stability programme, april 2020 update › 73248 › fff232e2d2ab485ab51deed2db23... ·...

Stability Programme, April 2020 Update

John McCarthy

Chief Economist, Department of Finance

21st April 2020

2 An Roinn Airgeadais | Department of Finance

Birds-eye view

• External backdrop: global pandemic

• Economic outlook

• Fiscal outlook

• Risks and alternative scenarios


External backdrop: global pandemic


Globally-synchronised shock

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

05/0

1

12/0

1

19/0

1

26/0

1

02/0

2

09/0

2

16/0

2

23/0

2

01/0

3

08/0

3

15/0

3

22/0

3

29/0

3

05/0

4

China

Italy

Japan

South Korea

Ireland

Portugal

Belgium

Spain

Saudi Arabia

Pakistan

Rest EU

Canada

Russia

Switzerland

Turkey

Egypt

Mexico

Brazil

India

UK

Iran

Share of world economy with containment measures Cumulative number of Covid-19 cases globally (to mid-April)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

20

/01

03

/02

17

/02

02

/03

16

/03

30

/03

13

/04

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External forecasts - ….

GDP, annual growth rate in per cent 2019 2020 2021

UK 1.4 -6.5 4.0

Euro area 1.2 -7.5 4.7

US 2.3 -5.9 4.7

Global economy 2.9 -3.0 5.8

Other key inputs

World trade growth, per cent change 0.9 -11.0 8.4

Oil prices, $ per barrel 64.1 39.2 41.1

€1 = stg£X 0.88 0.89 0.89

€1 = $X 1.12 1.11 1.11

Source: IMF, except oil prices (futures data) and exchange rates (technical assumption of unchanged rates as per end-March)


Economic outlook


A ‘black swan’: unparalleled shock to the Irish economy

• Short-term impact

= containment / restrictions: demand-side (lower demand for G&S)

: supply-side (ability of firms and labour to produce G&S)

• (possible) medium-term impact

= scarring effects (‘exit’ rates): workers exit labour market (unemployment, participation rates)

: firms exit market supply-side (lower investment, bankruptcy)

• Policy = minimise exit rate for capital / labour

• SPU: scenario not forecast

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GDP: -10½ per cent in 2020 baseline

60

70

80

90

100

110

120

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2018 2019 2020 2021

SPU projections, April

January forecasts

Baseline scenario for GDP levels, 2018q4=100

decline of 10.5% in 2020

partial recovery :::

Level of GDP at end-2021

= 10.5% below pre-crisis

path (c €10 bn).

Indicative quarterly profiles: q/q per cent change

q1 q2 q3 q4 2020

GDP -5 -18 8 7 -10.5

MDD -4 -29 16 14 -15.1

Consumption -5 -25 15 12 -14.2

MDD = modified domestic demand

The q1 figures for all variables informed by ‘nowcasts’ (see annex)

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Full-employment to record unemployment : in two quarters

0%

5%

10%

15%

20%

25%

Q1 2

01

6

Q3 2

01

6

Q1 2

01

7

Q3 2

01

7

Q1 2

01

8

Q3 2

01

8

Q1 2

01

9

Q3 2

01

9

Q1 2

02

0

Q3 2

02

0

Q1 2

02

1

Q3 2

02

1

peak 22% in q2

projections

1,800

1,900

2,000

2,100

2,200

2,300

2,400

Q1 2

01

6

Q3 2

01

6

Q1 2

01

7

Q3 2

01

7

Q1 2

01

8

Q3 2

01

8

Q1 2

01

9

Q3 2

01

9

Q1 2

02

0

Q3 2

02

0

Q1 2

02

1

Q3 2

02

1

Unemployment rate to peak in second quarter

annual average une. rate

= c.14% in 2020

Employment: large fall followed by partial recovery

projections

c.220,000 job losses

this year (-9.3%)


Fiscal outlook

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Policy response: swift and forcefulDate Measure € billion

employee / household / business supports : of which 4.8

1. employee supports

09-Mar Self-isolation unemployment benefit; sick pay for self-isolation

24-Mar Wage subsidy scheme; pandemic unemployment benefit

2. household supports

18-Mar Payment breaks available of up to 3 months on mortgage and personal loans

18-Mar Stamp duty on credit cards deferred by 3 months

16-Mar LPT deferred by 2 months

3. business supports

09-Mar Liquidity funding for affected businesses

13-Mar Interest and penalties for late certain payments by employers suspended

13-Mar March 2020 RCT rate review suspended (construction sector)

18-Mar Payment breaks available of up to 3 months on business loans

20-Mar Rates payments for certain impacted sectors deferred until May

09-Apr Further liquidity funding & loan schemes for SMEs

other supports : of which 2.0

1. health sector supports

09-Mar Improving capacity, increasing staffing, overtime

25-Mar Securing capacity of private hospitals

07-Apr Additional funding (Covid-19 Action Plan) and supports for nursing homes

13-Mar Customs ‘green routing’ for critical pharmaceutical goods

2. financial sector measures

18-Mar Central Bank reduced the Counter-Cyclical Buffer (CCyB) from 1% to 0%

3. housing sector supports

19-Mar Moratoriums on evictions and rent increases for duration of Covid emergency

19-Mar Notice period for tenancies of less than six months increased to 90 days

19-Mar Flexibility for BTL landlords to facilitate forbearance to affected tenants

Total measures 6.8

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Severe impact on the public finances

Budget balance [GGB, per cent GDP]Taxation revenue, annualised = 4-quarter rolling sum € bn.

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

55,000,000

60,000,000

65,000,000

Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2021

-0.7

-0.3

0.1

0.4

-7.4

-4.1

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2016 2017 2018 2019 2020 2021

projections projections2020 forecast = €49.6 bn.

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Temporary increase in public debt; minimal redemptions next year

Redemptions 2020 – 2030, € billionGross debt

40

50

60

70

80

90

100

110

120

130

201

5

201

6

201

7

201

8

201

9

202

0

202

1

debt-to-GDP ratio

debt-to-GNI* ratio

0

2

4

6

8

10

12

14

16

18

20

202

0

202

1

202

2

202

3

202

4

202

5

202

6

202

7

202

8

202

9

203

0

Fixed Rate/Amortising Bonds

Index Linked Bond

Floating Rate Bonds

UK Bilateral

EFSF

EFSM

Other MLTprojections

Note: EFSM loans automatically rolled-over by European

authorities and do not need to be re-financed in 2021

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Deterioration in fiscal situation in line with other advanced economies

Increase in debt ratio in 2020, pp GDP [IMF for EA MS]Headline deficit for 2020, per cent of GDP [IMF data for EA MS]

-10.0

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

ES FR GR BE IT EE LT EA IE MT AT PT FI SI NL SK DE LV LU CY

0

5

10

15

20

25

LU CY SI LV MT SK DE NL FI IE EE EA AT LT BE FR PT ES IT GR

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2019 2020 2021

Macroeconomic, y/y per cent change (unless stated)

GDP 5.5 -10.5 6.0

Modified Domestic Demand 3.0 -15.1 8.2

Employment 2.9 -9.3 5.5

Unemployment rate, per cent of labour force 5.0 13.9 9.7

Balance of payments (modified basis), per cent of GNI* 6.3 4.7 4.5

Fiscal

General government balance, per cent of GDP 0.4 -7.4 -4.1

General government debt, € bn €204 bn €218 bn €232 bn

General government debt, per cent of GDP 59 69 68

General government debt, per cent of GNI* 99 125 122

Summary: macroeconomic and fiscal projections


Risks

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Key risk = second wave / mutation / delay in vaccine

scenario analysis: GDP levels, 2018q4=100

Indicative recovery profiles: y/y per cent change

Recovery

begins2020 2021

GDP_baseline Q3_2020 -10.5 6.0

GDP_downside Q4_2020 -13.8 8.6

GDP_severe downside Q1_2021 -15.3 8.1

80

90

100

110

120

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2018 2019 2020 2021

Downside Severe downside SPU projection Pre-pandemic baseline


Annex

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Consumer spending – behavioural changes

Consumer spending, 2018q4=100 Household savings rate, per cent of disposable income

60

70

80

90

100

110

120

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2018 2019 2020 2021


January forecasts

gradual recovery but

‘lingering’ effects

decline of 14% in 2020

0

2

4

6

8

10

12

14

16

18

2016 2017 2018 2019 2020 2021

Household savings:

1. ‘forced’

2. precautionary

3. balance sheet repair

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Uncertainty: firms postponing investment

Modified investment spending, 2018q4=100 Contributions to modified investment, pp

0

20

40

60

80

100

120

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2018 2019 2020 2021


January forecasts

y/y decline of 37% in 2020

1.3

-37.2

22.5

-50

-40

-30

-20

-10

0

10

20

30

2019 2020 2021

Building & construction

Core M&E

Other

Modified investment

containment measures

in construction sector a

significant drag

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Collapse in external demand to reduce exports

Contribution to export y/y change, ppExports of goods and services, 2018q4=100

60

70

80

90

100

110

120

130

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2018 2019 2020 2021


January forecasts

y/y decline of 7.7% in 2020 12.3

-7.7

7.5

-10

-5

0

5

10

15

2019 2020 2021

Pharma

ICT

Aircraft leasing

Contract manuf

Tourism

Other

Total


Risk-off: tightening of financial conditions

Credit markets : widening spreads in riskier segmentsEquity markets : some losses paired back

0.0

2.0

4.0

6.0

8.0

10.0

12.0

20

/09

03

/10

16

/10

29

/10

11

/11

24

/11

07

/12

20

/12

02

/01

15

/01

28

/01

10

/02

23

/02

07

/03

20

/03

02

/04

15

/04

'B' rated corporate bonds

US 10yr bond

45

55

65

75

85

95

19

/02

22

/02

25

/02

28

/02

02

/03

05

/03

08

/03

11

/03

14

/03

17

/03

20

/03

23

/03

26

/03

29

/03

01

/04

04

/04

07

/04

10

/04

13

/04

16

/04

Dow Jones EuroStoxx 600 ISEQ All Share


Other key variables

Exchange rates : volatilityOil prices: demand and supply factors at work

20

30

40

50

60

70

04

/19

05

/19

06

/19

07

/19

08

/19

09

/19

10

/19

11

/19

12

/19

01

/20

02

/20

03

/20

04

/20

Oil prices weaker on lower global demand and increased

0.82

0.84

0.86

0.88

0.9

0.92

0.94

0.96

1.06

1.07

1.08

1.09

1.1

1.11

1.12

1.13

1.14

1.15

15

/10

/19

29

/10

/19

12

/11

/19

26

/11

/19

10

/12

/19

24

/12

/19

07

/01

/20

21

/01

/20

04

/02

/20

18

/02

/20

03

/03

/20

17

/03

/20

31

/03

/20

14

/04

/20

USD per euro GBP per euro


International: ‘hard’ data now catching up with soft data

Soft data = purchasing managers indices Hard data = industrial production

-15

-10

-5

0

5

10

07/1

9

08/1

9

09/1

9

10/1

9

11/1

9

12/1

9

01/2

0

02/2

0

03/2

0

Euro Area

U.K.

U.S.

China

Germany

25

30

35

40

45

50

55

10/1

9

11/1

9

12/1

9

01/2

0

02/2

0

03/2

0

Euro Area

U.K.

U.S.

China

Germany


Irish economy in q1: ‘now-casts’ (paper published today)

Modified Domestic Demand

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

20

00

M0

3

20

01

M0

3

20

02

M0

3

20

03

M0

3

20

04

M0

3

20

05

M0

3

20

06

M0

3

20

07

M0

3

20

08

M0

3

20

09

M0

3

20

10

M0

3

20

11

M0

3

20

12

M0

3

20

13

M0

3

20

14

M0

3

20

15

M0

3

20

16

M0

3

20

17

M0

3

20

18

M0

3

20

19

M0

3

20

20

M0

3

DoF estimate = -2.9 per cent

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

20

18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

20

19

Q2

20

19

Q3

20

19

Q4

20

20

Q1

Underlying Domestic Economic Activity

‘sudden-stop’

in March

Value shows deviation

from historical ‘norm’

[ 0 = norm / historical average ]

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Additional research published by DoF today

• Chart-pack: real-time economic and financial indicators

https://www.gov.ie/en/publication/603576-real-time-economic-and-financial-developments/

• Where are we now? Examining Irish Economic Developments in Real-Time

https://www.gov.ie/en/publication/e6b3a7-where-are-we-now-examining-irish-economic-developments-in-real-time/

https://www.gov.ie/en/publication/603576-real-time-economic-and-financial-developments/

https://www.gov.ie/en/publication/e6b3a7-where-are-we-now-examining-irish-economic-developments-in-real-time/

stability programme, april 2020 update › 73248 › fff232e2d2ab485ab51deed2db23... ·...

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