Budget 2020: macro-economic backdrop · Budget 2020: macro-economic backdrop John McCarthy Chief...

Budget 2020: macro-economic backdrop

John McCarthy

Chief Economist, Department of Finance

Presentation at ESRI Budget Perspectives Conference

13th June 2019

2 An Roinn Airgeadais | Department of Finance

Birds-eye view

• External demand: headwinds picking up

• Latest macro developments

• The labour Market

• The public finances

• ‘Brexit’ casts a long shadow

• Conclusion


External demand: headwinds picking up


UK: business substituting labour for capital

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

16

Q1

20

16

Q2

20

16

Q3

20

16

Q4

20

17

Q1

20

17

Q2

20

17

Q3

20

17

Q4

20

18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

*

per

cent change

investment and ouptut, y/y growth in the UK economy

investment

GDP

Brexit uncertainty

firms postponing investment

0

2

4

6

8

10

12

01/1

2/1

991

01/1

1/1

992

01/1

0/1

993

01/0

9/1

994

01/0

8/1

995

01/0

7/1

996

01/0

6/1

997

01/0

5/1

998

01/0

4/1

999

01/0

3/2

000

01/0

2/2

001

01/0

1/2

002

01/1

2/2

002

01/1

1/2

003

01/1

0/2

004

01/0

9/2

005

01/0

8/2

006

01/0

7/2

007

01/0

6/2

008

01/0

5/2

009

01/0

4/2

010

01/0

3/2

011

01/0

2/2

012

01/0

1/2

013

01/1

2/2

013

01/1

1/2

014

01/1

0/2

015

01/0

9/2

016

01/0

8/2

017

01/0

7/2

018

per

cent

unemployment rate

50-year low


-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0

1

2

3

4

5

6

7

8

03

/01/2

010

03

/04/2

010

03

/07/2

010

03

/10/2

010

03

/01/2

011

03

/04/2

011

03

/07/2

011

03

/10/2

011

03

/01/2

012

03

/04/2

012

03

/07/2

012

03

/10/2

012

03

/01/2

013

03

/04/2

013

03

/07/2

013

03

/10/2

013

03

/01/2

014

03

/04/2

014

03

/07/2

014

03

/10/2

014

03

/01/2

015

03

/04/2

015

03

/07/2

015

03

/10/2

015

03

/01/2

016

03

/04/2

016

03

/07/2

016

03

/10/2

016

03

/01/2

017

03

/04/2

017

03

/07/2

017

03

/10/2

017

03

/01/2

018

03

/04/2

018

03

/07/2

018

03

/10/2

018

03

/01/2

019

long term interest rates,

per cent

q/q growth rate, per cent

r-g < 0 ?

euro area: re-domination risk emerging?Italy: real and financial developments

48

49

50

51

52

53

54

55

56

57

58

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

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

q-o

-q g

row

th

EA GDP EA PMI


0

1

-3

-2

-1

0

1

2

3

4

197

7

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6

201

9

perc

en

tage p

oin

ts

yield curve

US recessions

US: near-inversion of yield curve an omen?

49

50

51

52

53

54

55

56

57

0

0.2

0.4

0.6

0.8

1

1.2

20

16

Q1

20

16

Q2

20

16

Q3

20

16

Q4

20

17

Q1

20

17

Q2

20

17

Q3

20

17

Q4

20

18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

q-o

-q g

row

th

US GDP PMI


China: vulnerabilities weighing on output

0

50

100

150

200

250

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

per

cent

of G

DP

private (=household and corporate) debt

0

2

4

6

8

10

12

201

0 Q

1

201

0 Q

3

201

1 Q

1

201

1 Q

3

201

2 Q

1

201

2 Q

3

201

3 Q

1

201

3 Q

3

201

4 Q

1

201

4 Q

3

201

5 Q

1

201

5 Q

3

201

6 Q

1

201

6 Q

3

201

7 Q

1

201

7 Q

3

201

8 Q

1

201

8 Q

3

201

9 Q

1

year-

on-y

ear

per

cent

change

China: GDP growth [4qma]

higher leverage post-2010

weighing on I, C


Let’ not forget about structural factors - peak’ globalisation?

0

5

10

15

20

25

30

35

40

45

50

20

25

30

35

40

45

50

55

60

65

197

0

197

1

197

2

197

3

197

4

197

5

197

6

197

7

197

8

197

9

198

0

198

1

198

2

198

3

198

4

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

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

6completion of WTO “Uruguay round”

global financial crisis

Source: World Bank, OECD, BIS, DoF calculations

China’s accession to WTO

TRADE INTENSITY =

world trade as per cent of GDP

FINANCIAL TRADE INTENSITY =

cross-border banking claims as per cent of GDP

decade-long ‘blip’ or fundamental reversal?


Import tariffs (and retaliatory measures) - ½ pp off level of world GDP

$34bn, 25%

$16bn, 25%

$200bn, 10%

$200bn, 25% $300bn, 25%

0%

5%

10%

15%

20%

25%

30%A

pr-

20

18

Ma

y-2

01

8

Ju

n-2

01

8

Ju

l-2

01

8

Au

g-2

01

8

Se

p-2

01

8

Se

p-2

01

8

Oct-

20

18

No

v-2

01

8

De

c-2

01

8

Ja

n-2

01

9

Fe

b-2

019

Ma

r-2

01

9

Ap

r-2

01

9

Ma

y-2

01

9

Ju

n-2

01

9

Ju

l-2

01

9

Au

g-2

01

9

Au

g-2

01

9

tari

ff,

pe

r cent

As it stands, tariffs

will apply to all

$550bn of Chinese

exports to US by

June

Note: size of bubble corresponds to export volume


Latest macro-economic developments


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

€ m

illio

n

increase in exports (nominal) since low-point [4qrs]

exports: 2012q1 pharma exports

"under contract"other_G computer

services

aircraft

leasingroyalties

other

servicesexports: 2018q4

level of exports has doubled since low-point

Exports continue to lead the way, less-so in labour-intensive sectors

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Q1

2015

Q2

2015

Q3

2015

Q4

2015

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Q1

2017

Q2

2017

Q3

2017

Q4

2017

Q1

2018

Q2

2018

Q3

2018

Q4

2018

contributions to real MDD, pp

C G b&c core m&e MDD

Low-frequency suggest moderation in H2/18 – higher frequency mixed bag

48

50

52

54

56

58

60

62

Jan-2

01

7

Mar-2

01

7

May-2

01

7

Jul-20

17

Sep-2

01

7

No

v-20

17

Jan-2

01

8

Mar-2

01

8

May-2

01

8

Jul-20

18

Sep-2

01

8

No

v-20

18

Jan-2

01

9

Mar-2

01

9

May-2

01

9

Services PMI

Manufacturing PMI

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


increase in household savings rate last year – some reversal in Q1

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

Q1 2

000

Q1 2

001

Q1 2

002

Q1 2

003

Q1 2

004

Q1 2

005

Q1 2

006

Q1 2

007

Q1 2

008

Q1 2

009

Q1 2

010

Q1 2

011

Q1 2

012

Q1 2

013

Q1 2

014

Q1 2

015

Q1 2

016

Q1 2

017

Q1 2

018

personal consumer spending

household disposable income

savings

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jan-1

5

Mar-1

5

May-1

5

Jul-1

5

Sep

-15

No

v-15

Jan-1

6

Mar-1

6

May-1

6

Jul-1

6

Sep

-16

No

v-16

Jan-1

7

Mar-1

7

May-1

7

Jul-1

7

Sep

-17

No

v-17

Jan-1

8

Mar-1

8

May-1

8

Jul-1

8

Sep

-18

No

v-18

Jan-1

9

Mar-1

9

12mma

Non-auto retail sales, annual growth rate (per cent)consumption, income and saving, € million [4qrs]

headline

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


“now-casting” modified domestic demand – principal component analysis

-12

-10

-8

-6

-4

-2

0

2

4

6

8

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

per

cen

t ch

ange

Model based MDD MDD Outturn

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2015Q

1

2015Q

2

2015Q

3

2015Q

4

2016Q

1

2016Q

2

2016Q

3

2016Q

4

2017Q

1

2017Q

2

2017Q

3

2017Q

4

2018Q

1

2018Q

2

2018Q

3

2018Q

4

2019Q

1

ye

ar-

on

-ye

ar

pe

r ce

nt


The labour market


1,700

1,800

1,900

2,000

2,100

2,200

Employment 2012q2 Manufacturing Construction Private services Public services Agriculture Employment 2019q1

‘000

increase in total employment (4qma) from low point of crisis

Employment surprise in Q1

y = -0.1042x + 76.454R² = 0.693

y = 0.0787x + 50.801R² = 0.5947

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

199

9 Q

11

99

9 Q

32

00

0 Q

12

00

0 Q

32

00

1 Q

12

00

1 Q

32

00

2 Q

12

00

2 Q

32

00

3 Q

12

00

3 Q

32

00

4 Q

12

00

4 Q

32

00

5 Q

12

00

5 Q

32

00

6 Q

12

00

6 Q

32

00

7 Q

12

00

7 Q

32

00

8 Q

12

00

8 Q

32

00

9 Q

12

00

9 Q

32

01

0 Q

12

01

0 Q

32

01

1 Q

12

01

1 Q

32

01

2 Q

12

01

2 Q

32

01

3 Q

12

01

3 Q

32

01

4 Q

12

01

4 Q

32

01

5 Q

12

01

5 Q

32

01

6 Q

12

01

6 Q

32

01

7 Q

12

01

7 Q

32

01

8 Q

12

01

8 Q

32

01

9 Q

1

pr_total pr_male

participation rate, 4qma

Demographic induced PR slowdown

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


The philips curve: dead or alive?

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

20152016

2017

2018

y = -5.611ln(x) + 14.302R² = 0.7864

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

wage inflation,

y/y

per

cent

change

unemployment rate, per cent -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Admin & support

Transport & storage

Arts & recreation

Accommodation & food

Wholesale & retail

ICT

Construction

Total economy

Industry

Health & social work

Public admin & defence

Education

Financial & real estate

Professional & scientific

annual change in weekly earnings in 2019 Q1, per cent


The public finances

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


Budgetary implementation: in line with expectations

Revenue side equation

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan-0

0

Jul-0

0

Jan-0

1

Jul-0

1

Jan-0

2

Jul-0

2

Jan-0

3

Jul-0

3

Jan-0

4

Jul-0

4

Jan-0

5

Jul-0

5

Jan-0

6

Jul-0

6

Jan-0

7

Jul-0

7

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-1

0

Jul-1

0

Jan-1

1

Jul-1

1

Jan-1

2

Jul-1

2

Jan-1

3

Jul-1

3

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

€ m

illio

ns

Excise Duty Income Tax CT VAT other Total

previous peak

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Ja

n-0

4

Ju

n-0

4

No

v-0

4

Ap

r-0

5

Se

p-0

5

Fe

b-0

6

Ju

l-0

6

De

c-0

6

Ma

y-0

7

Oct-

07

Ma

r-0

8

Au

g-0

8

Ja

n-0

9

Ju

n-0

9

No

v-0

9

Ap

r-1

0

Se

p-1

0

Fe

b-1

1

Ju

l-1

1

De

c-1

1

Ma

y-1

2

Oct-

12

Ma

r-1

3

Au

g-1

3

Ja

n-1

4

Ju

n-1

4

No

v-1

4

Ap

r-1

5

Se

p-1

5

Fe

b-1

6

Ju

l-1

6

De

c-1

6

Ma

y-1

7

Oct-

17

Ma

r-1

8

Au

g-1

8

Ja

n-1

9

€ m

illio

ns

health other net voted current expenditure

Expenditure side of equation

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


‘snowball’ main driver of debt reduction; interest burden remains high

-30

-20

-10

0

10

20

30

40

50

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

per

cent

of G

DP

primary balance

snowball

SFA

Change in debt ratio

debt increasing ↑

debt decreasing ↓

0

2

4

6

8

10

12

14

16

18

20

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

EU 28 25th-75th (inter-quartile range)

Ireland

Debt burden: interest / revenue ratio

Source: Annual Debt Report 2019, Department of Finance (forthcoming)


Brexit: casts a long shadow


Forecasting in a highly uncertain environment

2018 2019 2020

GDP 6.7 3.9 3.3

BoP (% GDP) 9.1 8.4 8.0

Inflation 0.7 0.9 1.1

Employment (% change) 2.9 2.2 2.1

Unemployment (%) 5.7 5.4 5.2

GGB (% GDP) 0.0 0.2 0.4

GG debt (% GNI*) 107.3 101.7 93.0

range of outcomes = wide

85

90

95

100

105

110

115

120

2016

2017

2018

2019

2020

2021

2022

2023

2018 =

100

no exit

hard exit

smooth exit

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


Impact of Brexit on Ireland (change from baseline in levels)

-2.4

-3.3

-5.0

-6.0

-4.0

-2.0

0.0

2020 2023 2028

pp

of

GD

P

Brexit impact on level of Irish GDP

Deal Disorderly


Conclusion


Main take-aways

• Difficult juxta-position- strong economy

- serious external risks

: existential threat to some sectors

• “Normal” cyclical slowdown in global economy- momentum has softened

- maturing cycle

- structural factors potentially more worrying

• Brexit casts a long shadow


Disclaimerand other information:

The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the Department of Finance, the Minister

for Finance or the Government of Ireland. Analysis and forecastsbased on StabilityProgramme,April 2019 Update.

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 latest publication’s followthe Departmentof Financeon socialmedia:

@IRLDeptFinance Department of Finance Ireland

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

https://twitter.com/IRLDeptFinance

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

Budget 2020: macro-economic backdrop · Budget 2020: macro-economic backdrop John McCarthy Chief...

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