The Irish Economy. Simon Barry

Transcription

1 The Irish Economy Simon Barry Chief Economist Republic of Ireland November 2

2 Irish public finances 2 large, but different, problems General Government Deficit as % GDP* 3% Stability and Growth Pact Limit Deficit inclusive of banking sector costs Source: Ecowin, UB, Department of Finance f 211f Underlying deficit 212f 213f 214f Slide 2

3 Fiscal correction now into its 3 rd year; 2 underlying budget targets are on track 2% Total Tax Revenue Cumulative y/y Change % % October -5.4%, End-year target -6% -% -2% -3% Oct-6 Source: Dept. of Finance Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr- Oct- mil Mar YTD. Revenue and Spending Deviations from Govt. Profile Source: Dept of Finance Apr May Jun Jul Aug Sep Oct Tax Revenue Voted Spending Net position = Revenue minus Spending

4 But poor policy response on banking recap contributed to significant deterioration in investor confidence, aggravated by EU policy miss-step in Oct bps 7 -Yr Govt Bond Spreads Relative to Germany Reflects the cost of Government borrowing over and above Germany 6 5 EU/ECB/IMF Greek Bailout Oct 29th EU annoucement on 'permanent crisis resolution mechanism' 4 3 Irish Budget Dec 9th 2 Nov- 9 Dec- 9 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Slide 4

5 And the negative feedback loop between the sovereign and the banking sector has intensified significantly 12 Sovereign and Bank Funding Costs Jan 23-Feb 23-Mar 23-Apr 23-May 23-Jun 23-Jul 23-Aug 23-Sep 23-Oct 23-Nov Indicative bank 5-yr (guaranteed) Irish gov 6-yr

6 The need for aggressive action is about much more than addressing concerns of foreign investors 12 Irish Debt / GDP Ratios, Source: IMF Projection 215 Net Gross Denmark Canada Switzerland General Govt Net Debt, % of GDP Latest IMF Forecasts for 214 (estimated peak for Ireland*) Source: IMF, Ulster Bank Netherlands Germany Austria Spain Ireland UK France US Portugal Belgium Italy Greece Japan *IMF estimate for Ireland has been adjusted upwards to take full account of Sep 3th Govt bank recap announcement of ca 31bn cost for 2 (IMF ca 22bn) Slide 6

7 The problem is manageable with decisive further action Debt Interest Payments, % of Tax Revenue 25% 2% 15% % 5% % Source: ESRI, UB High Growth Low Growth Projection Slide 7

8 The Policy Response In Search of a Circuit-Breaker The fiscal strategy: 4-year fiscal plan of 15bn (9% of GDP) over bn spending, 5bn taxation 6bn of front-loading in Budget 211, due on December 7th Note: above compares with total sum of measures already implemented of about 15bn (9% of GDP) since July 8 Of which approx 8bn hit in 29 alone The Menu of Options: Spending: Go back to McCarthy 1 An Bord Snip Social Welfare Lower public sector numbers further Revisit public sector pay and pensions More retrenchment on capital spending Taxation: Income tax / universal social charge (USC): Bring more lower paid into income tax net Need for corresponding increase for high earners Lower credits / allowances Property Water Charges Carbon Asset Disposals: McCarthy 2 An Bord Strip Wildcards? Slide 8

9 Plan B Activation of EU / IMF aid Plan B = Plan A, with a little help from our friends Objectives: Robustly address market concerns about health of banking sector To return public finances to sustainable course & re-establish credit-worthiness Bank restructuring Further stress-testing; recapitalisation; overcapitalisation? Downsizing, including disposal of overseas assets Transfer of further defective loans to NAMA? 4-year Fiscal Plan not likely to change much Size looks about right (subject to regular review) Mix looks about right EFSF / IMF no soft option: menu of fiscal options broadly the same either way But neither is the IMF a malicious agent of evil Issues Corporation tax? Reputational damage? Higher risk premium in medium-term?

10 The recovery process in a small, open economy Improvement in global economic conditions Pick up in output and employment of Irish export (and related) sectors Improvement in domestic confidence Households and firms more willing to spend & invest Recovery in domestic demand and employment Slide

11 Ireland is small, and very, very open Ireland UK US 29 bln % of GDP bln % of GDP bln % of GDP Consumption , Govt Spending , Investment ,15 11 Exports ,8 11 Imports , GDP 142 1,393 9,16

12 So the turn in the global economy is very important Sep-1 Source: CSO, UB, Irish Exports: Performance & Prospects Trade-Weighted GDP Growth across US, UK, Eurozone Jun-2 Mar-3 Dec-3 Sep-4 Jun-5 Mar-6 Dec-6 Sep-7 Jun-8 Mar-9 Dec-9 Sep- Jun

13 and Irish export growth is now clearly accelerating Sep-1 Source: CSO, UB, Jun-2 Mar-3 Irish Exports: Performance & Prospects Dec-3 Sep-4 Jun-5 Mar-6 Dec-6 Sep-7 Jun-8 Mar-9 Dec-9 Sep- Jun RoI External Demand Proxy* LHS RoI Export Volumes % yoy RHS * Trade Weighted GDP Growth (actual and projected) for US, UK, Eurozone. Source: UB

14 aided by ongoing improvements in competitiveness Source: Ecowin HICP, y/y% Irl UK Euro zone Oct-5 Apr-6 Oct-6 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr- Oct-

15 % yoy Index Consumer still fragile but freefall over Mar-6 Jun-6 Consumer Confidence and Retail Sales Volumes (3-mth average) Source: CSO, KBC/ESRI Sep-6 Dec-6 Mar-7 Jun-7 Core Retail Sales y/y (LHS) Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar- Jun- Sep- Consumer Confidence (RHS)

16 helped by more stable trends in unemployment & savings 14 Unemployment Rate (SA), % of Labour Force Mar-7 Source: CSO Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Household Savings Ratio Sep-9 Dec-9 Mar- Jun- 14% 12% % 8% 6% 4% 2% Source: CSO, UB The estimated savings rate has surged since '7 % e 2f 211f % of Disposable Income

17 The property slump is very well-advanced, though not quite yet complete, Source: DoE/UB Irish House Completions 8, 6, 4, 2, Ratio* of New House Prices to Average After-tax Earnings UB Estimate Ratio based on DoE House Prices 26 2(f) Based on 'actual' (latest DoE data) drop of 32% from peak to Q1 Based on UB estimated drop of 45% from peak to Q3 Dec-84 Dec-86 Dec-88 Dec-9 Dec-92 Dec-94 Dec-96 Dec-98 Dec- Dec-2 Dec-4 Dec-6 Dec-8 Dec- * Based on married working couple on average industrial earnings, 2 estimates based on assumed 47.5% peak-to-trough decline in house prices and 2.5% drop in earnings

18 Ongoing gradual global recovery offers very important support for Ireland Sep-1 Jun-2 Mar-3 Irish Exports: Performance & Prospects Source: CSO, UB, FORECAST Dec-3 Sep-4 Jun-5 Mar-6 Dec-6 Sep-7 Jun-8 Mar-9 Dec-9 Sep- Jun RoI External Demand Proxy* LHS RoI Export Volumes % yoy RHS * Trade Weighted GDP Growth (actual and projected) for US, UK, Eurozone. Source: UB Slide 18

19 and, if maintained, modest Irish growth should follow GDP Forecasts (% yoy) Source: CSO, UB f 211f 212f 213f 214f

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