Download Uncertainty ahead

Q1
Ibec
Quarterly
Economic
Outlook
Ibec Economic Outlook Q1 2014
2016
1
Uncertainty
ahead
GDP and components
Economic growth surpassed expectations in 2015 coming in at
External environment to weigh
7.8%. This was the fastest rate of growth we had seen since 2000
on growth
but was strongly aided by external tailwinds. While two of these -
Page 2
oil prices and interest rates - will remain favourable in 2016 their
Labour market
impact will be more muted. Additionally, the broader external
Employment and wage increases
environment faced by Irish business is becoming increasingly
see return of consumer spending
uncertain. There are growing signs that the global economy is
Page 5
slowing and closer to home the prospect of Brexit looms large.
It is going to be a lot more difficult to repeat the success of last
Brexit
What it means for business
year again in 2016.
Page 8
The housing market
Not all households out of the woods
Page 10
For Irish Business
GNP and its components
Annual % change
2015
2016
2017
Consumer spending
3.5
4.1
3.8
Government spending
-0.8
-0.9
1.2
Investment
28.1
11.4
5.9
Exports
13.8
9.3
5.1
Imports
16.3
9.4
5.4
GDP (Volume)
7.8
4.6
3.9
GNP
5.6
4.0
4.2
GDP (Value)
13.5
5.4
4.7
Ibec Economic Outlook Q1 2016
2
GDP and components
Exports
Total goods exports for the year of 2015 were up 19.9%
or €18.4 billion on 2014. This was driven in part by an
improvement in goods exports from indigenous sectors
but the dominant force continued to be the increase in
chemical and pharmaceutical exports; these were up
€12.6 billion or 24.4% annually. Within this, the export of
finished pharmaceuticals increased by almost €8 billion.
These figures, however, are flattered by exchange rate
driven price growth in pharma exports. This is a result of
much of Ireland’s pharmaceutical exports being priced in
dollars. The underlying volume growth of Irish exports was
a little more muted. The volume of Irish goods and services
exports grew by 13.8%, while value grew by 21.1% as a
result of these exchange rate pricing effects. The prospect
of weaker sterling in the run up to the Brexit referendum
will mean slower export growth next year for indigenous
manufacturers with a slowdown in global growth also likely
to be felt most heavily in the exporting sector.
290
270
250
230
210
190
170
150
130
110
90
20
20
20
19
05
03
01
99
97
19
17
20
20
20
20
20
15
13
11
09
07
20
GDP
Trend (GDP)
Figure 2: Regional GVA 2000 – 2014
190
180
170
Index: 2000 = 100
160
150
140
130
120
110
14
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
Border, Midland & Western
20
05
20
04
20
03
20
02
20
01
20
20
00
100
20
Regional gross value added
Significant column inches during the recent election
campaign were dedicated to regional recovery.
Commentators split into two camps, those who thought
the regions had not seen the recovery and those who said
figures clearly showed that it had. The truth, as always,
is somewhere in between. Recent figures from the CSO
show the contribution of various regions to value added
(roughly GDP) over the past decade. Clearly the recovery
is beginning to reach more of the country with the BMW
region seeing cumulative growth of 15% since the trough
of the crisis in 2010. This is compared to 17% in Dublin
and 9% in the rest of the South and East of the country.
On the other hand the regions outside Dublin had falls in
GVA of over 16% during the crisis compared to only 8% in
Dublin. When it comes to the regions it is fair to say that the
recovery has been just a little weaker than Dublin but the
fall during the crisis was twice as hard.
Figure 1: GDP and its pre crisis trend
Southern & Eastern (minus Dublin)
Dublin
Figure 3: Pharma and other goods exports
70
60
50
€bn
Economic growth
Growth in Q4 was notably strong pushing annual GDP
growth for 2015 to 7.8%. The key driver of this growth
was consumer spending, which was up by 3.5% in 2015.
Investment was also up significantly but its impact on GDP
was partially offset by higher levels of imports. Overall
growth was aided by the three tailwinds of low interest
rates, falling oil prices and favourable exchange rates.
It is unlikely that oil prices or low interest rates will
significantly go against Ireland in 2016; however, their effect
on growth will be significantly more muted than last year.
The impact of exchange rates on the other hand will be
much less certain in the run up to the Brexit referendum.
Indeed, the broader external environment facing the Irish
economy will be significantly more uncertain in 2016.
A marked slowdown in the global economy has been
apparent in recent quarters. This is worrying as in the past
Ireland’s economy has moved in unison with global growth.
In addition to this, there is significant uncertainty in the UK
due to the prospect of a Brexit vote in June and growing
political uncertainty at home. We expect that these factors
will weigh heavily on the Irish economy this year with
growth slowing to 4.6%.
40
30
20
10
0
2000
2003
2006
2009
Chemicals and related products
2012
Other exports
2015
Ibec Economic Outlook Q1 2016
Consumer credit
The cautious consumer attitude toward debt and spending
is understandable given that Irish households continue
to have high debt relative to their peers. January saw
outstanding loans for consumer credit fall by 1.5% (€165
million) on the same period last year as households
continued to pay down debt at a quicker level than taking
it on. In addition, households paid down €1.4 billion of
mortgage debt more than they took on. Household deposits
on the other hand rose by 3.8% or €3.5 billion over the
same period as households put a large proportion of
income from rising wage and employment into savings.
All in all Irish households now have €91 billion of credit
outstanding against €95 billion worth of deposits. The
balance of this net wealth across households is something
to bear in mind for consumer business (see page 9).
30
50
25
40
20
30
15
20
10
10
5
0
% of GDP
€bn
60
0
7
9
19
9
9
19
1
0
20
3
0
20
5
0
20
7
0
20
€bn, lhs
9
0
20
1
1
20
3
1
20
5
1
20
7
1
20
% of GDP, rhs
Figure 5: Consumer expenditure
100
80
€bn
60
40
20
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
1
20 0
1
20 1
1
20 2
1
20 3
1
20 4
1
20 5
1
20 6
17
0
19
Consumer spending
Consumer spending in 2015 rose by 3.5% showing a
domestic economy which was firmly back on a growth
footing. Employment this year will grow by about 40,000
jobs. Wages which grew by about 1.9% on average across
2015 will expand by about 2% across the economy.
One downside is that throughout 2015 households
continued to use about half of additional income to save
or pay down debt. The pace at which this household
deleveraging abates will be key to the continued recovery
in the consumer economy this year. External uncertainty
is unlikely to weigh heavily on the consumer economy
during the year although the prospect of a Brexit vote in
the UK does bring some risks for domestic facing firms.
For example, the ESRI recently showed that an extreme
Brexit scenario could see about four percent knocked off
the wages of Irish workers if freedom of movement was
severely restricted. The reality is likely to be more benign
but the broader economic impact may still flow through to
domestic demand.
Figure 4: Investment
Figure 6: Consumer credit
140
120
100
80
€bn
Investment outlook
Investment in 2015 rose by 28.1% on the back of a
continued strong recovery in business investment.
This investment figure was flattered by a large increase
in patent purchases during the year. This was driven
by changes in MNE structures rather than acquisitions.
Investment in machinery and equipment, excluding the
volatile aircraft sector, rose by 8.4%. For 2016 we expect
business investment to be a little more muted as business
confidence is dented by global uncertainty and more local
concerns such as domestic political instability and possible
Brexit. Construction investment is still struggling to gain
momentum despite clear shortages in the housing sector.
Cost, financing, and timeline issues are the main causes of
delay with supply in the market. This will mean continued
increases in rental prices in and around the main cities
allied to a growing accommodation shortage.
3
60
40
20
0
3
4
5
6
8
7
9
0
3
6
1
2
4
5
00 200 200 200 200 200 200 201 201 201 201 201 201 201
n
n
n
n
n
n
n
n
n
n
n
n
n
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
n2
Ja
Loans for house purchase
Consumer credit
Household deposits
Ibec Economic Outlook Q1 2016
4
Figure 7: Retail sales
125
120
120
100
115
80
110
60
105
40
100
01/09/15
01/05/15
01/01/15
01/09/14
01/05/14
01/01/14
01/09/13
01/05/13
01/01/13
01/09/12
01/05/12
01/01/12
01/09/11
01/05/11
01/01/11
01/09/10
01/05/10
01/01/10
01/09/09
01/05/09
01/01/09
0
01/09/08
90
01/05/08
20
01/01/08
95
Retail sale volumes excl. cars and bars, rhs
KBC Bank Ireland / ESRI consumer expectations, 3mma, lhs
Figure 8: Contributions to growth
8
7
6
Percentage point
Summary of growth outlook
The economic outlook for 2016 is much different than at
this time in 2015. A global slowdown, local uncertainty and
the prospect of the Brexit vote loom large over Ireland’s
economic prospects. Our forecasts put economic growth
in the region of 4.6% this year but the possibility of
deviation from that figure is substantial. As such it should
be taken with appropriate caution. In the same way that
much of the drivers of Ireland’s spectacular growth last
year were external, many of the issues causing doubt
about economic growth this year are not within our control.
Policy should take the path of least harm as the economy
navigates what could be a tricky time. It is imperative that
we maintain underlying competitiveness and fiscal stability
to guard against external shocks.
5
4
3
2
1
0
-1
Personal
Expenditure
Government
Expenditure
2015
Investment
2016F
Balance
of Trade
GDP
2017F
Table 1: Risk assessment for 2016
Probability
Factors
High
Medium
Low
Financial market stability
Infrastructure gaps
Fiscal pressure
Wage pressures
Global oil prices
Exchange rates
Brexit
International economy
Labour market conditions
Downside risk
Source: Ibec assessment
Upside risk
Index
Index
Retail sales
There is a very close historical relationship between
growth in retail sales and consumer expectations. In 2015,
retail sale volumes grew by 6.4% and values grew by
2.5%. This was the largest year one year increase in retail
turnover since 2007. The key drivers of this were cars,
electrical goods, furniture and lighting. In the past three
months consumer expectations have increased by roughly
5% and given the strong positive correlation between
the two series, it seems apparent that retail sales should
continue to rise. That said, retail sale values are still 13%
below 2008 levels, despite volumes returning to their precrisis peak. This suggests that strong competition in the
retail sector continues to put downward pressure
on prices.
Ibec Economic Outlook Q1 2016
5
Labour market
Figure 9: Employment growth
6
4
2
0
y-on-y % ch
Employment forecast
Employment in Q4 2015 was up 44,100 on the same period
a year earlier with average annual employment growth
across the year of 2.6%. Total annual employment growth
slowed in Q4 to 2.3% similar to the hiring patterns seen
in 2014. We expect employment growth to be a little softer
this year than in 2015 but still strong at 40,000 new jobs or
2.1%. Damaging long-term unemployment has continued
to fall quickly throughout the year and is now at 102,100.
This is down from 204,000 at its peak in Q1 2012. Shortterm unemployment on the other hand decreased by 6,100
(-7.2%) over the year to 79,200. Short-term unemployment
Table 1: Risk assessment for 2016
has almost returned to pre-crisis levels; this will mean a
significantly tighter labour market in most sectors. With
many of those long-term unemployed formerly employed in
High
Factors
the construction sector the ability of the economy to meet
its housing needs will also have a major effect on reducing
Financial market stability
unemployment over the coming years.
-2
-4
-6
-8
-10
Probability
-12
2007Q1
2008Q3
2010Q1
Medium
2011Q3
Employment growth total
2013Q1
Low2014Q3
FTE employment growth
Infrastructure gaps
Employment by sector
Fiscal pressure
Employment
growth in 2015 was evenly split between
Dublin and the regions. Employment in Dublin rose by
Wagebetween
pressures
22,900
Q4 2014 and Q4 2015. Over the same
period employment outside Dublin rose by 21,200.
Global oil prices
Increases in employment in Dublin were driven by tourism,
ICT, personal services and industry. This suggests a good
Exchange rates
industry mix driven by domestic demand, strong exports
and
continued FDI. Employment growth outside Dublin on
Brexit
the other hand was driven by health, public administration
and
construction.economy
Growth in externally tradable industries
International
was much weaker outside Dublin with industrial, ICT and
Labour
market conditions
tourism
employment
declining. Areas cannot thrive in
the long run selling goods, which they don’t produce, to
themselves. The next government must have a renewed
focus on developing these tradeable industries outside the
capital and helping indigenous SMEs export.
Figure 10: Employment by sector
Other
Health
Education
Public admin
Admin & support
Professional services
Finance & real estate
ICT
Accommodation &
food services
Transportation
Wholesale & retail
Construction
Industry
Downside risk -6
-4
-2
Upside
risk
2
4
0
6
8
10
Persons 000’s
Dublin
Outside Dublin
Table 2: Labour market summary
Employment 000s annual average
2014
2015
2016
Agriculture
109
110
107
Industry
348
374
385
Services
1,456
1,474
1,514
Total
1,913
1,958
2,005
Employment growth (%)
1.7
2.6
2.1
Unemployed
243
204
185
Unemployment rate (%)
11.3
9.4
8.4
2,157
2,167
2,190
Labour force
Source: Ibec forecasts
Table 3: International economies summary
12
Ibec Economic Outlook Q1 2016
6
Prices and labour costs
Figure 11: Inflation
0.9%
0.7%
0.5%
y-on-y % ch
Inflation outlook
In 2015 inflation was -0.3% with overall prices in the
economy falling marginally. One would expect that
prices in a rapidly growing economy such as Ireland
would increase but prices are still only at 2008 levels.
Much of the fall in overall prices was due to oil, which
had a negative impact on transport and energy prices.
In 2016, positive improvements in the domestic
economy should see prices recover, but there are still
some external factors which will have a negative impact
on prices. Firstly, the price of oil isn’t showing any signs
of substantial recovery for the foreseeable future.
In addition, the depreciation of sterling will reduce
import prices which in turn will have downward pressure
on inflation. As a result, we forecast inflation in 2016 to
be 0.5%.
0.3%
0.1%
-0.1%
-0.3%
-0.5%
2015
Wages
Average wages across the economy rose by 1.9%
in 2015 almost in line with the results of Ibec’s HR
managers’ survey (1.75%). Although much of the
underlying change in average wages can be driven by
compositional shifts, such as hiring younger workers,
there is clear upward momentum in wage trends.
There is a large divergence between sectors when it
comes to wages. Administrative and support services
(+6.4%) and ICT (+4.9%) are the sectors where the
largest average wage increases can be seen. On
the other hand changes in other major employers
such as manufacturing (+0.3%), health (+0.4%) and
accommodation and food (+0.3%) have been much
more modest. A number of sectors including construction
(-1.9%), finance (-0.7%) and utilities (-1.9%) have seen
average wages fall but again compositional effects mean
these results should be treated with some caution.
2016(F)
2017(F)
Figure 12: % change in average weekly wage, 2015
Mining & quarrying
Utilities
Construction
Finance & real estate
Other services
Industry
Accommodation &
food services
Manufacturing
Health & social work
Arts & recreation
Public admin
Education
Professional services
Wholesale & retail
Transport & storage
ICT
Admin & support
All NACE
economic sectors
-3
-2
-1
0
1
2
3
4
5
6
% ch
Figure 13: Short and long term unemployment
200
180
160
Persons 000s
Cyclical and structural unemployment
A low unemployment rate is typically associated with
higher wage pressures in the economy. In 2015, wages
in Ireland increased by 1.9% which is broadly similar
to the increase experienced in the UK. This is unusual
given that the unemployment rate in the UK is much
lower than it is here (5.1% vs 8.8%). Looking at the
breakdown of unemployment can help explain this.
Short-term unemployment (STU) is now almost back to
pre-crisis levels, while long-term unemployment (LTU)
which still makes up the majority of total unemployment
is still more than three times higher than it was pre-crisis.
The longer someone is unemployed, the higher the
depreciation of skills and the less likely they are to return
to the workforce. This means that LTU will not have the
same downward pressures on wages as STU. This helps
explain why high unemployment in Ireland isn’t having a
negative impact on wage growth.
140
120
100
80
60
40
20
0
Short term unemployed
2007Q4
2012Q4
Long term unemployed
2015Q4
7
Probability
High
Factors
Ibec
Economic Outlook Q1 2016
Medium
Low
7
Financial market stability
International economies
Infrastructure gaps
Fiscal pressure
International economies
The
IMFpressures
forecasts that global growth in 2016 will be
Wage
3.4%, up marginally on growth last year of 3.1%. This will
Global
oil prices
be
the product
of 2.1% growth in advanced economies
and 4.3% growth in emerging market economies. This
Exchange
rates
growth
however,
is exposed to some downside risks.
For the past five years, growth in China has accounted
Brexit
for more than half of global GDP growth. Last year,
the Chinese economy grew by an estimated 6.8%, its
International economy
lowest growth rate in 25 years. This slowdown has been
the
result market
of the economy
rebalancing from investment
Labour
conditions
towards consumption. This will not only have a direct
impact on global GDP growth, but it will also have knock
on effects on other economies through reduced demand
for imports and lower commodity prices.
Figure 14: Growth in major economies, % ch
5%
Annual % ch
4%
3%
2%
1%
Upside risk
Downside risk
0%
World
Eurozone
2015
Currency movements
On
the 10th
of March,
the ECB
announced that it would
Table
2: Labour
market
summary
enhance its quantitative easing programme further by
cutting
interest rates
increasing
asset purchases.
Employment
000sand
annual
average
While currency movements after the announcement
were volatile, in theory this should lead to an additional
Agriculture
depreciation of the euro. This would mean that
favourable trading conditions which were a boost to
Industry
exports in 2015 would remain this year. This stimulus in
the eurozone combined with a tightening of monetary
Services
policy
in the US, is maintaining a positive exchange rate
against the dollar. However, the impact of quantitative
Total on the sterling exchange rate is not achieving its
easing
intended goal as the euro has actually appreciated in
Employment
growth
(%)
2016
due to growing
uncertainty
surrounding a potential
Brexit outcome in June (see page 8).
US
UK
2016(F)
2017(F)
Emerging
Figure 15: Euro exchange rates
1.6
2014
2015
1.5
110
107
374
385
0.8
1,456
1.1
1,474
1,514
0.7
1
1,913
1,958
2,005
2.6
2.1
348
0.9
1.2
6
6
01
01
r2
n2
Ma
Ja
No
v2
01
5
5
15
01
20
p2
ly
Ju
Se
5
5
01
01
y2
r2
Ma
Ma
4
5
01
n2
Ja
4
01
01
v2
p2
Se
No
4
14
20
Ju
ly
01
Ma
y2
4
01
01
r2
Ma
n2
4
0.5
1.7
Ja
0.6
Unemployed
243
204
EUR/USD, lhs
185
Unemployment rate (%)
11.3
9.4
8.4
2,157
2,167
2,190
EUR/GBP, rhs
Table 3: International economies summary
Real GDP, y-on-y % ch
Inflation, y-on-y % ch
2015
2016
2017
2015
2016
2017
Eurozone
1.5
1.7
1.7
0.9
1.0
1.3
UK
2.2
2.2
2.2
0.1
1.5
2.0
USA
2.5
2.6
2.6
0.1
1.2
1.8
Emerging markets
4.0
4.3
4.7
5.5
5.6
5.9
World
3.1
3.4
3.6
3.3
3.4
3.6
Source: IMF economic outlook
EUR/GBP
1.3
0.9
Labour force
1.1
1
1.4109
EUR/USD
2016
Ibec Economic Outlook Q1 2016
8
Brexit and Irish business
The state of play
In advance of the UK referendum on membership of the EU
there has been growing interest in the implications for Irish
business. With the vote fast approaching, YouGov’s most
recent opinion poll (March 3rd) showed 40% are in favour of
remaining within the EU, with 37% in favour of leaving and
a large proportion of voters still undecided. Though a vote to
leave is not the most likely outcome of the June referendum,
neither is it a tail risk. The betting markets, which are often
the best forecast of political outcomes, suggest a probability
of Brexit of around 30%.
Pre-June referendum
A possible Brexit carries with it a series of possible impacts
which may affect the Irish economy and business community
throughout 2016 and the years ahead. These impacts can
be split into six main categories (see table 4). The most
immediate of these is exchange rate impact. Fears of a
Brexit have pushed the sterling/euro exchange rate, which
is key for Irish companies in the traded sector, from £0.7 in
December to almost £0.8 today. It is likely that the sterling/
euro exchange rate will move toward £0.85 before the UK
referendum in June and there is a wide band of uncertainty
around the possible exchange rate effects of the vote itself.
Post Brexit - the first two years
In the very aftermath of a possible Brexit various analysts
have suggested that the sterling/euro exchange rate would
move toward or above parity and could fall to around £0.75
if the referendum result is a vote to stay in the EU. A Brexit
therefore could leave Irish firms selling into the UK market
30% less competitive by June than they were in January
through exchange rate movements alone. Further risks to
Irish exporting firms come in the form of restrictions on
freedom of trade. If a Brexit does occur it is likely that the
UK will enter into a free trade or bilateral agreement with
the EU. In the short-run that trade agreement will take at
least two years, but is likely to take much longer. This would
bring a level of uncertainty for Irish firms exporting to Britain
in the short term impacting on employment, investment
and export plans. In addition, a Brexit would bring an
immediate competitiveness impact for Ireland. Firstly,
there are opportunities for Ireland from a Brexit. UK based
corporates and financial sector firms will need a home within
the European single market. Dublin may be in a prime
position to benefit. It will face strong competition from the
larger European capitals, however, along with centres like
Luxembourg and Frankfurt. On the downside, Brexit would
mean that the UK would no longer be subject to state aid
rules when competing for FDI or encouraging indigenous
business. If the UK were to introduce new aid measures
this could boost their potential attractiveness to business.
Additionally, it is highly likely that the UK government would
introduce enhanced business and investment supports in
order to prevent capital flight in the short-run and to improve
their long run attractiveness for FDI. This could carry serious
implications for Ireland.
Post Brexit in the long-run
In the longer term even if a new agreement or trade deal
is negotiated, customs and other procedures are likely to
become more onerous for Irish exporters. The likelihood
of trade tariffs on the other hand is low. Firms operating
within both the EU and UK markets would also have to deal
with the prospect of regulatory divergence over the years
ahead. Depending on the type of new agreement this could
be minimised for some firms involved in product trade as
UK goods may have to meet common standards with the
EU’s internal market. For services companies operating
in both jurisdictions the impacts are potentially greater
as it is unlikely the UK would have to abide by common
standards in their domestic services market. On the other
hand a new agreement may not provide the same access
for the UK to the EU services market. Additionally, if the
UK voted to leave the EU it would be free to negotiate free
trade agreements with other third countries, for example the
Commonwealth nations. This could bring further competition
into the UK market in a specific number of sectors which
may impact on Irish business – particularly small indigenous
exporters. However, such trade agreements could take
years to negotiate and the level of access that the UK
would gain remains uncertain. Finally, there are a range of
other risks which will have broader business implications.
These include energy security for large energy users,
freedom of travel and broader worries about the social and
political impact. These should all be borne in mind by Irish
companies when plotting their potential exposure to Brexit.
Table 4: Brexit risks
Risk and
opportunities
Timeline
Exchange rate
risk
Trade risk
Competitiveness
and investment
impact
Regulatory
divergence
Energy security
Freedom of
movement
Sterling will
weaken against the
euro in lead up to
the referendum
and weaken
significantly in case
of Brexit.
Brexit will effect
trade between
Ireland and UK
over the long term
meaning a higher
compliance burden
for firms.
Potential positive
spillover for Ireland
from capital flight.
UK regulation
diverges with EU
standards making it
more costly to
trade across
countries.
Integrated energy
market means
Ireland exposed to
UK changes.
Movement for Irish
people to UK could
be restricted in the
case of Brexit.
Short run
Short/Long run
Short/Long run
Long run
Long run
Long run
Increased
competition in UK
market.
UK may become
more attractive
place to do
business.
Likelihood
Likely impact
High
Moderate
Low
Ibec Economic Outlook Q1 2016
9
Household finances
Concentration of debt
What is unique about the structure of Irish debt is its
concentration on a relatively small cohort of households.
Only 34% of Irish households have a mortgage on their
main residence but the average loan to value (LTV) ratio is
the highest in the eurozone. The LTV of Irish households
is twice the average and 20 percentage points higher than
second placed Netherlands. This concentration of the debt
burden has severe social costs for those households which
have high debt but actually means the debt drag on total
consumer spending power is lessened. This is because
those households are concentrated and account for a lower
proportion of overall consumption than if the debt burden
was evenly distributed. The CSO’s household consumption
and finance survey shows those householders where debt
is concentrated tend to be aged between 35 and 45, living
in the Dublin commuter belt and live in otherwise highest
income households. This divergence between households’
income and wealth positions is a key factor for consumer
facing business to bear in mind.
Consumer finance expectations
The European Commission regular survey of consumer
sentiment shows that on balance (positive responses minus
negative) more consumers thought their finances would
improve in the coming year than at any time since 2002.
In addition, more consumers on balance believed their
finances had improved over the past twelve months than
at any time since 2007. As recovery in domestic demand
takes hold household finances will improve further. Data
from the financial accounts of households suggests that
households’ net financial assets outstripped their liabilities
for the first time in almost a decade in late 2014. Given
the concentration of debt in a relatively small part of the
population the drag of this debt on the consumer economy
is likely to ease significantly during 2016.
Figure 16: Household debt ratios
274%
207%
141%
127%
127%
115%
112%
105%
94%
90%
89%
62%
58%
52%
41%
24%
17%
DE
GR
35%
23%
13%
8%
BE
ES
FR
19%
18%
8%
5%
4%
IT
IE
NL
AT
Debt to disposable income ratio (OECD)
PT
SI
SK
FI
Debt to assets ratio (ECB)
Figure 17: Debt burden by age group of
household head
9
14.3
2.3
65+
12.8
55-64
44.7
10.2
14.2
45-54
104.1
29.7
17.5
35-44
203.7
65.2
14.7
Under 35
72.1
76.7
Debt service to income ratio
Debt to income ratio
Debt to asset ratio
Figure 18: Household financial expectations index
20
10
0
-10
Balance
Household indebtedness
In an international context Irish households remain heavily
indebted despite the rapid pace of deleveraging in recent
years. As both a proportion of household disposable
income and household wealth, Ireland has among the
highest debt levels in Europe. When it comes to the ratio
of debt to disposable income Ireland has the second
highest in Europe with households having €2.07 of debt to
every euro of disposable income. This suggests that the
debt overhang of Irish households will be a bigger drag
on consumption than in many other European countries.
When it comes to our debt to asset ratio Ireland again has
the second highest debt levels in Europe, second only to
the Netherlands. Household debt in Ireland is equivalent
to 41% of total household assets compared to a eurozone
average of only 23%.
-20
-30
-40
-50
-60
5
98
r1
Ma
7
98
r1
Ma
9
98
r1
Ma
1
99
r1
Ma
3
99
r1
Ma
5
99
r1
Ma
7
99
r1
Ma
Financial situation over last 12 months
9
99
r1
Ma
1
00
r2
Ma
3
00
r2
Ma
5
00
r2
Ma
7
00
r2
Ma
9
00
r2
Ma
1
01
r2
Ma
3
01
r2
Ma
5
01
r2
Ma
Financial situation over next 12 months
Ibec Economic Outlook Q1 2016
10
Housing market
Figure 19: Building cost and price
140
130
120
110
100
Index
90
80
70
60
50
40
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Building costs
The current housing crisis is a supply side problem and
is not likely to go away until enough houses are built
to meet demand. Building costs grew by 12% between
2005 and 2008 but this was offset by rising prices which
increased by 30% over the same period. Prices have
fallen since then and are now 33% lower than they were
in 2005. At the same time however, building costs are still
at the same level as they were during the boom.
The current number of houses being built is nowhere
near what is needed to meet demand from population
growth. This disparity between costs and prices can go
some way towards explaining why supply isn’t growing to
meet demand.
House Building Cost Index
2,100
130,000
1,900
125,000
1,700
120,000
1,500
115,000
1,300
110,000
1,100
105,000
900
100,000
700
95,000
Jan-10
House Completions
135,000
500
Nov-10
Sep-11
Jul-12
May-13
Construction Employment
Mar-14
Jan-15
Nov-15
House Completions
Figure 21: House completions
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
Regional Housing Market
In terms of the regional housing market, there is some
evidence of recovery happening outside of Dublin with
26% growth in the number of houses built last year.
This was accompanied by 10% growth in house prices
(only marginally lower than growth in Dublin). Demand
for housing has still been heavily concentrated in Dublin
however, where employment and population growth over
the past few years has been strongest. This can already
be seen in rents which grew by 9% last year, and have
now surpassed pre-crisis levels (rents outside Dublin still
remain 14% below). However, the number of houses built
last year slowed in Dublin (down 12% on the previous
year), despite record growth in 2014. This slowdown of
building in one of the areas where demand is highest will
lead to more pressures building up in the coming months.
Residential Property Index
Figure 20: Construction sector
Construction Employment
Employment and completions
In 2014, both the number of completed houses and
employees in construction increased by just over 30%.
In 2015, while growth was still strong, it has slowed with
both growing only half as fast as 2014. This is to be
expected as in 2014 growth was coming from a much
lower base. That said employment in construction has
slowed in the second half of this year to less than 1% in
the final two quarters where previous growth had been
roughly 5%. This combined with the slowdown in building
commencements in the final quarter of 2015 suggests that
the rate of building growth has slowed. This slowdown in
the rate of building growth coincided with the introduction
of the Central Banks new mortgage rules. Up to that point
construction was taking place under the expectation
that prices would rise to a level where developers would
be able to meet costs. The cap on mortgages in effect
has restrained prices meaning that this will not now be
achieved. Given that the new mortgage regulations are
necessary for a stable market this implies that costs must
come down if housing supply is to meet demand.
Dublin
Excluding Dublin
Dates for your diary ‘The Innovation
Imperative’
As part Ibec’s regional event series entitled ‘The Innovation Imperative’, you
are invited to attend a business forum in your region on innovation and
managing change. Each event will examine the supports available for your
business as well as managing people through change and the workplace of
the future.
Midlands: 4 May, Hodson Bay Hotel, Athlone
South East: 5 May, Clayton Whites Hotel, Wexford
North West: 12 May, Harvey’s Point Hotel, Lough Eske, Donegal
Cork: 19 May, Maryborough House Hotel, Douglas, Cork
Mid West & Kerry: 25 May, Strand Hotel, Ennis Road, Limerick
West: 26 May, Clayton Hotel, Ballybrit, Galway
Dublin & Mid East: 31 May, The Spencer Hotel, IFSC, Excise Walk, Dublin 1
Events will run from 11am-1pm and will be followed by a networking lunch.
To book your place, please visit www.ibec.ie/events
Ibec Economic Outlook Q1 2014
12
Further information
Fergal O’Brien
Director of Policy and Chief Economist
T: 01 605 1544
E:[email protected]
Gerard Brady
Senior Economist
T: 01 605 1515
E:[email protected]
Alison Wrynn
Economist
T: 01 605 1603
E:[email protected]
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