Presentation to Joint Oireachtas Committee on Finance, Public Expenditure and Reform Economic Outlook underpinning Budget 2014 8 October 2013

Presentation to Joint Oireachtas Committee on Finance, Public Expenditure and ReformEconomic Outlook underpinning Budget 20148 October 2013

2012 2013 2014

GDP 0.9 1.3 2.4

Consumption -0.9 0.2 1.1

Government -3.7 -2.1 -2.0

Investment 1.2 3.7 8.2

Exports 2.9 2.3 3.0

Imports 0.3 1.8 2.3

Employment -0.6 0.4 1.1

Unemployment 14.7 14.0 13.3

HICP 2.0 1.2 1.8

SPU Forecasts

3

Developments since then

4

National Accounts outturn surprised on the downside

2012 2013

y-o-y % change

SPU Outturn Q1 Q2

GDP 0.9 0.2 -1.0 -1.2

Consumption -0.9 -0.3 -1.1 -1.3

Government -3.7 -3.7 -1.8 -1.7

Investment 1.2 -1.0 -19.6 1.0

Exports 2.9 1.6 -4.1 1.0

Imports 0.3 0.0 -4.0 2.6

5

External developments

6

SPU forecast Current outlook2013 2014 2013 2014

Euro/GBP 0.85 0.85 0.85 0.84Euro/US Dollar 1.31 1.31 1.32 1.34Brent Crude (€ per barrel) 80 76 82 78

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13£0.75

£0.77

£0.79

£0.81

£0.83

£0.85

£0.87

£0.89

€70

€75

€80

€85

€90

€95

€100Currencies and oil

GBP/EUR (RHS)Brent Crude (€) (LHS)

Technical assumptions:Currencies assumed unchanged from

10 day MA; Oil prices assumed to move in-line with futures prices

External assumptions

7

Q2 export market growth better than expected20

12q1

2012

q2

2012

q3

2012

q4

2013

q1

2013

q2

2012

q1

2012

q2

2012

q3

2012

q4

2013

q1

2013

q2

2012

q1

2012

q2

2012

q3

2012

q4

2013

q1

2013

q2

US UK euro area

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

q-o-

q %

chan

ge

8

And conjunctional indicators are positive

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-1340

42

44

46

48

50

52PMI Data

UK Composite

Euro area composite

above 50 = expansion

9

Weakness in exports in Q1 but service exports remain strong

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q215,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

23,000

24,000 Export GrowthExport of GoodsExport of Services

€ m

illio

n (c

onst

ant p

rices

, sa)

10

While the “patent cliff” is impacting on goods exports

Decline in exports to the US is indicative of patent expiry Exports of both organic chemicals and finished products down sharply

11

Domestic developments

12

Core retail sales have increased in each of the last 4 quarters Headline sales revised slightly upward over the summer

Signs of stabilisation in “core” retail sales

2010 2011 2012 2013-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4% Personal consumption

Core Retail Sales

y-o-

y %

cha

nge

13

Three successive quarters of annual employment growth, with employment increasing by 1.8% in Q2

The unemployment rate has fallen 1.7 pp since Feb 2012

Jan

Feb

Mar

chAp

rilM

ayJu

ne July

Augu

stSe

ptem

ber

Oct

ober

Nove

mbe

rDe

cem

ber

Janu

ary

Febr

uary

Mar

chAp

rilM

ayJu

ne July

Augu

stSe

ptem

ber

Oct

ober

Nove

mbe

rDe

cem

ber

Janu

ary

Febr

uary

Mar

chAp

rilM

ayJu

ne July

Augu

stSe

ptem

ber

Oct

ober

Nove

mbe

rDe

cem

ber

Janu

ary

Febr

uary

Mar

chAp

rilM

ayJu

ne July

Augu

st

2010 2011 2012 2013

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%Labour market developments

Employment (lhs)

Live Register (SA, rhs)%

y-o

-Y C

hang

e

Leve

l, %

Supported by continued LM improvements

14

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%Savings rate (SA)

But savings rate remains elevated

15

And nominal wages have been broadly stable

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%Earnings composition

Average Weekly Paid Hours (Hours)

Average Hourly earnings (Euro)

Earnings per Week (Euro)

% y

-o-y

cha

nge

16

Signs of recovery in “core” investment

2010 2011 2012 2013-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%Contribution to investment

Building & ConstructionM&E - less planesOther Transport (incl. planes)Total

y-o-

y %

chan

ge

17

While tourism is out-performing expectations

Up 7 per cent y-oy- in June, with gains across all regions Tourism expenditure netted out of GDP, but impacts employment and taxes

Great Britain Other Europe North America Other Areas0

100

200

300

400

500

600

700

800

900Trips to Ireland by Area of Residence

Jun-Aug 10 Jun-Aug 11 Jun-Aug 12 Jun-Aug 13

'000

18

Outlook 2014

20

2012 2013 2014

GDP 0.2 0.2 1.8

Nominal GDP (€m) 163,950 165,875 170,300

GNP 1.8 1.0 1.4

Consumption -0.3 -0.2 1.1

Government -3.7 -0.9 -1.9

Investment -1.0 4.9 6.8

Exports 1.6 -0.6 1.9

Imports 0.0 -0.4 1.4

Employment -0.7 1.6 1.4

Unemployment 14.7 13.5 12.6

HICP 2.0 0.7 1.5

Current A/C (% of GDP) 4.4 4.4 4.1

Budget 2014 work in progress macroeconomic forecasts

21

Exports being dragged down by goods

2012 2013 2014-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-3.6-4.0

-1.0

6.9

2.7

4.5

1.6

-0.6

1.9

Services exportsGoods exportsExports

22

Real household income - labour income growing in 2014

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-15

-10

-5

0

5

10

15

20 ∆ personal consumption defla-tor∆ other household income∆ net cash transfers∆ profit income∆ labour income∆ real Yd

% y

-o-y

cha

nge

23

Signs of a breakdown of Okun’s law

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

0

2

4

6

8

10

12

14

16

18

20 Labour market and output (Okun's Law)

actual une rate fitted une rate

% o

f lab

our f

orce

24

Fall in productivity due to compositional shift

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%Productivity

Employment GrowthLabour ProductivityGDP growth

% y

-o-y

cha

nge

25

Labour market outlook more positive

2012 2013 201412

12.5

13

13.5

14

14.5

15 Unemployment rate forecastsSPU forecastBudget 2014

% o

f lab

our f

orce

26

But employment growth dominates the impact

Labour force makes light positive contribution to unemployment (endogenous) But employment growth is making the main contribution to the contraction in

unemployment

2011 2012 2013 2014-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%Contributions to unemployment rate decline

Contribution from labour forceContribution from employment growthPP change in unemployment Rate

27

Exports below level suggested by historical patterns

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0 Export model

∆ exports_actual ∆ exports_fitted

year

-on-

year

per

cen

t cha

nge

28

But nominal GDP to come in below expectations

2012 2013 2014158

160

162

164

166

168

170

172

174

176 Nominal GDPSPU forecastBudget 2014

€bill

ion

29

Current A/C and GNP

2012 2013 2014

GNP (yoy % change) 1.8 1.0 1.4

Current account (% of GDP) 4.4 4.4 4.1

GNP boosted strongly by re-domiciled plcs from UK in 12. Strong carryover, though this effect stalled in H1 13

30

Current account largely stable

Decline in merchandise balance (pharma) largely offset by services balance growth over horizon

Income balance reduced in 2013 in response to falling net exports Transfer balance impacted by EU Budget contributions

2012 2013 2014-25

-20

-15

-10

-5

0

5

10

15

20

25

30

22.2 21.2 19.9

-19.0 -18.4 -18.7

2.0 2.5 4.0

-0.7 -1.0 -1.0

4.4 4.4 4.1

Transfer balance Services balance Income balanceMerchandise balance Current account

31

Inflation – expected to pick-up modestly next year

Assumed reversal of 2011 Jobs Initiative VAT measures expected to add about 0.5pp to HICP – reflected in strong services growth

Drag from NEIG goods and clothing/footwear expected to ease with stronger GDP

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%Contributions to HICP

Food Alc and tobacco NEIG EnergyCore Services Admin Services y-o-y HICP

y-o-

y %

cha

nge

32

Inflation forecast - top down approach19

86q2

1987

q119

87q4

1988

q319

89q2

1990

q119

90q4

1991

q319

92q2

1993

q119

93q4

1994

q319

95q2

1996

q119

96q4

1997

q319

98q2

1999

q119

99q4

2000

q320

01q2

2002

q120

02q4

2003

q320

04q2

2005

q120

05q4

2006

q320

07q2

2008

q120

08q4

2009

q320

10q2

2011

q120

11q4

2012

q320

13q2

2014

q120

14q4

-3

-2

-1

0

1

2

3

4

5

6

7Quarterly CPI (excl. mortgage)

Actual Quarterly CPI (excl. mrtg)

Fitted Quarterly CPI (excl. mrtg)

y-o-

y %

cha

nge

33

GDP deflator – export prices

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0export prices_actual

export prices_fitted

34

GDP deflator – import prices

1999q1

1999q3

2000q1

2000q3

2001q1

2001q3

2002q1

2002q3

2003q1

2003q3

2004q1

2004q3

2005q1

2005q3

2006q1

2006q3

2007q1

2007q3

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q3

2013q1

2013q3

2014q1

2014q3-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

import prices_actual, y/y

import prices_fitted y/y

35

External environment Global growth may not recover as expected Re-intensification of euro area macro financial issues

Internal environment Pharma cliff contraction intensifies High household debt weighs on consumption

However, stronger growth than expected in our trading partners could lead to stronger growth here

Key risks to forecasts

36

Impact of shocks using HERMES

Year 1 Year 2

% change compared to base

1% increase in world output

GDP 0.8 0.9

1 pp increase in savings rate

GDP -0.3 -0.3

1 pp increase in interest rate

GDP -0.3 -1.1

37