Macro Economics for Financial Markets

Ireland

TABLE OF CONTENTS

Executive Summary …………………………………………………………………………………..  3

Section 1 : Introduction ………………………………………………………………..  4

Section 2 : Ireland on the Business cycle ……………………………………………..5

2.1 GDP and GNI*  ………………………………………………………………………5

2.2 Unemployment rate …………………………………………………………………..7

2.3 Inflation rate ………………………………………………………………………….8

2.4 Balance of Payment …………………………………………………………………. 9

Section 3: Domestic and external Demand ………………………………………..….12

3.1 Consumption …………………………………………………………………….…..12

3.2 Government ……………………………………………………………………….…13

3.3 Investment ……………………………………………………………………………. 14

3.4 Net Exports …………………………………………………………………………. .14

Section 4:  Leading Indicators ………………………………………………………….15

4.1 Interest rates ……………………………………………………………………….….15

4.2 balance of trade …………………………………………………………………………17

Section 5: Potential risks to this Ireland’s economic outlook …………………………. 19

5.1 Britain’s exit from Europe (BREXIT) …………………………………………………19

5.2 Housing crises ………………………………………………………………………….19

Bibliography ……………………………………………………………………………….20

Executive Summary

This report aims to evaluate the current position of the Irish economy.

A detailed formalized research and analysis has been conducted to determine the below.

1)     The current position of Ireland on the business cycle using GDP and GNI* , Unemployment rate , Inflation rate , Balance of Payment

2)     The contribution of components of domestic and aggregate demand in the Irish economic activity

3)     The key leading indicators of Ireland.

4)     2 potential risks to Ireland’s current economic outlook –  BREXIT and Housing crises

Section1

Ireland experienced cycles of boom and bust. The Irish economy grew very rapidly for over a decade prior to the Global Financial Crisis (GFC). 

Having gone through the blast of the mid-2000s and the bust of the 2008-2013 period, the development of late years has conveyed Ireland to the verge of full capacity once and again.

The performance was broadly remarked upon and, as late as June 2008Economic Co‐operation and Development (OECD) stated: ‘Ireland’s economic success story is one that many OECD countries would like to emulate.’ (OECD 2008, p. x)

However in September 2008, the country fell quickly into a crisis shortly after the failure of Lehman Brothers.

The Irish Government in September 2008 ensured the liabilities of Irish banks on the basis that they needed ‘temporary support’ during a liquidity crisis. Indeed even before the extent of the solvency crisis in the banking sector was fully appreciated, the construction industry was already in decline—banks were no longer willing or able to lend to the extent that they had up to 2007

For Ireland, it was the combination of the bursting of the housing bubble and the collapse of the domestic banking system, as a result of excessively risky lending, that made the ultimate adjustment process enormously challenging.

With the ECB providing essential liquidity support to the Irish banking system, Ireland was in a position to bit by bit balance its fiscal position and to support a major restructuring of the banks, with the introduction of new banking regulations

Section 2

Burns and Mitchell (1946)  defined business cycle as : “ Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises.

Based on theory and prior research, the below indicators have been used  to understand the position of Ireland on the business cycle.

2.1 Gross Domestic Product (GDP)

GDP is the measure of economic activity and signals the direction of overall aggregate economic activity. 

The Gross Domestic Product (GDP) in Ireland was worth 57,500 million EUR in 2017. The GDP value of Ireland represents 0.54 percent.

Since 2013, GDP has developed by 50 percent. Accordingly, the estimation of the Irish economy is currently near €300 billion, 56 percent higher than it was at the pinnacle of the Celtic Tiger in 2007.

Source : Eurostat

The Irish economy is expected to grow, in  gross domestic product (GDP) terms, by 4.8% this year and 4.2% in 2019

Modified gross national income, Modified GNI or GNI* was created by the Central Bank of Ireland to measure the Irish economy and Irish indebtedness. It is designed to exclude the effects of globalization that are disproportionally impacting the measurement of the size of the Irish economy.

GNI* per capita was noted to be at 18182 EUR in 2016.

Source : Eurostat

Comparison between GDP and Modified GNI* :

Ireland is one of the OECD’s fastest growing economies. On comparison of Ireland with the remaning 21 OECD countires for inflation and purchasing power, Ireland’s GDP per capita wavered from about 12% in 1995 to 22% in 2003. GNI* per capita moved from about 20% in 1995 to a less 4% above average, which is still quite a significant jump.

The key takeaway is the progressive broadening of the hole among GDP and GNI amid the 2000s, trailed by a sharp difference from the earliest starting point of this decade onwards. The progression change obvious in 2015 implies that adjusted GNI added up to €189.2 billion out of 2016, around 33% lower than GDP (the last was an expected €275.6 billion out of 2016).

2.2 Unemployment Rate

Irish seasonally adjusted unemployment rate decreased to 5.3 percent in October of 2018 from 5.4 percent in September.

Source : Eurostat

Unemployment Rate in Ireland is expected to be 5.10 percent before the finish of this quarter. In the long-run, Ireland Unemployment Rate is expected to be around 5.50 percent

2.3 Ireland inflation rate

Inflation rate in Ireland increased to 0.9 percent in September of 2018 from 0.7 percent in August.

The inflation rates available for Ireland are:

Current inflation Ireland (CPI) – It is derived from the Irish consumer price index. The index is a measure of the average price which consumers spend on a market-based goods and services.

Consumer prices go down 0.1 percent in October, after a 0.4 percent fall in September

The largest upward contribution to the CPI came from: housing & utilities, transport,  and restaurants & hotels.

Current harmonized inflation Ireland (HICP Ireland) – It is a measure of the average price consumers spend on a market-based goods and services

Source : Eurostat

The HICP shot up 1.1 percent from the previous year; and fell by 0.2 percent from the previous month.

2.4 Balance of payment:

The balance of payments (BOP) is a statement that methodically outlines the economic transactions of an economy with regard to the rest of the world for a specific time period. It is concerned with transactions and deals with flows instead of stocks.

Source : Eurostat

The balance of payments has of three categorizations –  the current account, the capital account and the financial account.

         Irish current account balance changed to EUR 10162 million surpluses in the second quarter of 2018 from EUR 3303 million shortages a year before. Ireland recorded a Current Account excess of 12.50 percent of the nation’s GDP in 2017. 

Source : Eurostat

Ireland noted a capiital and financiial account overflow of 14187 EUR Million in the second quarter of 2018.

Capital Flow found the middle value -968.44 EUR Million from 1990 until 2018, reaching unequaled high of 14332 EUR Million in the fourth quarter of 2017 and a low of -33500 EUR Million in the first quarter of 2017.

Source : Eurostat

Source : Eurostat

Section 3

Domestic and external Demand

The section focuses on the contributions of the components of demand over the last 10 years. The period of 2008 – 2018 will enable us to understand the variations of demand during the 2008 crises and how the economy got back to its feet again.

Ng and Wright (2013) highlighted that:” In the modern environment of radically enhanced global macro economic and financial linkages, isolated country analysis seems insufficient for informed assessment of the state of real activity.

The below points highlight the five main components of demand for domestic output of incomes.

3.1Consumption:

Final consumption expenditure ( or total consumption) is the addition of government consumption expenditure and private household consumption expenditure. This number takes into account any statistical variation in the use of resources in relation to the available supply. 

Keynes highlighted 3 factors that drive consumption – disposable income, expected future income and wealth.

In Ireland, the percentage of Final consumption expenditure to GDP was recorded at 45.32%

x`

Source : Eurostat

3.2 Government:

This determinant involves the spending by federal, state, and local governments.

Government spending in Ireland was recorded at 26.1 percent of GDP in 2017. That it, 35000 billion euros.

Source : Eurostat

3.2  Investment :

The Keynesian model displays around the key role of expectations about the future in impacting business decisions.

Source : Eurostat

3.3  Net Exports :

Exports remain the primary engine for Ireland’s growth. In 2017, exports hit an all-time high of EUR 122 billion.

Section 4

Leading Indicators

4.1 Ireland Interest rate :

Ireland’s benchmark interest rate is set by the European Central Bank. The official designation for the rate is the primary refinancing operation.

Interbank Rate

In Ireland, the interbank rate is the rate of interest charged on short-term loans made between banks.

Interbank Rate in Ireland stayed unaltered at -0.32 percent in October from -0.32 percent in September of 2018.

Foreign exchange reserves:

 Foreign Exchange Reserves are the foreign assets held by the country central bank. They can be unique drawing rights and marketable securities denominated in foreign currencies like treasury bills, government bonds, corporate bonds and equities and foreign currency loans.

Foreign Exchange Reserves expanded to 4105.50 EUR Million in October from 3922.90 EUR Million in September 2018.

Ireland Loans to private sector :

Loans to Private Sector in Ireland increased to 41131 EUR Million in September from 40733 EUR Million in August 2018. Loans to Private Sector in Ireland averaged 87983.07 EUR Million from 2003 until 2018

Source : Eurostat

Loans to Private Sector in Ireland are required to be 48200.00 EUR Million before the finish of this quarter. Looking forward, we gauge Loans to Private Sector in Ireland to stand at 42925.24 in a year time. In the long haul, the Ireland Loans to Private Sector is anticipated to slant around 65600.00 EUR Million in 2020.

Private Debt to equity :

Private sector debt to GDP measures the indebtedness of sectors, non-financial corporations and households and non-profit institutions serving households, as a percentage of GDP.

Source : Eurostat

Private Debt to GDP in Ireland diminished 406.71 percent in 2016 from 428.50 percent in 2015.

4.2 Ireland Balance of Trade:

Ireland’s balance of trade expanded to EUR 4.39 billion in August of 2018 from EUR 3.52 billion from August of 2017. Exports flooded 20 percent to EUR 11.56 billion and imports a progressed at a marginally gentler 18 percent to EUR 7.2 billion.

Exports : 

Ireland is the 28th largest export economy in the world. In 2016, Ireland exported $160B and imported $74.4B, resulting in a positive trade balance of $86.3B.

Exports remain the essential driver for Ireland’s growth. In 2017, exports hit an unsurpassed high of EUR 352 billion. The country exported mostly: chemicals and related products (55 percent of total exports), mainly medical and pharmaceutical products, organic chemicals, and essential oils, perfume materials, toilet and cleansing preparations.

Source : Eurostat

Exports in Ireland are expected to be 11200000.00 EUR Thousand by the finish of this quarter as per the forecasts of economists and econometric models. Looking forward, we gauge Exports in Ireland to stand at 11900000.00 in a years time. In the long haul, the Ireland Exports is anticipated to drift around 12500000.00 EUR Thousand in 2020, according to our econometric models.

Imports :

In 2017, imports to Ireland took an unexpected high of EUR 30 billion. The country imported mainly machinery and transport equipment (39 percent of total imports), namely other transport equipment, including aircraft , road vehicles , office machines and automatic data processing machines, including computers , and electrical machinery, apparatus and appliances and parts.

Source : Eurostat

Imports to Ireland propelled 18 percent from the previous year to EUR 7.17 billion in August 2018, as purchases accelerated fundamentally

SECTION 5

A housing shortage and the Britain leaving the European Union (BREXIT) are among the key economic and social risks to Ireland’s economic recovery

BREXIT:

A Brexit-related slowdown in Irish economic growth influencing Irish bank loan portfolios, with a potential rise in NPLs

Brexit is likely to impact the investment decisions of multinational companies.

A large number of International financial market asset valuations seem high and vulnerable to changes in market sentiment

The impacts of Brexit on the Irish economy will not only translate into negative impacts for Irish exporters in the UK market. Supplier industries to the export sectors will likewise be affected.

HOUSING:

The lack of housing crosswise over Ireland is the country’s “most pressing issue”. It has an adverse effect on the Irish economy as it is influencing the disposable income, mobility, competitiveness and quality of life.

The housing crises and associated high prices alongside rental costs also affects Ireland’s attractiveness for inward investments and skilled immigrants

This affects economic growth and tax revenues become vulnerable to changes in Ireland’s attractiveness as a location for the foreign companies.

It has been highlighted a shortage of labor in the construction sector as one of the main issues for the economy.

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Tradingeconomics.com. (2018). Ireland Interest Rate | 1998-2018 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/ireland/interest-rate

Tradingeconomics.com. (2018). Ireland Private Debt to GDP | 2001-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/ireland/private-debt-to-gdp

Tradingeconomics.com. (2018). Ireland Unemployment Rate | 1983-2018 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/ireland/unemployment-rate