Imminent risk from Brexit Last year saw first budget surplus since - PowerPoint PPT Presentation

Imminent risk from Brexit Last year saw first budget surplus since 2007 August 2019

Index Page 3: Summary Page 8: Macro Page 23: Fiscal & NTMA funding Page 40: Brexit Page 46: Long-term fundamentals Page 57: Property Page 64: Other Data Page 76: Annex (GDP distortions explainer) 2

Summary Full employment as debt sustainability improves

Domestic economy growing: averaging around 4.5 per cent from 2013-18 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 -400 -10% 4.6 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 (104% 2018, from 166% peak) helpful 14 0 12 -5 Debt-to-GG Revenue 10 (251% 2018, from 353%) 8 -10 6 4 -15 Average interest rate 2 -20 (2.6% 2018, 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% 2018, 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 of Ireland’s control Brexit US Tax “Hard” Br Brexit – end end Oct. ct. 2019 Ireland is still a “high beta” bet Corporati Cor tion tax x reform rm may is ne is next xt cli cliff ed edge - cou ould redu educe on on the the US S ec economy, im impact Irela eland's s ec economic ic Irish rish gr growth th to o 0% % in in 2020. in n par parti ticular r its its ICT sec ector. mod odel in in the the med edium term erm. Em Empl ployment migh ight t be be up up to o 4% % US S is is in in the the la late stag age of of its its The he OECD BEP BEPS II pr process ss is is less le ss tha than in in a a be benign sce cenario economic cy ec cycl cle, , al although this this sla lated to o rep eport rt by y en end 2020 acc according to o Do DoF/E /ESRI. may be be extended by y Fed pol policy 6

€ 12bn (of € 14-18bn) 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 cover r al all l One ne of of the the lon longest t weig eighted Rati tings s from mai ain ag agencies 2019 red edempti tions s an and mor ore average maturi riti ties s in in Eur Europe The remainder of this year’s NTM NTMA used ECB’s QE to extend Ireland’s debt sustainability is fun unding (at le least € 3bn bn) wil ill debt maturit deb ity, red educe in interest improving, im g, alth although Br Brexit is is mee eet t 2020 bon bond rede edempti tions cos ost an and rep epay the the IMF loa loans hol holding bac back rati ting up upgrades 7

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

Labour market best illustrates Ireland’s growth story – Ireland is at or very close to full employment Unemployment rate: down to 4.6% Total employment back above previous peak in July 2019 from peak of 16% as 160K 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 back to pre-crisis 2.0 Non-Construction Employment levels 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 employment an important driver; though labour participation rate has been slow to recover High-skill employment has grown sharply Labour participation has not yet fully recovered as young stay in school 6.0% 68% 67% 4.0% 66% 2.0% 65% 0.0% 64% -2.0% 63% -4.0% 62% -6.0% 61% -8.0% 60% Rate inflated pre-crisis by migrant construction workers -10.0% 59% 2008 2010 2012 2014 2016 2018 58% High Skill Other Employment Growth 1998 2001 2004 2007 2010 2013 2016 2019 Source: Eurostat; CSO 10 High Skill jobs include the ISCO08 defined groupings Managers, Professionals, Technicians and associate professionals

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% Transport/Storage IT Arts & Rec Construction Admin & Support Wholesale/Retail Fin, Insurance & RE Total Education Industry Prof, science & tech Accom & Food Health Public admin -8% -10% 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 Hours worked Hourly wage Employment Other Compensation 4Q average hourly earnings y-o-y Q1 2019 COE growth (y-o-y) 2018 average annual earnings ( € 000, RHS) Source: CSO 11

Despite being late cycle, inflation is low; Ireland’s Phillips Curve might be starting to bite Inflation (%) in Ireland similar to rest of euro At full employment, wage growth could be area currently – Brexit ref. impact has gone an issue in 2019 4 12.0% 3 10.0% y = -0.7385x + 0.0956 Nominal wage growth per head 2 R² = 0.8006 8.0% 1 6.0% 0 4.0% -1 2.0% -2 Unemployment -3 0.0% breached 5% -4 barrier in early -2.0% 2019 -4.0% 2.0% 5.0% 8.0% 11.0% 14.0% 17.0% HICP Ireland HICP Euro Area "Core" Ireland "Core" EA Unemployment Rate Source: CSO, Eurostat Source: CSO, NTMA analysis; Non-Agriculture employment /wage data on yearly basis (1999-2018) 12

GDP distortions mean we need to look to other metrics; Irish recovery evident when looking at GNI* GNI* was € 197bn in 2018; 7.3% higher than GNI* growth rate averaged 7.7% 2013-2018 in 2017 (current prices) (current prices) 350 40% GNI* is 61% of 300 GDP 30% 250 20% 200 10% 150 0% 100 -10% 50 -20% 0 1995 1999 2003 2007 2011 2015 GDP GNI* GDP Growth GNI* Growth Source: CSO 13 Note: See annex for discussion on the GDP distortions from 2015 onwards

When looking for price-adjusted timely data, modified final domestic demand is the best measure In real terms underlying growth in Ireland Unusually large changes in multinational averaged 4.4% since 2014 stock levels distort the MDD measure 15% 15.0% 10.0% 10% 5.0% 5% 0.0% 0% -5.0% -5% -10.0% -10% -15.0% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 -15% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Investment Consumption Govt Modified Domestic Demand MFDD (MDD ex stocks) Stocks MDD MFDD Source: CSO Note MFDD measure used here includes private consumption, government consumption, building 14 investment, elements of machinery & equipment investment, elements of intangible asset investment. See annex for more detail.

Economy has been driven by multinational growth – in particular ICT; sector grew 25% in 2018 alone Breakdown of the Irish economy by sector – Information and communication sector has Industry (pharma) and ICT are 40% of GVA seen exceptional growth in recent years Other, 2.7% 30% 25% P Admin, 20% Educ & Industry, 15% Health, 27.4% 11.9% 10% Prof, Admin and Support 5% , 12.0% 0% Financial, Construction -5% + Real Estate, 8.0% 9.6% -10% Dist, trans, -15% ICT, 14.5% hotels, rest., 1997 2000 2003 2006 2009 2012 2015 2018 14.0% ICT % of Economy (GVA adjusted for 2015 distortions) ICT Sector (GVA 4Q y-o-y) Source: CSO (2018) Note GVA figures adjusted for distortions in 2015. A depreciation charge was subtracted from 15 industry GVA in 2015 and onwards to take account od multinational effects.

Short-term indicators point to further growth, although a little less hot than in the last five years Ireland’s PMIs diverging in recent months, MFDD growth is heavily correlated with employment growth as manufacturing slows around the world 65 15% 10% 60 MFDD y-o-y growth 5% 55 0% 50 -5% 45 -10% MFDD = 1.362*employ + 0.004 40 R² = 0.86 -15% -10% -5% 0% 5% 10% Employment y-o-y growth Services Manufacturing Composite Source: CSO; Markit, Bloomberg, Investec Note MFDD measure used here includes private consumption, government consumption, building 16 investment, elements of machinery & equipment investment, elements of intangible asset investment. See annex for more detail.

Consumer spending growth consistent around 3% mark Services driving latest growth in spending Private consumption expanded by 3.4% in 2018 – Q1 continued trend 12% 115 12% 105 9% 9% 95 6% 6% 85 3% 3% 75 0% 0% 65 -3% -3% 55 -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 17