The Irish Economic Update: Deep COVID-19 recession, but resilient Irish economy can bounce back - AIB
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The Irish Economic Update: Deep COVID-19 recession, but resilient Irish economy can bounce back May 2020 Oliver Mangan Chief Economist AIB 1
Coronavirus pandemic triggers deep recession Ireland hit by deep recession in H1 2020 as economy put into lockdown to contain coronavirus Rising unemployment, with over 1 million workers enrolled on State income support schemes Jobless rate soars to 16.5% in March, and expected to climb above 20% in April PMI for manufacturing falls to 36.5 in April. Service PMI will be much lower Big falls in GDP in Ireland, as elsewhere, in H1 2020 OECD estimate that Irish GDP could fall by 15% yoy in Q2 – less than in other advanced economies Activity expected to rebound in H2 2020 as virus abates and restrictions on activity are lifted Nonetheless, IMF, ESRI and Central Bank still expect that GDP will fall by circa 7-8% in 2020 Strong growth expected in 2021 given depressed base for this year – growth of over 6% per IMF Broad range of government supports announced to help household incomes and businesses Blow-out in public finances, with budget deficit forecast to hit 7% of GDP (12.5% of GNI*) in 2020 2
Activity data begin to show initial impact of COVID-19
Unemployment rate spikes from 4.8% in Feb to COVID-19 adjusted figure of 16.5% in March
Over 1 million workers either in receipt of Pandemic Unemployment Benefit / standard
unemployment benefit or enrolled on State’s temporary wage subsidy scheme in April
Retail sales (ex-motor trade) fell by 0.7% in Q1, with sales down by 1.9% in March
Consumer confidence collapses to near record low in April, having picked up over the winter
33% yoy drop in total number of cars licensed for first time (new + 2nd hand imports) in March
Manufacturing PMI falls sharply in March/April to 36.0 as virus outbreak hits output and orders hard
Services PMI plummets to over 10 year in March. Expected to hit record low in April
Construction PMI slumps to 11-year low in March. Will fall further in April due to sector lockdown
Forecasts that housing completions could fall by anywhere from 5% to 25% this year
Tax receipts 5.7% below profile in March, government spending rises. Big deficit on cards in 2020
3Data deteriorate on COVID-19 related restrictions
65
AIB Irish Mfg and Services PMIs Consumer Confidence (ESRI - KBC)
120
Services
60
100
55
50 Manufacturing
80
45
40
60
35
30 40
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Source: Refinitiv Source: Refinitiv
Live Register
600,000
% Unemployment Rate (%)
17
500,000
15
13
400,000
11
9 300,000
7
200,000
5
3
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
100,000
Mar 00 Mar 04 Mar 08 Mar 12 Mar 16 Mar 20
4
Source: CSO via Refinitiv
Source: CSO via RefinitivCOVID recession comes after strong growth in 2013-2019
Previous Irish recession of 2008-2009 also severe. GDP fell 9.5%, with GNP down 12%
Collapse in construction activity and banking system, severe fiscal tightening, high
unemployment. Ireland entered a 3 year EU/IMF assistance programme from 2010-2013
GDP at end of 2008-09 recession was still almost 25% higher than in 2001, highlighting that
economic crash came after a long period of very strong growth going back to 1993
Ireland tackled its problems aggressively in the public finances, banking sector & property
market. Imbalances in economy unwound – housing, debt levels, competitiveness, BoP
Economy recovered strongly, with robust underlying growth of circa 5% in 2013-19 period
Focus was on generating growth via the large export base and FDI as the route to recovery
Recovery in domestic economy followed, led by rebound in investment & retail spending
Strong jobs growth. Unemployment rate fell from 16% in early 2012 to below 5% in H2’19
Budget deficit eliminated quicker than expected. Public finances in surplus in 2018/19
Major deleveraging by private sector, including households, during the last decade
Balance of payments returned to large surplus 5Economy still performing very well before virus struck
% Retail Sales (ex-autos) - Volume, YoY, % Modified Final Domestic Demand and Employment
8 % %
8.00 5.0
7
6.00 4.0
6
3.0
4.00
5
2.0
2.00
4
1.0
0.00
3
0.0
2 -2.00
-1.0
1 -4.00 -2.0
0 -6.00 -3.0
Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018 Q4 2019
Source: CSO via Refinitiv LHS: Modified Final Domestic Demand (YoY - 3QMA) RHS: Employment Growth (YoY)
Source: Refinitiv
% Employment (YoY, %) Irish, Eurozone & UK Inflation (HICP Rates)
6 5
Private
4
4 Eurozone
3
UK
2
2
Total
1
0
Public 0
-2
-1
Ireland
-4 -2 6
Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018 Q4 2019 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
Source: CSO via Refinitiv
Source: RefinitivLarge Irish export base has seen strong growth
Exports as % of GDP
Ireland a very open economy – exports, driven Finland
by large scale FDI, are a huge part of economy UK
Exports rise strongly in recent years, helped by
Germany
France
large FDI inflows Italy
Total exports rose by 10.4% in 2018 and 11.1% Ireland
Portugal
in 2019
Spain
Pharma, medical care products, IT equipment, 0 10 20 30 40 50 60 70 80 90 100 110
and food & drink are main goods exports Source: Thomson Datastream
Irish Exports of Services
IT, business, financial and tourism are the main 20
(Volume, 3 Qtr Moving Average, YoY% Change)
service exports
16
Multi-nationals account for almost 70% of
exports per IDA 12
Eurozone, US and UK are the three biggest 8
export markets
4
Ireland a big importer from UK – it is the UK’s
0 7
fifth biggest export market Q4 2013 Q4 2014 Q4 2015 Q4-2016 Q4-2017 Q4 2018 Q4 2019
Source : CSODomestic demand solid ahead of the pandemic
Construction Output
Construction sees strong recovery since 2013. %
20
(Volume, 3 Qtr Moving Average, YoY% Change)
Output up nearly 12% on average in 2016-18 period
Slowdown in non-residential construction activity
16
last year – construction output up 5.8% in 2019 12
Business investment (ex aircraft/intangibles) has 8
recovered strongly since 2013
4
However, Brexit uncertainty saw business
investment flat-line in 2019 0
Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018 Q4 2019
Consumer spending grew by 3.5% on average over Consumer Spending
Source : CSO via Refinitiv
%
2014-2018 period. Up by 2.8% in 2019 6
(Volume, 3 Qtr Moving Average, YoY% Change)
Modified final domestic demand grew at 4.4% rate
4
in 2014-2018 period. Rose by 3% in 2019
Strong growth in core retail sales of circa 4-5% in 2
recent years – rose by 4.4% in 2019
Car sales returned to very high levels in 2018-19, 0
with notable rise in direct imports from UK
-2 8
Q4-2013 Q4-2014 Q4-2015 Q4-2016 Q4-2017 Q4-2018 Q4-2019
Source: CSO via RefinitivHouse building on steady rise before virus halted activity
Housing completions up 18% yoy to over 21,000 units Irish Housing Activity
in 2019, a moderation on 2018’s 25% growth rate 40,000
35,000
Housing commencements increase by further 17% in 30,000
2019 to 26,000 units 25,000
20,000
Planning permissions jump by 38% YoY to over 40k in 15,000
2019, driven by a sharp rise in apartment applications 10,000
5,000
Measures put in place to boost new house building. 0
2011 2012 2013 2014 2015 2016 2017 2018 2019
More NAMA activity, apartment planning rules relaxed Completions Commencements Estimated Annual Demand
Source: CSO, Dept. of Housing, AIB ERU Calculations
Housing output still running well below annual new %
30
Housing Repayment Affordability *
housing demand, estimated at close to 35,000 units
Forecast completions of circa 24,500 in 2020 before
25
virus outbreak. Now expected to be 16,000-20,000 20
Mortgage lending growth eases to 9.5% in 2019, though 15
mortgage approvals did pick up over the year 10
Income growth outpacing house price inflation recently, 5
which helps affordability metrics Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18 Feb-20 9
* % of disposible income required for mortgage repayments for 2 average income
household, 30 year, 90% LTV, AIB variable mortgage rate. Based on Permanent Source: AIB, Permanent TSB/ESRI,
TSB/ESRI national house price & CSO residential property price index CSO, Dept. of FinanceHouse price inflation slows sharply
House prices declined by a very sharp 55% % National House Price Inflation %
5 25
between their peak in late 2007 and early 2013
4 20
House prices have since rebounded as big housing 3 15
shortage emerged after 90% fall in home building 2 10
Prices up 83% by Feb 2020 from low in March 2013 1 5
0 0
–Dublin prices up by 99%, non-Dublin rise 82%
-1 -5
But house prices still some 18% below 2007 peak -2 -10
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20
House price inflation slows sharply in 2018/19 Mo nth-on-Month : LHS Year-on-Year : RHS Source: CSO via Refinitiv
reflecting tighter Central Bank lending rules
% Residential Property Prices
Prices up 1.1% yoy nationally in Feb 2020, down 30
Dublin vs. Non Dublin
from a high of 13.3% in April 2018 25
Dublin prices flat yoy in Feb, down from +13% in 20
15
Apr ‘18; non-Dublin at 2.3% vs. 15% last year
10
Recession to see price falls but may be limited if 5
economic downturn short and given low supply 0
Annual growth in rents slows to less than 4% -5
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20
10
Ex-Dublin (YoY, %) Dublin (YoY, %) Source: CSO via RefinitivAIB Model of Estimated Housing Demand
Rising headship rates added circa
Calendar Year 2017 2018 2019 2020 2021
8,000 per year to housing demand in
2002-2011 period
Household 28,000 28,500 28,000 28,000 28,000
Shortage of housing, high rents, Formation
tighter lending rules saw average of which
household size rise in 2011-16. Thus,
headship fell – was a drag of circa Indigenous 18,500 17,500 16,500 16,500 16,000
10,000 p.a. on housing demand Population Growth
Assume no change in headship in Migration Flows 9,500 11,000 11,500 11,500 11,500
2017-2021 – note long-term trend is
upwards, adding to demand Headship Change* 0 0 0 0 0
Pent-up demand has also built up in Second Homes 500 500 500 500 500
recent years from lack of supply Replacement of 5,000 5,000 5,000 5,000 5,000
Thus, forecast table may be under- Obsolete Units
estimating actual real level of Estimated Demand 33,500 34,000 33,500 33,500 33,000
housing demand
Shortfall in supply met from run
Completions 14,400 18,100 21,250 18,000 22,000
down of vacant stock and demand Shortfall in Supply -19,100 -15,900 -12,250 -15,500 -11,000
being reduced by fall in headship
rate. Both factors very evident in *Headship is % of population that are heads of households.
2011-16 and most likely in 2017-21
Sources: CSO, DoECLG, AIB ERU. Note 2002-21 estimates are pre coronavirus 11Govt. debt ratios had fallen, private sector deleverages
Government Debt Ratios (%)
%
130
%
10
Gov Debt Interest (% GDP)
120
Gen Gov Net Debt /Modified
Gross National Income Ratio 8
110
100
6
90
80
4
70
General Gov Gross Debt/GDP Ratio
60 2
50
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(f) 2021(f) 0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Sources: Dept of Finance, CSO, AIB ERU (Inflated/Distorted GDP figues from 2015)
Source: NTMA; Dept of Finance (Pre Coronavirus)
% Irish Private Sector Credit (Inc Securitisations) as % GNI* Irish Household Debt Ratio
% (% of Disposible Income)
350 240
300 220
250 200
200
180
150
160
100
140
50
120
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 100
Q3 2003 Q3 2005 Q3 2007 Q3 2009 Q3 2011 Q3 2013 Q3 2015 Q3 2017 Q3 2019
12
Sources: Central Bank, CSO, AIB ERU Calculations
Source: CSO, Central Bank, AIB ERULarge budget deficit in 2020, but bond yields stay very low
Budget deficit declined sharply over last decade, 2
General Government Balance* (% GDP)
with small surpluses recorded in 2018 and 2019
0
Primary budget surplus (i.e. excluding debt -2
interest) of near 2% of GDP in 2019
-4
Debt interest costs very low – at 1.4% of GDP -6
However, Covid-19 and efforts to mitigate it will -8
see the public finances deteriorate in 2020 -10
Tax receipts 5.7% below profile in March. Gov -12
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(f)2021(f)
spending 7.6% above profile *Excludes banking recapitalisation costs in 2010-11 Source : Dept of Finance
Dept. of Finance now forecasting budget deficit % Irish Benchmark Yields %
of 7.4% of GDP this year. Will fall in 2021 4 4
Gov Debt/GDP ratio has fallen sharply, as have 3 3
Irish bond yields, in recent years
2 2
Debt ratio will move higher this year
1 1
Bond yields stable despite blow-out in budget
deficit and much larger debt issuance in 2020 0 0
Sovereign debt ratings upgraded in recent years; -1
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
-1
Apr-20
S&P at AA-, Fitch at A+, Moody’s A2 for Ireland 5 Year 10 Year Source: Thomson Reuters
13Key medium-term Irish growth drivers remain in place
Favourable medium-term drivers of strong Irish
growth remain in place Irish GDP Forecasts
House building picking up from still low output % Vol 2020 2021
levels – big focus of next government IMF -6.8 6.3
Government spending supportive of growth ESRI -7.1 N/A
Department of Finance -10.5 5.8
Activity to be aided by continuing very low interest
Central Bank of Ireland -8.3 N/A
rate environment
Good inflows of FDI expected to continue
Labour market dynamics supportive of growth IMF: WEO Forecasts
% 2020 2021
Economy has deleveraged, no obvious imbalances
GDP -6.8 6.3
World economy expected to rebound from 2021 Unemployment Rate 12.1 7.9
Strong Irish growth of circa 6% possible next year CPI 0.4 1.7
after sizeable fall in GDP in 2020 Current Account* 6.3 5.3
A UK-EU FTA will lower Irish growth somewhat, but Budget Balance* -7.4 -4.1
this may now not happen until 2022 *% of GDP (Department of Finance for Budget f/c)
14Brexit: EU-UK trade talks delayed- extension possible
EU and UK agreed on revised Brexit deal at last October’s Heads of State Summit
NI to remain within Single Market for goods and have dual EU-UK customs system
UK left the EU on Jan 31st 2020 in orderly exit. Transition period in place until end 2020
UK government had ruled out extending the transition period beyond this date
However, with talks delayed due to virus outbreak, this position is likely to be reviewed
Negotiations expected to prove difficult and fractious
EU insisting on level playing field, with considerable regulatory alignment
UK government puts focus on ‘taking back control’ and non-alignment with EU
UK could opt for ‘no deal’ rather than have close alignment with EU rules under a FTA
However, some type of FTA seems likely as it’s the best outcome for both the UK and EU
Given COVID, may require more time and thus extension to transition period to get a deal done
15Risks to the Irish economy
Main near-term risk is obviously the coronavirus – will weigh heavily on growth this year
Persistence of virus or fresh outbreak could delay global/Irish recoveries
Highly open nature of Irish economy means it is quite exposed to a global recession
Brexit remains a challenge given uncertainty about future EU-UK trading relationship
Questions around Ireland’s corporation tax regime (Apple ruling, moves on tax harmonisation in EU,
OECD tax reform/minimum tax rate proposals) could impact FDI
Supply constraints in new house building activity, which is recovering at a slow pace
Competitiveness issues - high Dublin house prices, high rents, high personal taxes, high wages
Credit constraints – tightening of lending rules, on-going deleveraging, weak credit demand
Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB
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