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The Irish Economic Update –
Doing Relatively Well
September 2014
Oliver Mangan
Chief Economist
AIB
April 2013
aibeconomicresearch.com
1
Irish economy recovering after deep recession
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Irish economy boomed from 1993 to 2007 with GDP up by over 250% – Celtic Tiger
Very severe three year long recession in Ireland from 2008-2010. GDP fell by 10%
Collapse in construction activity and banking system, severe fiscal tightening, high
unemployment
GDP in 2010 back to 2005 levels but still over 25% higher than in 2000, highlighting that the
economic crash came after a very strong period of growth, unlike in other countries
Ireland entered a three year EU/IMF bail-out programme at end 2010 as it could no longer
access funding on global capital markets
Ireland exited its financial assistance programme on schedule in December 2013, without a
precautionary credit line - has very large cash balances and no problem with market access
Budget deficit has declined at quicker than expected pace in past four years
Ireland benefits from the pick up underway in world economy, given its large export base
Domestic economy recovering, led by rebound in investment and labour market
GNP rose by 1.9% in 2012 and 3.2% in 2013. GNP up by 3.4% yoy in Q1 2014
2
Upbeat tone to Irish data continues in 2014
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GNP rose by 3.2% in 2013. GNP up by 3.4% yoy in Q1 2014 with GDP up by 4.1% yoy
Strong pick up in mfg PMI in past year – hits highest level since 1999 in August
Surge in manufacturing output in H1 2014 – up 24% yoy in Q2
Exports rebound strongly in H1 2014. BoP remains in large surplus
Very strong services PMI data this year – index well over 60 in recent months, at 7 year highs
Housing market improving, while commercial property market recovering strongly
Construction PMI soars to above 60 – averages over 60 year-to-date, at record highs
OECD leading indicator for Ireland rises strongly – hits best level in H1 2014 since 2008
Consumer confidence in July at its best level since early 2007
Strong rise in core retail sales in recent quarters – up by 4% yoy in Q2 2014
Car sales surge by 30% year-to-date – best sales since 2008
Employment rises for 7 consecutive quarters, up 1.7% yoy in Q2 2014
Declining Live Register, with jobless rate falling from 15% in H1 2012 to 11.2% by Aug 2014
Further large fall in budget deficit in 2014: spending below target, taxes ahead of schedule
3
Strong Irish economic indicators
GNP & Employment
%
10
Ireland Mfg and Services PMIs
70
8
65
6
4
Services
60
2
55
0
50
-2
Manufacturing
-4
45
-6
40
-8
35
-10
-12
Q1 04
Q1 05
Q1 06
Q1 07
GNP % YoY (3Qtr.Mov.Avg.)
Q1 08
Q1 09
Q1 10
Q1 11
Employment % YoY
Q1 12
Q1 13
Q1 14
30
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Source: Thomson Datastream, Investec
Source: CSO & Thomson Datastream
Industrial Production ( 3 Mth Moving Average Vol Y/Y %)
Consumer Confidence (ESRI - KBC)
25
110
20
15
90
10
5
70
0
50
-5
-10
30
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Source: ESRI - KBC, Thomson Datastream
-15
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Thomson Datastream
4
Labour market has improved – good job growth
Year Average
2011
2012
2013
2014(f)
2015(f)
2016(f)
Unemployment Rate %
14.6
14.7
13.1
11.5
10.5
9.5
Labour Force Growth %
-0.9
-0.6
0.4
-0.2
0.3
0.9
Employment Growth %
-1.8
-0.6
2.4*
1.5
1.5
2.0
Net Emigration : Year to April (‘000)
27.4
34.4
33.1
21.4
15.0
10.0
Source: CSO and AIB ERU forecasts
*Note: Employment ex Agriculture: +1.3% in 2013
Employment (% Chg YoY)
Unemployment Rate (%)
6
16
Private
4
15
2
14
0
13
-2
12
-4
Total
11
-6
-8
Public
10
9
-10
-12
2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1
Source: CSO
8
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Thomson Datastream
5
Exports pick up again as pharma patent cliff abates
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Ireland a very open economy – exports, driven by
huge FDI, equated to 105% of GDP in 2013
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Exports as % of GDP 2013
Finland
UK
Major gains in Irish competitiveness since 2009
Germany
Goods exports fell by 4% in 2013 on sharp drop in
pharma output (patents expire). Rebound in H1 2014
France
Italy
Ireland
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Service exports rise strongly since 2010 as new FDI
broadens export base and global recession ends
Portugal
Spain
0
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10
20
30
40
50
Total exports rise by 7.4% yoy in Q1 2014
60
70
80
90
100
110
Source: Thomson Datastream
Irish Exports of Services
Unit Labour Costs 2009-2013 (% Change)
(Volume, 3 Qtr Moving Average, YoY% Change)
20
Portugal
Spain
15
Ireland
10
UK
5
Eurozone
0
Italy
-5
France
Germany
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
Source: EU Commission
14
-10
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Source : CSO
Q1 2014
6
Impact of FDI on economy (Source IDA)
KEY FDI IMPACTS ON THE IRISH ECONOMY
- 1,050 multinational companies
- €121bn Exports (70% of Irish exports)
- 161,000 Jobs in FDI, 275,000 in total
- 70% of Corporation Tax
- €11bn Spending on services/materials
- €8bn in Payroll
- 67% of Business R&D expenditure
WORLD LEADERS CHOOSE IRELAND
- 8 of the top 10 in ICT
- 9 of the top 10 in Pharmaceuticals
- 17 of the top 25 in Medical Devices
- 3 of the top 5 Games companies
- 10 of the ‘top born on the Internet’ firms
- More than 50% of the world’s leading
Financial Services firms
7
Domestic economy recovers over past year
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Domestic economy contracted by 23% from its peak in
Q1 2008 to mid-2012
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Construction Investment (% YoY)
30
20
Construction investment big drag on GDP growth - fell
from 13-14% of GDP in 2004-08 to 5% in 2012
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%
Total construction output rose by 13.7% in 2013
House building stabilised last year and has started to
pick up in 2014 from very low levels
Pick-up in commercial property market last year which
10
0
-10
-20
-30
-40
Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014
Source : CSO
has continued in 2014
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Irish Retail Sales (ex autos)
Business investment (ex volatile transport, mainly
planes) rebounding – up 40% yoy in Q1 2014
4
Total investment (ex transport) up 14.5% yoy in Q1
0
Strong rise in retail spending over past year, up 3.4%
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yoy in H1 2014, with car sales up by 30% year-to-date
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Fiscal drag has eased considerably in 2013-14
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Domestic spending (ex transport) rose by 0.4% in
2013 and up by 3.3% yoy in Q1 2014
-8
(Volume, Yr-on-Yr % Change)
2
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Q1 2014
Source: Thomson Datastream
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Dublin house prices surge amidst a lack of supply
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Housing output fell by 90% but now past the bottom
of cycle
National House Price Inflation
%
3.0
%
30
Much of the new housing stock overhang eliminated
2.0
20
House prices declined sharply – fell by over 50%
between their peak in late 2007 and early 2013
1.0
10
0.0
0
House prices now rebounding – up 17.5% from low
Dublin prices up by 34% and non-Dublin prices rise
by 7% from their troughs
-1.0
-10
-2.0
-20
-3.0
Jun-06
Jun-07
Jun-08
Jun-09
Month-on-month : LHS
Nationally, prices up 13.4% yoy in July 2014.
Dublin up 23%, non-Dublin rise 5% yoy in July
Jun-10
Jun-11
Jun-12
Jun-13
-30
Jun-14
Source: CSO
Year-on-year : RHS
Irish Residential Property Price Indices
House prices nationally are now 42.3% below peak
level hit in 2007 (Dublin now 43% below peak)
140
Rents also rebound – up 20% from lows
110
(Base 100 = Jan'05)
130
120
100
Decline in number of second-hand properties for
sale. Very low level of new house building
90
Shortage of family homes emerges in Dublin
60
Current level of house building nowhere near
meeting estimated demand
40
Jan-05
80
70
50
Jan-06
Jan-07
National Prices
Jan-08
Jan-09
Ex-Dublin Prices
Jan-10
Jan-11
Dublin Prices
Jan-12
Jan-13
Jan-14
Source: CSO via Thomson Datastream
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House building rising from very depressed levels
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%
30
House building is beginning to pick up but activity
is still at very low levels
Big jump in new housing registrations and
commencements, but still at depressed levels
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Housing Repayment Affordability *
Housing completions 8,300 in 2013; 8,500 in 2012
Latest data show housing completions also
picking up (+32% in 2014), especially in Dublin
Recovery in house prices should help spur more
26
22
18
14
* % of disposable income required for mortgage repayments for 2 income
household, 30 year 92% mortgage.
Based on permanent tsb/ESRI national house price & CSO House price index
10
Jan-96
Jan-98
Jan-00
Jan-02
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Housing affordability, though, still at levels
pertaining in 1997, before the boom started
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Jan-08
Jan-10
Jan-12
Jan-14
Housing Completions
100,000
90,000
80,000
Mortgage lending up almost 50% in H1 2014,
though still at low level in absolute terms
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Jan-06
Sources: AIB, permanent tsb/ESRI, CSO, Dept of Finance,
building activity
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Jan-04
Government announces measures to help boost
house building activity
70,000
60,000
50,000
40,000
30,000
20,000
10,000
Completions may hit 11,000 this year but will take
0
1997
1999
2001
2003
2005
2007
2009
2011
2013 2015(f) 2017(f)
a couple of years to get near 25,000 demand level
Source: CSO; DoEHLG and AIB ERU
10
AIB Model of Potential Housing Demand 2010-2016
Calendar Year
2010
2011
2012
2013
2014
2015
2016
21,500
16,500
15,500
16,000
17,500
18,500
18,000
Indigenous
Population Growth
27,500
24,500
24,000
23,500
23,000
22,500
22,000
Migration Flows
-9,000
-6,500
-10,000
-9,500
-6,000
-5,000
-4,000
Increased
Headship
3,000
3,000
3,000
3,000
3,000
3,000
3,000
Second Homes
1,000
1,000
1,000
1,000
1,000
1,000
1,000
Replacement of
Obsolete Units
4,000
4,000
4,000
4,000
4,000
4,000
4,000
Total POTENTIAL
Demand
26,500
25,000
22,000
22,000
25,000
24,500
25,000
Completions
14,500
10,500
8,500
8,300
11,000
15,000
20,000
-12,000
-14,500
-13,500
-13,700
-14,000
-9,500
-5,000
Household
Formation
of which
POTENTIAL Impact
on Vacant Stock
Sources: CSO, DoECLG, AIB ERU
11
Budget deficit in marked decline, little funding required
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Some €30bn of fiscal tightening implemented
in 2008-2014 period. Little more to be done
Further marked fall in budget deficit in 2014.
On course for sub 3% deficit by 2015
Primary budget (i.e. excluding debt interest
costs) back in surplus in 2014, with a primary
budget surplus of over 2% of GDP by 2015
General Gov Budget Deficit* (% GDP)
12
10
8
6
4
2
Debt interest not overly high at 5% of GDP
0
Maturity profile of debt greatly extended.
Modest amount of bonds mature in 2015-17
Very high government cash balances of €25
billion at mid-year. Exchequer fully funded to
end 2015
Ireland exited its EU/IMF bailout programme
on schedule in December 2013
Irish bonds yields have fallen sharply with five
year yields at 0.7%, ten year falls to 1.8%
Sovereign debt ratings upgraded; two rating
agencies now have Ireland at A-
2008
2009
2010
2011
2012
2013
2014(f)
2015(f)
Source : IMF, Dept of Finance, AIB
*Excludes banking recapitalisation costs in 2009-11
Irish Benchmark Yields
%
%
20
20
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
Jan-11
0
Jul-11
Jan-12
5 Year
Jul-12
10 Year
Jan-13
Jul-13
Jan-14
Jul-14
Source: Thomson Reuters
12
Gov debt stabilises; private sector deleveraging
General Gov Net Debt* (% GDP)
Debt Interest (% GDP)
10
120
9
100
8
7
80
6
5
60
4
40
3
2
20
1
0
0
2008
2009
2010
2011
2012 2013(e) 2014(f) 2015(f) 2016(f) 2017(f) 2018(f)
* Gross General Gov Debt Less Gov Cash Balances/Deposits
1980
1990
1995
2000
2005
2010
2015
Source: NTMA; Dept of Finance
Source: IMF
Irish Private Sector Credit (Inc Securitisations) as % GDP
%
1985
Irish Household Debt (€M)
275
210,000
250
200,000
225
190,000
200
175
180,000
150
170,000
125
160,000
100
75
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014(f)
Sources: Central Bank, CSO, AIB ERU Calculations
150,000
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Source : Central Bank of Ireland
13
Ireland benefits from improving global economy
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The adjustment on the domestic side of economy is
over so no longer a drag on growth
GDP Contributions (2008-2016)
%
6
3
Housing, labour market and domestic demand are all
on an improving path
Construction rebounding from very depressed activity
levels
Little further fiscal tightening required in 2015 to get
budget deficit down below 3% of GDP
0
-3
-6
-9
-12
2008
Major gains made on the competitiveness front
2009
Net Exports
2010
2011
2012
Fixed Investment
2013
Govt Spending
2014(f)
2015(f)
2016(f)
Personal Spending
Source: CSO and AIB ERU forecasts
Large, diversified export base means Ireland benefits
from improving global growth
Irish, Eurozone & UK Inflation (HICP Rates)
6
UK
Irish lead indicators pointing to more strong growth
GDP growth of 3% forecast for 2014 as pharma cliff
eases. GNP to rise by 3% also
GDP growth of 3.5% in 2015 and 3.7% in 2016 as
domestic demand improves further
Scope for upside surprises on growth, especially if
exports and/or investment perform very strongly
4
2
0
Eurozone
-2
Ireland
-4
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
14
Source: Thomson Datastream
AIB Irish Economic Forecasts
% change in real terms unless
stated
2011
2012
2013
2014 (f)
2015 (f)
2016 (f)
GDP
2.8
-0.3
0.2
3.0
3.5
3.7
GNP
-0.8
1.9
3.2
3.0
3.0
3.2
Personal Consumption
-1.2
-1.2
-0.8
0.5
1.5
1.8
Government Spending
-2.1
-2.1
1.4
1.3
1.5
2.0
Fixed Investment
-2.9
5.0
-2.4
3.0
5.0
6.0
Domestic Spending (ex planes)
-1.3
-0.5
0.4
1.5
2.0
2.5
Exports
5.5
4.7
1.1
5.0
5.0
5.0
Imports
-0.6
6.9
0.6
3.7
4.0
4.2
HICP Inflation (%)
1.1
2.0
0.5
0.5
1.0
1.5
Unemployment Rate (%)
14.6
14.7
13.1
11.5
10.5
9.5
Budget Deficit (% GDP)
8.6
8.1
5.7
3.8
2.5
1.5
BoP Current A\C as % GDP
0.8
1.6
4.4
4.4
4.2
4.0
Source: CSO, AIB ERU Forecasts
15
Risks to the Irish economic recovery
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Recovery in the global economy is not yet secure, especially in the eurozone, with on-going
risks and headwinds. This is a concern given importance of exports to the Irish economy
Major changes to corporation tax, although this would have to be agreed to by Ireland
Supply bottlenecks in the construction sector, especially new house building
High indebtedness and scale of balance sheet repair by households (mortgage debt is very
high, as are mortgage arrears). Major deleveraging has already taken place but difficult to
estimate its duration
Continuing credit contraction – fewer banks, tighter credit conditions, on-going deleveraging
CPD Hours. The code for this presentation is 2014-0604
Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish
forecasts are from AIB Economic Research Unit. This presentation is for information purposes and is not an invitation to deal. The information is
believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This presentation is not to be
reproduced in whole or in part without prior permission. In the Republic of Ireland it is distributed by Allied Irish Banks, p.l.c. In the UK it is
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