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Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3...

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Budget 2021: Macroeconomic outlook Presentation to Irish Fiscal Advisory Council Economics Division, Department of Finance 25 th September 2020
Transcript
Page 1: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Budget 2021: Macroeconomic outlook

Presentation to Irish Fiscal Advisory Council

Economics Division, Department of Finance

25th September 2020

Page 2: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

2 An Roinn Airgeadais | Department of Finance

Birds-eye view

• Recent developments

• Post-lockdown macro-economic developments

• Forecast framework and methodological approach

• DoF short-term forecasts

• Overview of supply-side developments

• Conclusion

Page 3: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

3 An Roinn Airgeadais | Department of Finance

Recent developments

Page 4: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

4 An Roinn Airgeadais | Department of Finance

Truly global symmetric shock

“Two-speed” economic impact, q/q per cent changeRecord GDP fall in key trading partners, q/q per cent change

-23%

-18%

-13%

-8%

-3%

2%

Q1/2

019

Q2/2

019

Q3/2

019

Q4/2

019

Q1/2

020

Q2/2

020

United States

Euro area

United Kingdom

- 9%

-20%

-12%

-23

-18

-13

-8

-3

2

20

19

Q4

20

20

Q1

20

20

Q2

GDP MDD

Export portfolio

Source: a) Macrobond b) CSO

Page 5: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

5 An Roinn Airgeadais | Department of Finance

Domestic demand vs. external demand

-10

-5

0

5

10

15

20

201

9M

01

201

9M

02

201

9M

03

201

9M

04

201

9M

05

201

9M

06

201

9M

07

201

9M

08

201

9M

09

201

9M

10

201

9M

11

201

9M

12

202

0M

01

202

0M

02

202

0M

03

202

0M

04

202

0M

05

202

0M

06

202

0M

07

F&B Core M&E Chem Other Core goods

Contributions to ‘core goods’ export growth (y-on-y, 3MMA)

-20

-15

-10

-5

0

5

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2014 2015 2016 2017 2018 2019 2020

C G B&C Other modified investment MDD

Q2: modified domestic demand = -16 per cent

Source: a) CSO b) CSO

Page 6: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

6 An Roinn Airgeadais | Department of Finance

Exports proving resilient (so far) to fall in external demand

Contributions to Irish exportsGDP – modest revisions in key trading partners

-13.5

-11.5

-9.5

-7.5

-5.5

-3.5

-1.5

0.5

2.5

2020 (OECD June) 2020 (OECD September)

United Kingdom Euro Area United States

+3.5%+1.4% +1.2%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2

Computer services

Other services

Pharma-chem

Other goods

Total exports

Source: a) OECD b) CSO

Page 7: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

7 An Roinn Airgeadais | Department of Finance

Fall-out in the labour market unprecedented

Unemployment rate, per cent = highest level ever [c. twice GFC rate]Change in employment levels (000’s, y/y)

-600

-500

-400

-300

-200

-100

0

100

200

12Q

1

12Q

2

12Q

3

12Q

4

13Q

1

13Q

2

13Q

3

13Q

4

14Q

1

14Q

2

14Q

3

14Q

4

15Q

1

15 Q

2

15 Q

3

15 Q

4

16 Q

1

16 Q

2

16 Q

3

16 Q

4

17 Q

1

17 Q

2

17 Q

3

17 Q

4

18 Q

1

18 Q

2

18 Q

3

18 Q

4

19 Q

1

19 Q

2

19 Q

3

19 Q

4

20 Q

1

20 Q

2

COVID-adjusted

[ headline figure includes those on PUP who

as classified as employed under ILO definition ]

Source: a) & b) CSO

17.3% Dec 1985

4%June 2001

Peak = 16% Feb 2012

29.1% April 2020

15.4%Aug 2020

0

5

10

15

20

25

30

35

Jun-8

3

Jun-8

4

Jun-8

5

Jun-8

6

Jun-8

7

Jun-8

8

Jun-8

9

Jun-9

0

Jun-9

1

Jun-9

2

Jun-9

3

Jun-9

4

Jun-9

5

Jun-9

6

Jun-9

7

Jun-9

8

Jun-9

9

Jun-0

0

Jun-0

1

Jun-0

2

Jun-0

3

Jun-0

4

Jun-0

5

Jun-0

6

Jun-0

7

Jun-0

8

Jun-0

9

Jun-1

0

Jun-1

1

Jun-1

2

Jun-1

3

Jun-1

4

Jun-1

5

Jun-1

6

Jun-1

7

Jun-1

8

Jun-1

9

Jun-2

0

Page 8: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

8 An Roinn Airgeadais | Department of Finance

Weak sentiment = precautionary saving

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

0

20

40

60

80

100

120

01/2

019

02/2

019

03/2

019

04/2

019

05/2

019

06/2

019

07/2

019

08/2

019

09/2

019

10/2

019

11/2

019

12/2

019

01/2

020

02/2

020

03/2

020

04/2

020

05/2

020

06/2

020

07/2

020

08/2

020

Consumer (lhs)

Industry (rhs)

Services (rhs)

Source: a) KBC & DG ECFIN, b) CBI

Consumer & business sentiment Change in household deposits, February to July, € million

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2017 2018 2019 2020

Page 9: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

9 An Roinn Airgeadais | Department of Finance

Post-lockdown macro-economic developments

Page 10: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

10 An Roinn Airgeadais | Department of Finance

Ultra-high frequency / real-time data confirm rebound in q3

Number of cars on Irish roads

Source: a) TII and b) Revolut

Daily Revolut transactions vs daily new infections (7 day ma)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

100

200

300

400

500

600

700

800

900

1000

07/0

2/2

020

21/0

2/2

020

06/0

3/2

020

20/0

3/2

020

03/0

4/2

020

17/0

4/2

020

01/0

5/2

020

15/0

5/2

020

29/0

5/2

020

12/0

6/2

020

26/0

6/2

020

10/0

7/2

020

24/0

7/2

020

07/0

8/2

020

21/0

8/2

020

04/0

9/2

020

18/0

9/2

020

Daily New Cases, 7 Day MA Spending per user, Indexed 7 day MA

Level 3

restrictions

introduced in

Dublin

Schools

Close

Non-essential

movement

restricted

Re-opening Phases

1 2 3

Local

restrictions

in three

counties

introduced.

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

07/0

2/2

020

14/0

2/2

020

21/0

2/2

020

28/0

2/2

020

06/0

3/2

020

13/0

3/2

020

20/0

3/2

020

27/0

3/2

020

03/0

4/2

020

10/0

4/2

020

17/0

4/2

020

24/0

4/2

020

01/0

5/2

020

08/0

5/2

020

15/0

5/2

020

22/0

5/2

020

29/0

5/2

020

05/0

6/2

020

12/0

6/2

020

19/0

6/2

020

26/0

6/2

020

03/0

7/2

020

10/0

7/2

020

17/0

7/2

020

24/0

7/2

020

31/0

7/2

020

07/0

8/2

020

14/0

8/2

020

21/0

8/2

020

28/0

8/2

020

04/0

9/2

020

11/0

9/2

020

18/0

9/2

020

Page 11: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

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Body Level Five

11 An Roinn Airgeadais | Department of Finance

‘Unofficial data’ broadly confirmed by ‘official data’

Unemployment / under-employment falling but v. highRetail sales [=goods] suggest release of pent-up demand

0

20

40

60

80

100

120

Jan-2

0

Fe

b-2

0

Mar-

20

Apr-

20

May-2

0

Jun-2

0

Jul-20

January

2020 =

100

Schools close

12th March

Full lockdown

27th March

Phase 1

18th May

Phase 2

8th June

Phase 3

29th June

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

23-M

ar

30-M

ar

06-A

pr

13-A

pr

20-A

pr

27-A

pr

04-M

ay

11-M

ay

18-M

ay

25-M

ay

01-J

un

08-J

un

15-J

un

22-J

un

29-J

un

06-J

ul

13-J

ul

20-J

ul

27-J

ul

03-A

ug

10-A

ug

17-A

ug

24-A

ug

31-A

ug

07-S

ep

Pandemic Unemployment Payment Live Register TWSS (currently in receipt)

Phase 2

June 8thPhase 3

June 29thPhase 1

May 18th

Total = c. 800 K

peak = 1.2m

PUP = 206 K

(as of 21st Sept.)

LR = c.215 K

(as of mid-Sept.)

TWSS = 360 K

(as of end-Aug.)

Source: a) & b) CSO & DoF calculations

Page 12: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

12 An Roinn Airgeadais | Department of Finance

Majority of firms trading normally but uncertainty remains high

Corporate deposits by quarter, € million

Source: a) CSO and b) CBI

63%

21%

11%

3%1%

1%

Trading at capacity

Trading at <50%

Trading at >50%

Ceased trading temporarily

Ceased trading permanently

Don't know

CSO Covid-19 Business Impact Survey Results, 27 July - 23 August

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

201

5Q

1

201

5Q

2

201

5Q

3

201

5Q

4

201

6Q

1

201

6Q

2

201

6Q

3

201

6Q

4

201

7Q

1

201

7Q

2

201

7Q

3

201

7Q

4

201

8Q

1

201

8Q

2

201

8Q

3

201

8Q

4

201

9Q

1

201

9Q

2

201

9Q

3

201

9Q

4

202

0 Q

1

202

0 Q

2

Page 13: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

13 An Roinn Airgeadais | Department of Finance

Virus-resilience: Ireland and elsewhere

Re-introduction of restrictions in several EU MSUp-tick in infection rate in EU (no. infections per 100k, 7 day m.a.)

Source: a) ECDC and b) Oxford University

0

10

20

30

40

50

60

70

80

90

100

10fe

b2020

20fe

b2020

01m

ar2

02

0

11m

ar2

02

0

21m

ar2

02

0

31m

ar2

02

0

10a

pr2

02

0

20a

pr2

02

0

30a

pr2

02

0

10m

ay20

20

20m

ay20

20

30m

ay20

20

09ju

n20

20

19ju

n20

20

29ju

n20

20

09ju

l2020

19ju

l2020

29ju

l2020

08a

ug2020

18a

ug2020

28a

ug2020

07sep2

020

IE

lockdown stringency index for EU MS

0

5

10

15

20

25

01

/03

/20

01

/04

/20

01

/05

/20

01

/06

/20

01

/07

/20

01

/08

/20

01

/09

/20

IE

Page 14: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

14 An Roinn Airgeadais | Department of Finance

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

19/0

1/2

0

12/0

2/2

0

07/0

3/2

0

31/0

3/2

0

24/0

4/2

0

18/0

5/2

0

11/0

6/2

0

05/0

7/2

0

29/0

7/2

0

22/0

8/2

0

15/0

9/2

0

EA

U.S.

U.K.

lockdowns deconfinement

Apple mobility indices for Ireland’s MTPs

Source: a) Apple & b) IHS Markit

Spilling over into real-time data

10

20

30

40

50

60

70

03/2

020

04/2

020

05/2

020

06/2

020

07/2

020

08/2

020

09/2

020

Euro Area

United Kingdom

United States

PMIs softening

Composite PMI, 50 = no change

Page 15: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

15 An Roinn Airgeadais | Department of Finance

Forecast framework and methodological approach

Page 16: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

16 An Roinn Airgeadais | Department of Finance

Budget 2021: key building blocks of forecast

• Forecast horizon: 2020 and 2021

: exceptional uncertainty

: medium-term projections in spring

• Key assumptions: no vaccination

- continued demand / supply constraints

: disorderly end to transition period- tariffs

- NTBs

- supply chains

Page 17: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

17 An Roinn Airgeadais | Department of Finance

Methodological approach

• Calibration = challenging : no historical precedent for (1) pandemic or (2) IE-UK bilateral trade on WTO terms

• Construct initial ‘baseline’ forecast = no vaccine in 2021

: social distancing [ supply and demand effects ]

: heightened risk aversion / uncertainty [ impacting on savings and investment decisions ]

: take account of sector-specific [ +ve. and –ve. ]

: Brexit = limited FTA [ less benign than previous assumptions ]

• Layer-in disruption to EU-UK trade: “no-deal shock” treated as additive [ evidence base = DoF/ESRI ]

: First year impact mostly on traded side

• Consultation with third parties: Central Bank, IMF, ESRI on forecast approach and methodological issues

Page 18: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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18 An Roinn Airgeadais | Department of Finance

Impact of no trade deal UK exit – medium term

95

100

105

110

115

120

2019 2020 2021 2022 2023 2024 2025

no brexitdeal baselineno deal

No deal = 3.8 per cent

below no Brexit

Counterfactual deal =

2.1 per cent lower

-5.0

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2021 2022 2023 2024 2025

No FDI

FDI

Net Impact2 year lag on FDI

Level would be 1.2 per

cent lower without FDI

GDP levels – 2019 = 100 GDP - pp difference to hypothetical no UK exit baseline

Source: a) & b) DoF and ESRI calculations

Page 19: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

19 An Roinn Airgeadais | Department of Finance

Dual shocks: Covid and disorderly ‘Brexit’

Evidence base:

Examination of the sectoral overlap of COVID-19 and Brexit Shocks (Daly & Lawless, 2020)

Main Findings:

• Limited overlap in the sectors exposed to both Covid-19 and Brexit shocks

• Adding shocks together- broader range of at risk

- but sectors do not appear to be impacted by interaction effects

• Important: impacts likely to vary at firm level.

• SME revenue shortfall of €8-15bn by end-year (ESRI)- reduced capacity to absorb an additional shock?

Approach:

• Sectoral impact of both shocks

• Sectoral overlap

• Domestic supply chain interactions

Page 20: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

20 An Roinn Airgeadais | Department of Finance

Sectoral impact of dual shock: evidence base

BREXIT

Green Amber Red Sum Covid-19 Sectors

CO

VID

-19

Green 7 10 6 23

Amber 2 11 5 18

Red 12 4 0 16

Sum Brexit Sectors 21 25 11 57

Page 21: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

21 An Roinn Airgeadais | Department of Finance

DoF short-term forecasts

Page 22: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

22 An Roinn Airgeadais | Department of Finance

Consumer spending: precautionary savings to remain high

Personal consumer spending, contribution to y/y % change Quarterly profile for consumption, 2020q1=100

3.2

-7.7

5.8

-8

-6

-4

-2

0

2

4

6

2019 2020 2021

Services

Goods

PCE

Source: a) & b), CSO & DoF projections

projections

80

85

90

95

100

105

2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4

No-Deal Deal - counterfactual

projections

Page 23: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five

23 An Roinn Airgeadais | Department of Finance

Uncertainty to curtail investment

Modified investment, contribution to y/y % change Quarterly profile for modified investment, 2020q1 = 100

1.2

-19.3

5.1

-20

-15

-10

-5

0

5

10

2019 2020 2021

B&C

Core M&E

Other Modified Investment

Modified Investment

projections

Source: a) & b) CSO & DoF projections

70

75

80

85

90

95

100

105

2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4

No-Deal

Deal counterfactual

projections

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Exports to outperform in 2020; WTO tariffs a headwind for 2021

Contributions to export growth, pp Quarterly Profile for exports, 2020q1 = 100

10.5%

1.9%

1.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2019 2020 2021

Contract manufacturing

Underlying goods

Services

Total Exports

projections

Source: a) and b), CSO & DoF projections

86

88

90

92

94

96

98

100

102

104

106

108

2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4

Deal counterfactual

No deal forecast

projections

Page 25: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Imports broadly in line with final demand

Quarterly Profile – Modified Imports, 2020q1 = 100Import growth y/y %

86

88

90

92

94

96

98

100

102

104

106

20

19

Q1

20

19

Q2

20

19

Q3

20

19

Q4

20

20

Q1

20

20

Q2

20

20

Q3

20

20

Q4

20

21

Q1

20

21

Q2

20

21

Q3

20

21

Q4

Deal counterfactual

No deal forecast

projections

Source: a) CSO & b) DoF projections

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2019 2020 2021

Average Model Prediction

Modified Imports

projections

Page 26: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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External accounts: surplus reduced by assumed tariffs / NTBs / etc

Modified Current Account, % of GNI*

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2019 2020 2021

projections

50%

55%

60%

65%

70%

75%

80%

85%

2019 2020 2021

projections

Modified Trade Balance, % of GNI*

Source: a) & b) CSO & DoF projections

Page 27: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Inflationary pressures non-existent

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

20

19

Q1

20

19

Q2

20

19

Q3

20

19

Q4

20

20

Q1

20

20

Q2

20

20

Q3

20

20

Q4

20

21

Q1

20

21

Q2

20

21

Q3

20

21

Q4

Energy Core Services

Unprocessed Food Processed Food

NEIG Actual Rents for Housing

All Items HICP Core

projections

Source: a) macrobond & b) eurostat

Core inflation remains muted, y/y % change

0

10

20

30

40

50

60

70

80

07/1

9

07/1

9

08/1

9

09/1

9

10/1

9

11/1

9

12/1

9

01/2

0

02/2

0

03/2

0

04/2

0

05/2

0

06/2

0

07/2

0

08/2

0

09/2

0

Human

transmission

confirmed

OPEC +

supply

cut

3 month

low

Brent spot price, close USD

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28 An Roinn Airgeadais | Department of Finance

1500

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

Q1 2

016

Q2 2

016

Q3 2

016

Q4 2

016

Q1 2

017

Q2 2

017

Q3 2

017

Q4 2

017

Q1 2

018

Q2 2

018

Q3 2

018

Q4 2

018

Q1 2

019

Q2 2

019

Q3 2

019

Q4 2

019

Q1 2

020

Q2 2

020

Q3 2

020

Q4 2

020

Q1 2

021

Q2 2

021

Q3 2

021

Q4 2

021

Labour market has borne the brunt

Projections

Employment levels (‘000) Employment growth

-15.0

-10.0

-5.0

0.0

5.0

10.0

2019 2020 2021

Projections

Source: a) & b) CSO & DoF projections

Page 29: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Unemployment shock lingers in the near-term: L-intensive sectors

Unemployment rate (% of labour force)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2019 2020 2021

10.7%

projections

15.9%

5.0%

Quarterly profile for unemployment rate (% of labour force)

Source: a) & b) DoF projections

4.8%5.4% 5.2%

4.5%

8.7%

27.4%

15.6%

12.5%

11.4%10.6% 10.1%

9.7%

11.6%

10.9%10.4%

10.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021

Deal counterfactual

No deal forecast

projections

Page 30: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Evolution of ‘wage bill’

2018

2019

2020

2021

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

Pa

y p

er

em

plo

ye

e g

row

th (

y-o

n-y

, %

)

Unemployment rate (% of labour force)

Wage “Philips Curve” Recovery in labour income driven by employment recovery

Source: a) & b) CSO & DoF projections

-15.0

-10.0

-5.0

0.0

5.0

10.0

2019 2020 2021

Employees

Pay per employee

Wage bill

projections

Page 31: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

31 An Roinn Airgeadais | Department of Finance

Household savings = precautionary motive

Household savings rate, per cent of disposable incomeContribution to real disposable income growth

0

5

10

15

20

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

projections

Source: a) CBI & DoF b) CSO & DoF

4.7

-0.5

2.1

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2019 2020 2021

labour

capital income

net cash transfers

PCD

real disposable income

projections

Page 32: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Contributions to growth in GDP and MDD

Contribution to change in GDP – y/y% Contribution to change in MDD – y/y%

3.6

1.0

-0.6

1.9

-3.5

2.0

5.6

-2.5

1.4

-8

-6

-4

-2

0

2

4

6

2019 2020 2021

MNX

Stocks and Statistical Discrepancy

MDD

GDP

projections

2.0

-4.7

3.4

1.2

2.5

-0.4

1.1

-2.8

1.0

3.3

-6.5

3.9

-10

-8

-6

-4

-2

0

2

4

6

2019 2020 2021

Personal consumption

Public consumption

Construction

Other Modified Investment

Modified domestic demand

projections

Source: a) & b) CSO & DoF projections

Page 33: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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33 An Roinn Airgeadais | Department of Finance

Assumed quarterly profile for economic activity

GDP, 2019q4=100

Source: CSO & DoF projections

If deal: back to pre-crisis level (=2019q4)

by end-2021

[ not baseline scenario ]

If ‘no deal’: Still below pre-crisis level (=2019q4)

by end-2021

[ baseline scenario ]

90

95

100

105

2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4

No-Deal

Deal counterfactual

Page 34: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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34 An Roinn Airgeadais | Department of Finance

National income and flow-of-funds

Contribution to change in national income – y/y%

2.1

-3.1

2.2

0.6

-2.1

0.8

6.1

3.1

-1.0

8.9

-2.0

2.1

-6

-4

-2

0

2

4

6

8

10

2019 2020 2021

Labour

Taxes/subsidies

Statistical discrepency

GOS

National Income

projections

Modified S-I (% of GNI*)

3.3

7.4

1.5

3.4

8.1

7.2

1.0

-9.0

-5.7

7.76.7

3.4

-12

-7

-2

3

8

13

18

2019 2020 2021

Modified Corporate S-I

Household S-I

Government S-I

Modified S-I

projections

Source: a) & b) CSO & DoF projections

Page 35: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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2019 2020 2021

GDP 5.6 -2.5 1.4

Modified Domestic Demand 3.3 -6.5 3.9

Modified gross national income (current prices) 7.6 -5.6 1.8

Personal consumption 3.2 -7.7 5.8

Government consumption 6.3 13.3 -1.8

Modified investment 1.2 -19.3 5.1

Exports 10.5 1.9 1.0

Modified imports 12.4 1.8 2.3

Modified current account 7.7 6.7 3.4

Employment 2.9 -13.8 7.1

Unemployment (rate) 5.0 15.9 10.7

Budget 2021 forecasts, annual per cent change unless stated

Page 36: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Forecast Changes vs SPU (2020): 2020 & 2021

Contributions to revision – 2020, pp Contributions to revision – 2021, pp

Source: a) & b) Department of Finance

*contributions may not sum due to rounding

Page 37: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Downside Upside

Second national lock-down Widespread deployment of vaccine earlier than expected

National lockdowns in main trading partners Significant progress on effective treatments limit mortality rates

Premature fiscal tightening in main trading partners Brexit trade agreement concluded (this year or next)

Financial sector becomes “amplifier” Faster-than-expected recovery in trading partners

Brexit impact leads to non-linearities

Beyond short-term:

“Scarring” effects [ labour market mismatch / productivity ]

Legacy effects [debt (public & private) / re-shoring / de-globalisation

Risk matrix – balance = tilted to downside

Page 38: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

38 An Roinn Airgeadais | Department of Finance

Overview of supply-side developments

Page 39: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Possible recovery scenarios [ publication (evidence base) = forthcoming ]

Baseline:

• No Covid, Brexit ‘deal’ scenario

Recovery:

• rapid rebound to pre-pandemic level output

Swoosh:

• slow recovery due to scarring

• more likely the longer it lasts

2nd wave:

• 2nd lockdown

• slow recovery due to precautionary saving etc.

Medium term scenarios for real GDP (€mn)

Source: Department of Finance

70,000

75,000

80,000

85,000

90,000

95,000

100,000

105,000

110,000

Baseline

Recovery

Swoosh

2nd wave

Page 40: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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‘Trend’ growth post COVID-19 ?

Transmission channel Impact on potential output growth

Labour Migration -

Labour Supply - / +

Education/Training - / +

Capital Stock Investment - / +

Social distancing -

Total Factor Productivity Within firms - / +

Between firms - / +

Reallocation of activity - / +

See also: Mauro, Filippo di, and Chad Syverson. “The COVID Crisis and Productivity Growth.” VoxEU.Org (blog), April 16, 2020. https://voxeu.org/article/covid-crisis-and-productivity-growth

Young, Garry. “Covid-19: Deficits, Debt and Fiscal Strategy.” Presented at the Institute for Fiscal Studies (IFS) and the National Institute of Economic and Social Research (NIESR) (Webinar), July 1, 2020.

https://www.ifs.org.uk/uploads/Presentations/Covid-19-Deficits-debt-and-fiscal-strategy.pdf

Page 41: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

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Alternative output gap measure: GDP, Extended HP

Average of K and L model estimates

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

202

4

202

5

Source: a) & b) Department of Finance

0

5

10

15

20

25

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

202

4

SPU 2019 Budget 2021

Potential Output

Page 42: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

42 An Roinn Airgeadais | Department of Finance

Conclusion

Page 43: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

43 An Roinn Airgeadais | Department of Finance

Summary

• Economy in finely balanced position

- shock = disproportionate impact on labour-intensive service sectors

• Labour market has borne the brunt

- some firms / sectors potentially not viable with social distancing

- Unemployment rate likely to be ‘higher for longer’

• Outlook is for very modest growth

- Drag on exports from no-deal Brexit

- MDD recovering slowly

• Risks heavily tilted to downside

- Vaccine a key unknown

- Significant discontinuities on downside

Page 44: Budget 2021: Macroeconomic outlook · 2020. 10. 1. · Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ... suggest release of pent-up demand Unemployment

44 An Roinn Airgeadais | Department of Finance

Disclaimerand other information:

The forecasts in this presentationare those of the Departmentof Finance.

Outturn data are sourced from a variety of sources including the Department of Finance, Central Statistics Office, European Commission (AMECO) and

CentralBank of Ireland.

For the latestpublicationssee links below,and follow the Department of Financeon socialmedia:

• Trade costs and Irish goods exports – published 23rd September 2020; available here

• A high frequency model of the COVID-19 pandemic – published 23rd September 2020; available here

• Examination of the sectoral overlap of COVID-19 and Brexit shocks – published 17th September 2020; available here

@IRLDeptFinance Department of Finance Ireland

https://twitter.com/IRLDeptFinance https://www.linkedin.com/company/department-of-finance-ireland/


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