Ireland: Entering 2019 with momentum yet risks ahead 2018 saw first budget surplus since 2007 January 2019
Index Page 3: Summary Page 8: Macro Page 23: Fiscal & NTMA funding Page 42: Brexit Page 48: Long-term fundamentals Page 60: Property Page 67: Other Data Page 79: Annex (GDP distortions explainer) 2
Summary Growth continues and debt sustainability improves rapidly
Domestic economy growing: averaging five per cent in 2014-18 True growth healthy, Dramatic drop in Employment (000s) above but slowing? unemployment rate 2008 peak 30% 18 200 16.0 25% 16 100 20% 14 15% 0 12 10% 10 -100 5% 8 0% -200 6 -5% 5.3 -300 -10% 4 -15% 2 -400 1996 1999 2002 2005 2008 2011 2014 2017 2008 2011 2014 2017 0 Non-Construction Employment GDP Underlying* 1999 2003 2007 2011 2015 Construction Employment Total Employment vs 2008 peak * Underlying series is modified final domestic demand 4
Primary surplus, improving debt dynamics and cash balances provide protection Five years of primary Ireland is improving its debt NTMA bond prefunding surplus ( € bn) provides protection ( € bn) dynamics by the month 10 25 € Billions Debt-to-GNI* 5 (105% 2018f, from 166%) 20 0 15 -5 Debt-to-GG Revenue (255% 2018f, from 353%) -10 10 -15 Gap year Average interest rate 5 helpful -20 (2.6% 2018f, from 5.1%) 0 -25 2019 2020 2021 1995 1998 2001 2004 2007 2010 2013 2016 2019f Debt-to-GDP^ Debt Prefunded in Bonds (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 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 the on the US S ec economy, gr growth by y 4%-7% over r a a 4-5 5 tha thanks 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 China slo Chi lowdown, tr trad ade war ars, s, Impact t of of US S Corp Corporate Tax Over er a a tw two-year r peri period the the tightening mon tig onetary ry pol policy cy al all reform rm ec economic hi hit t cou ould be be 3%+ %+ point poi t to o hea headwind for or Irela eland 6
Funding range in 2019 of € 14-18bn: similar to 2018 Green € 14 14-18bn € 15bn Cash € 3bn bn rai aise sed thr through the the 2019 fun unding ran ange € 15.3b .3bn yea ear en end 2018 cash ash syndicated sale of Ireland’s first bal balance. Irel eland pr prefunded Sovereign Gree So een bon bond. . 2018 2018 he heading in into mor ore vol olatile ile Yiel ield of of 1.39 .399% on on 2031 bo bond € 17.25 .25bn funding com ompleted times tim Average maturi rity 11.8 .8 yea ears Interest t rate of of 1.07 .07% 7
Section 1: Macro Best measures - labour market, GNI* and Modified Domestic Demand (MDD) - show Ireland’s economy is in rude health
Labour market best illustrates Ireland’s growth story – 100K non-construction jobs added on net vs. 2008 peak Unemployment rate: 5.3% Total employment back above previous peak in November 2018 as 100K non-construction jobs added on net 18 200 Thousands 2.3m 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
High skill job creation and full-time employment expanding strongly before easing in recent quarters High skill employment growth has been strong Substantial full-time employment growth in recent years 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% 2007Q3 Peak 2018Q3 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: CSO 11
Wages growth evident in 2018 but uneven across sectors … however disparities remain across Wage growth a driver for increase in compensation of employees… sectors regarding wage growth 8% 7.0% 65 60 6.0% 6% 55 5.0% 50 4% 45 4.0% 40 3.0% 2% 35 30 2.0% 25 0% 1.0% 20 -2% 0.0% 15 IT Fin, Insurance & RE Education Accom & Food Construction Arts & Rec Transport/Storage Total Industry Wholesale/Retail Public admin Health Prof, science & technical Admin & Support -4% -6% -8% -10% 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Hours worked Hourly wage 4Q average hourly earnings y-o-y Employment COE growth (y-o-y) 2018 Q3 average annual earnings ( € 000, RHS) Source: CSO 12
Ireland’s labour market is edging closer to full employment - US and UK likely already there Ireland’s unemployment (% of labour force) Unemployment rates falling across Europe; falling faster here converging on main trading partners 2012 2016 2017 18Q3 10 Ge Germany 5.4 4.2 3.8 3.4 9 Neth Netherlands 5.8 6.0 4.9 3.8 8 Aus ustria ia 4.9 6.0 5.5 4.9 7 Luxembourg Lux 5.1 6.3 5.6 5.1 6 Slov lovenia ia 8.9 8.0 6.6 5.3 5 Ireland nd 15 15.5 8. 8.4 6. 6.7 5. 5.6 4 Belg lgiu ium 7.6 7.9 7.1 6.5 3 Sweden Sw 8.0 6.9 6.7 6.5 2 EU 28 EU 28 10.5 8.6 7.6 6.7 1 Por ortugal 15.8 11.2 9.0 6.8 0 Eur Euro Area 11.4 10.0 9.1 8.1 US UK Ireland Euro Area France 9.8 10.1 9.4 9.3 Current U rate U Rate (20 yr average) Ital aly 10.7 11.7 11.3 10.0 Lowest U Rate in 20 yrs Spain pain 24.8 19.6 17.2 15.0 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 2019f EA Monetary Less Much less Accommodative Accommodative Accommodative Policy accommodative accommodative Further US Monetary Accommodative Accommodative Accommodative Further tightening: Policy but tightening tightening curve inversion? Stimulative due Trade/Mon. US growth Stimulative Less stimulative Stimulative to fiscal Policy lead to package slowdown? Oil price Falling Falling Rising Falling Neutral Less favourable; UK growth Stimulative Growth slowing Growth slowing Brexit crunch Brexit impact Euro currency Very Helpful Helpful Headwind Neutral 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
Short-term indicators robust if a little less hot Ireland’s PMIs are expanding but down from MDD grew strongly in 2018 heights of 2016 65 20.0% 15.0% 60 10.0% 55 5.0% 0.0% 50 -5.0% 45 -10.0% -15.0% 40 -20.0% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 35 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.
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 Economic 15% 25 growth 20 2013-18 15 10% 10 5 5% 0 -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 17 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
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