Quarterly Economic Commentary, Spring 2019

Abstract

2018 saw the Irish economy register another sizeable increase in activity with GDP estimated to have risen by 6.7 per cent. While some of this increase is due to the disproportionate activities of a select number of multinational firms, the underlying performance of the economy is still remarkably strong. Increases in taxation receipts, even aside from corporation taxes and the ongoing dynamic performance of the labour market, are compelling evidence of this. However, the present year has seen international sources of growth cool; the underlying weaknesses in the Chinese economy along with the deterioration in the trade relationship between the US and China have contributed to a reduction in the global outlook. The recovery in the Euro Area has also stalled somewhat. Inevitably, this will impact on the domestic economy, with the contribution of the trade balance to growth set to decline. These developments have led us to revise downwards our forecast of real GDP growth in 2019 from 4.2 per cent in the previous Winter Commentary to 3.8 per cent for 2019. It should be noted that all forecasts in the Commentary, unless otherwise stated, assume that the United Kingdom remains a member of the European Union. The importance of Brexit for the Irish economy has seen the Department of Finance commission a joint research project with the ESRI to examine various different Brexit scenarios using COSMO-the structural model of the Irish economy. Other empirical work completed by researchers at the Institute (Lawless, 2016a; Lawless, 2016b; Lawless and Morgenroth, 2018) 1 examining the Brexit issue from a microeconomic persective has also been used in this exercise. The results of this analysis, which are published in a paper with the Commentary (Bergin et al., 2019), are used in the Commentary to examine the implications for the short-run growth outlook of the different scenarios. Therefore, like the previous Commentary, we produce a baseline set of forecasts under a no-Brexit scenario and complement this with a set of forecasts associated with certain Brexit outcomes. Overall, this results in a baseline real GDP forecast of 3.8 per cent for the Irish economy in 2019 and 3.4 per cent in 2020. However, under a no-deal exit for the 1

Quarterly Economic Commentary, Winter 2019

“…In Ireland on the other hand there is little evidence that lower policy rates are being passed on to consumers as the interest rate in 2019 has remained relatively flat. The Research Note in this Commentary by Allen Coghlan et al (2019) show that affordability issues in the Irish housing market are growing over time. The relatively high rates on borrowing faced by Irish homeowners are likely to exacerbate these affordability challenges.…”

Carbon taxes and compensation options

“…Source: Authors' calculations using the 2015-16 HBS.Notes:Deciles of household income equivalised using CSO equivalence scales. Incomes and expenditures uprated to 2019 levels using actual and forecast average hourly earnings and Consumer Price Index (CPI) growth fromMcQuinn et al (2019).…”

“…Tableshows share of households reporting an inability to afford adequately heating their home ('subjective measure') and the share spending more than the specified percentage of after housing cost (AHC) income on light and heat. Incomes and expenditures uprated to 2019 levels using actual and forecast average hourly earnings and CPI growth fromMcQuinn et al (2019).…”

Assessing the distributional impact of budgetary policy: the role of benchmarks and indexation

“…Price and wage inflation for 2020 are calculated using the average of the ESRI's Quarterly Economic Commentary (QEC) forecast and the Central Bank's Quarterly Bulletin forecast. BothMcQuinn et al (2019) and Central Bank of Ireland (2019) forecast a CPI of +1.4% in 2020. QEC (2019) forecasts a 3.5% growth in average hourly earnings while Central Bank of Ireland (2019) forecasts +3.6% for compensation per employee.…”