- Business Areas
- Funding and Debt Management
- Investor Relations
- Irish Economy and Public Finances
Irish Economy and Public Finances
- Macroeconomic outlook
• Ireland’s strong economic growth continues in 2019. Modified final domestic demand - the best price-adjusted quarterly measure of underlying growth for Ireland – grew at 2.9% in the year to Q2 2019. MFDD which strips the multinational distortions (more on these below) has grown by 4.3% y-o-y on average since 2014.
• Regardless of statistical issues, the Irish labour is a good barometer of the economy’s progress. Employment increased by 2.0% y-o-y to stand at over 2.2 million people in Q2 2019. In the year to Q2 2019, 11 of 14 sectors saw employment growth. Unemployment was 5.3% of the labour force in September 2019 - a fall of near eleven percentage points from its peak. Moreover the jobs added are highly skilled – over 1 million jobs in Ireland are categorised as highly skilled. All evidence suggests Ireland is at – or very close to - full employment.
• As a result, wage inflation (3.5% y-o-y in Q2 2019) is back in all sectors however the picture is not uniform across the economy: certain sectors are operating closer to full capacity than others. In IT, financial services and construction, wage growth is between 4-7%. Public sectors like health are closer to 1.0% wage growth.
• The high frequency indicators have turned to a mixed bag for Ireland. The composite PMI reading for September 2019 was 51.0 which is still above the expansionary threshold (50). However, the manufacturing PMI has dipped below the 50 territory since June. Services so far has remain strong and stayed above 50 (53.1 in September). There is evidence that the PMIs – along with tax data - are leading indicators for modified final domestic demand in Ireland. These metrics will be monitored for any slowdown in growth.
• Consumer spending is improving despite a reduction in confidence. Consumption grew by 3.0% y-o-y in 2019Q2. Disposable income has expanded in aggregate, thanks to more people at work. Other positives exist: debt levels are lower, rising house prices have led to higher net worth, low inflation underpins real income, interest expenditure is nudging down and other non-wage income are rising. Overall, the private sector has deleveraged after the debt accumulation of the 2003-13 period. This should help the Irish economy better weather any negative shock in the near term.
• Turning to the outlook for Ireland, the Department of Finance forecasts that real GDP and GNI* will continue to grow in the coming years. In its Budget 2020 forecasts, the Department of Finance expects real GNI* growth of 2.9% for 2019 but only 0.2% in 2020. The Government has taken the view that although unlikely, it is prudent to produce the Budget under a no-deal Brexit scenario hence the projected slowdown in GNI*.
• There are more pessimistic estimates of the impact of a “hard” Brexit on Ireland. Recent analysis suggests a cliff edge exit could see growth below zero in 2020. If a deal is stuck, moderate consumption growth is expected and underlying fixed investment is forecast to expand in 2019-21.
• The current account of the Balance of International Payments recorded a surplus of 17.4% of GDP in 2018. Much of the dramatic improvement in recent years comes from activities of redomiciled companies and imports of intellectual property however. A clear understanding of the current account is difficult in the face of these distortions. The CSO has released a modified current account (CA*) measure which aims to be consistent with its GNI* calculation. This CA* metric stood at 6.5% of GNI* for 2018. Current account data in Ireland is to be taken with extreme caution but this CA* metric is a useful estimate and suggest Ireland is living within its means.
- Key Economic Figures
2018 2019F 2020F 2021F 2022F 2023F Consumer spending (% chg vol) 3.4 2.7 1.4 1.9 2.1 2.3 Government spending (% chg vol) 4.4 4.5 3.5 2.0 2.0 2.0 Investment (% chg vol) 8.5 3.2 -0.2 3.4 3.9 4.2 Exports (% chg vol) 10.4 10.2 0.9 4.2 4.1 4.0 Imports (% chg vol) -2.9 22.6 -6.5 2.9 4.4 4.6 GDP (% chg vol) 8.2 5.5 0.7 2.5 2.8 2.7 GNP (% chg vol) 6.5 4.3 -0.1 2.4 2.5 2.4 GNI*(%chg vol) 7.3 3.0 0.2 3.4 3.5 3.4 Nominal GDP (bn) 324.1 343.2 351.4 365.2 380.7 396.5 Employment (% chg) 2.9 2.4 0.8 1.1 1.5 1.7 Unemployment rate (% labour force) 5.8 5.2 5.7 5.9 5.9 5.7 HICP (% chg yoy) 0.7 0.9 1.3 1.4 1.8 2.0 GDP Deflator (% chg yoy) 0.8 0.4 1.6 1.4 1.4 1.4 General Government Balance (€bn) 0.2 0.7 -2.0 -0.2 0.1 0.4 General Government Balance (% GNI*) 0.1 0.3 -1.0 -0.3 0.1 0.7 Primary Government Balance (% GDP) 2.7 2.6 1.0 1.7 1.8 2.0 General Government Debt (bn) 205.9 203.6 198.5 205.8 207.1 213.2 General Government Debt (% GDP) 63.5 59.3 56.5 56.4 54.4 53.8 General Government Debt (% GNI*) 104.2 100.2 97.5 97.7 94.9 94.5 Average interest rate on stock of GG debt 2.6 2.3 2.0 1.9 1.9 2.0
Source: Department of Finance (Budget 2020, October 2019).
- Annual Public Finances
• The General Government Balance (GGB) was in surplus in 2018, albeit very slightly (€170m). This is the first General Government surplus in a decade. The Government forecasts another small budget surplus in 2019. Under the Government’s Budget 2020, in a no-deal Brexit scenario, Ireland would increase spending in a counter-cyclical fashion with the GGB in 2020 being -€2bn (-1.0% of GNI*). If a deal was struck, the Government have indicated such increased spending would not incur.
• Looking at debt sustainability, Gross Government debt peaked as a percentage of GDP in 2013 at 119.5%. Following rapid GDP growth and the MNC distortions outlined below the debt ratio fell to 64% at end-2018. Given the GDP distortions, Debt-to-GNI* (104% for 2018, 100% for 2019f) is a more useful metric for evaluating Ireland’s debt sustainability. It should be note however that Debt-to-GNI* understates the ability of Ireland to repay debt. GNI* excludes certain activities that the Irish State could possibly tax and hence excludes some part of its ability to repay. This means that the Debt-to-GNI* ratio is likely too high. With debt-to-GDP too low, it is fair to say the reality of Ireland’s “proper” debt ratio is somewhere in the middle.
• This GDP denominator issue means that other metrics of debt serviceability are required. Debt-to-GG Revenue (235.7% 2019f), interest as a percentage of revenue (5.4% 2019f) and the average interest rate on Ireland’s debt (2.3% 2019f) are more apt measures for comparison with other sovereigns regarding Ireland’s debt serviceability.
• Despite the positive trend for Ireland’s fiscal position in the last decade, there are areas of risk. First, the reliability of corporate tax receipts. CT receipts are heavily concentrated on several large firms and have more than doubled in recent years. Second, the Department of Health overspend in 2018 continues a poor trend. Prudence on spending with regards to temporary or unexpected revenue is warranted.
- Key Annual Public Finance Figures
Annual Public Finances on EU-Comparable general Government basis
Description European System of Accounts
2018 2019F 2020F 2021F 2022F 2023F €bn €bn €bn €bn €bn €bn Revenue Taxes on production and imports D.2 25.5 26.6 27.2 28.1 28.8 29.7 Current taxes on income, wealth D.5 34.6 36.2 37.5 39.1 41.0 43.1 Capital taxes D.91 0.5 0.5 0.5 0.5 0.5 0.6 Social contributions D.61 13.5 15.1 15.6 16.4 17.2 18.2 Property Income D.4 1.3 1.7 1.3 1.2 1.2 1.3 Other 7.0 6.3 6.6 6.8 7.1 7.4 Total revenue TR 82.3 86.4 88.7 92.1 95.9 100.3 Expenditure Compensation of employees D.1 22.2 23.0 23.7 24.1 24.2 24.1 Intermediate consumption P.2 11.0 13.2 14.2 14.5 16.0 17.6 Social payments D.6 30.1 30.0 31.0 31.4 31.6 31.6 Interest expenditure EDP_D.41 5.2 4.7 4.0 3.7 3.9 4.0 Subsidies D.3 1.9 1.6 1.4 1.4 1.4 1.5 Gross fixed capital formation P.51 6.3 7.9 8.8 9.1 9.4 10.0 Capital transfers D.9 1.7 1.8 2.3 2.8 3.1 3.5 Other 3.8 3.5 3.9 3.9 4.0 4.1 Total expenditure TE 82.2 85.7 90.7 92.8 95.7 98.8 General Government Balance (GGB) B.9=TR-TE 0.2 0.7 -2.0 -0.2 0.1 0.4 GGB as % of GDP 0.1% 0.2% -0.6% 0.7% 1.0% 1.3% GGB as % of GNI* 0.1% 0.3% -1.0% -0.3% 0.1% 0.7% Primary Balance (PB) 5.4 5.4 2.0 3.5 4.0 4.4 Primary Balance as % of GNI* 2.7% 2.6% 1.0% 1.7% 1.8% 2.0%
NOTES & SOURCES
Source: Department of Finance (Budget 2020, October 2019)
- National Accounts Distortions
• From 2015 onwards, Ireland’s national accounts are distorted by the reclassification of multinational companies or their assets as being resident in Ireland. Given the presence of such large distortions, GDP and GNP have little information content in regards to Ireland’s economic activity.
• The reclassification of multinational companies’ activity as Irish expanded the capital stock in 2015 by c. €300bn or c. 40%. In some cases, whole companies re-domiciled in Ireland while in others multinationals moved assets (mostly intangibles) to their Irish-based subsidiary. The goods produced by the additional capital were mainly exported. This resulted in a step change in net exports Q1 2015. Net exports grew by over 100% in 2015. Complicating matters, the goods were produced through “contract manufacturing”. The result of contract manufacturing is a goods export is recorded in the Irish Balance of Payments even though it was never produced in Ireland. There is little or no employment effect in Ireland from this contract manufacturing.
• Contract manufacturing (CM) has occurred in Ireland in the past but did not have a significant net impact on GDP since the company engaged in CM would send royalties back to its parent as a royalty import. However now that the parent/intangible asset is here, there is no royalty import and Ireland’s GDP is artificially inflated. This scale of contract manufacturing (c. €70bn) is unprecedented.
• Further to these distortions, the continued import of intellectual property by firms in Ireland gives a misleading picture on the drivers within Irish growth. When a firm moves IP into Ireland it is recorded as an import and also as investment. These two net out so overall GDP is not affected however the net exports and investment figures are distorted. Adjusting for this provides a better picture of the drivers of Ireland growth.
- National Accounts Distortions - Data Table
National Account – Current Prices
(Euro, y-o-y growth rates)
Gross Domestic Product (GDP)
minus Net Factor Income from rest of the world
= Gross National Product (GNP)
add EU subsidies minus EU taxes
= Gross National Income (GNI)
minus retained earnings of re-domiciled firms
minus depreciation on foreign owned IP assets
minus depreciation on aircraft leasing
• In response to the distortions, the CSO convened the Economic Statistics Review Group (ESRG) to identify indicators that would provide a better understanding of Ireland’s highly globalised economy. In February 2017, the ESRG released its recommendations. The CSO has agreed to implement these recommendations.
• Among the main proposals were the publication of two new supplementary indicators, one closely related to Gross National Income (known as GNI*) and another is a modified version of domestic demand.
• For GNI*, Gross National Income is stripped of the profits of redomiciled companies, depreciation on R&D/ IP assets and depreciation on aircraft leasing. On a nominal basis, GNI* amounted to €197bn in 2018 compared with €324bn for Gross Domestic Product (GDP). GNI* grew 7.3% in nominal terms in 2018.
• Modified final domestic demand can give us a more-timely gauge of the real economy in the quarters ahead. Modified final domestic demand (which excludes inventories) grew in real terms by X.X% y-o-y in Q2 2019. This measure is domestically focussed and is constructed to be largely unaffected by the activities of multinational companies. The measure includes private consumption, government consumption and elements of investment.
11 October 2019