10% 100 0% 50 -10% 0 -20% 1995 1999 2003 2007 2011 2015 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 GDP GNI GNI* GDP GNI* Source: CSO 10 Note: GNI* series pre 1995 = GNI given minimal distortions in pre-1995 era.

Modified Final Domestic Demand (MFDD) is a useful cyclical indicator  MFDD also seeks to strip out the impacts of the 20.0% MNC distortions. 15.0%  The measures omits parts of aircraft leasing and 10.0% IP imports from investment to give a modified measure of domestic demand. 5.0%  The measures includes: 0.0% private consumption  -5.0% government consumption  -10.0% building investment  elements of machinery & equipment  -15.0% investment -20.0% elements of intangible asset investment  1999 2001 2003 2005 2007 2009 2011 2013 2015 2017  This measure pegs nominal growth closer to 7.4% Modified Dom. Demand (Real) at Q2 2017 (annualised y-o-y). In real terms, Modified Dom. Demand (Nominal) growth y-o-y in Q2 was 5.6%. Source: CSO 11

Consumption is a large contributor to economic growth; unaffected by MNC distortions “Core”* retail sales up 3.9% y-o-y in value Private consumption grew at terms August 2017 (peak=100) 2.1% y-o-y in Q2 2017 115 100 10% Gap = price 110 95 8% discounting; continues to widen 90 6% 105 85 4% 100 80 2% 95 75 0% 90 70 -2% 85 65 -4% 80 60 -6% 75 2002 2004 2006 2008 2010 2012 2014 2016 2005 2007 2009 2011 2013 2015 2017 Consumption Growth Y-o-Y (RHS) Volume Index Value Index Annualised Consumption ( € bn) Source: CSO, CSO (retail sales) * excludes motor sales; 3m average 12

PMI indicators show Ireland’s broad based recovery Ireland composite PMI is expanding – Recovery is broad based (PMI chg. manufacturing hurt in mid-2016 by Brexit as cumulative index level, June 2000=100) 70 350 Growth of services is 65 300 much stronger than rest 60 250 55 200 50 150 45 100 40 50 35 0 30 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 PMI Services PMI Manufacturing Services Manufacturing Composite PMI Construction Source: Markit; Bloomberg; Investec ; NTMA workings 13

Labour market has rebounded since 2012; unemployment continues to fall and Ireland employs two million again Unemployment rate: 6.1% Employment up 12.6% in September 2017 from cyclical low (2008 peak = 100) 16 105 14 100 12 95 10 90 8 85 6 80 Non-Construction 4 Unemployment 75 Employment has more than above 2008 peak 2 70 halved in 5 years for first time 0 65 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Non-Construction Employment Total Employment Source: CSO 14

Employment growth driven by high skill job creation; Full- time employment growing at 5% in Q2 2017 Over 55% of all employment growth has been Substantial shift from part-time employment high skilled since start of 2014 to full-time employment in recent quarters 8.0% 15% 6.0% 10% 4.0% 5% 2.0% 0% 0.0% -2.0% -5% -4.0% -10% -6.0% -15% -8.0% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 -10.0% Part-time Emp (Y-o-Y) Full-time Emp (Y-o-Y) 2000 2002 2004 2006 2008 2010 2012 2014 2016 Employment (Y-o-Y) High Skill Other Employment Growth Source: Eurostat; CSO 15 High Skill jobs include the ISCO08 defined groupings Managers, Professionals, Technicians and associate professionals

Labour participation has not yet recovered – young age groups the driver Participation rate hovering around 60% Part. rate down as construction jobs lost and younger people stay in education longer 65% 10.0 64% 5.0 63% 0.0 62% 61% -5.0 60% -10.0 59% -15.0 58% Rate inflated pre-crisis by migrant construction 57% -20.0 workers 56% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 pp. change in participation rate since peak Source: CSO, 16

Wages only now rising, pointing to slack in the market Wages and hours worked beginning to recover, Wide disparity in wage growth across although pockets of excess capacity remain sectors 32.4 37,500 3.0% 60 2.5% 55 37,250 2.0% 50 32.2 1.5% 45 37,000 1.0% 40 32.0 0.5% 35 36,750 0.0% 30 31.8 -0.5% 25 36,500 -1.0% 20 31.6 -1.5% 15 36,250 Prof, science & tech Wholesale/Retail Transport/Storage Accom & Food Admin & Support Fin, Insurance & RE Health Industry Construction Public admin Education Info & Comm Arts & Rec 31.4 36,000 31.2 35,750 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2009 2010 2011 2012 2013 2014 2015 2016 Hours Worked (Annualised) 4Q average hourly earnings y-o-y Annualised Earnings (annualised, € , RHS) 2017 Q2 average annual earnings ( € 000, RHS) Source: CSO (Earnings), NTMA Analysis 17

Unemployment falling across Europe; falling faster here Q4 Q4 2013 % Q4 Q4 2014 % Q4 Q4 2015 % Q4 Q4 2016 % Q2 2017 % Q2 Germany 5.1 4.9 4.5 4.0 3.9 .9 Netherlands 7.6 7.1 6.7 5.5 5.0 .0 Irela eland 12.2 .2 10.4 .4 9.0 .0 7.0 .0 6.2 .2 Sweden 8.0 7.8 7.1 6.9 6.6 .6 Belgium 8.5 8.6 8.7 7.2 7.6 .6 EU 28 10.7 9.9 9.0 8.3 7.7 .7 Euro area 11.9 11.4 10.5 9.7 9.2 .2 Portugal 15.4 13.5 12.3 10.4 9.2 .2 France 10.1 10.4 10.2 10.0 9.6 .6 Italy 12.3 12.7 11.6 11.8 11.2 .2 Spain 25.8 23.8 21.0 18.7 17.3 .3 Greece 27.6 25.9 24.3 23.3 22.6 .6 Source: Eurostat, 15-74 age basis 18