New forecast for Irish GDP to contract by 10% in 2020 · Due to the enormous disruption from the COVID-19 pandemic, we have revised our forecasts for Irish GDP growth to a 10.3% contraction

May 27 2020 06:30 IST/BST

IRISH ECONOMY

New forecast for Irish GDP to contract by 10% in 2020

ECONOMIC RESEARCH

THE DAVY VIEW Conall MacCoille

[email protected]

+353 1 6148770

See the end of this report for important

disclosures and analyst certification. All

authors are Research Analysts unless

otherwise stated.

Our new forecast is for Irish GDP to contract by 10% in 2020 and

rebound by 7% in 2021, with the unemployment rate peaking at

25% in Q2 2020 and falling to average 12% in 2021. We expect

the government deficit to equal 9% of GDP in 2020 and 5% in

2021. Housing completions are expected to fall to just 13,800

accompanied by a 5% decline in house prices through 2020.

Irish economy to contract by 10% in 2020, rebound 2021

Our new forecast is for Irish GDP to contract by 10% in 2020 followed by a 7%

rebound in 2021. This reflects an initial 20% hit to GDP in Q2 2020 followed by a

gradual recovery as the economy re-opens along the lines of the Irish

government’s phased roadmap. Despite this recovery, our forecasts imply GDP

will be 10% below its pre-COVID-19 level at end-2020 and 5% below by end-

2021. We expect the Irish unemployment rate will rise to 25% in Q2 2020, falling

thereafter but remaining in double-digit territory through 2020 and 2021.

Economic hit will be focused on domestic demand

Our forecast is for consumer spending to contract by 12.5% in 2020, rebounding

by 7.3% in 2021. Investment spending will fall sharply, in part due to homebuilding

declining to 13,800 units, accompanied by a 5% drop in house prices. Ireland’s

defensive export sector should perform better but we still expect a 7% contraction,

with world trade set for a double-digit decline. We forecast a government deficit of

9.2% of GDP in 2020 and 5.3% in 2021.

Enormous risks around our forecasts

There is clearly enormous uncertainty around our forecasts. There is still limited

information on the size of the initial hit to the economy. We assume the economy

re-opens through Q3 2020 along the lines of the Irish government’s roadmap.

Clearly, another COVID-19 outbreak with associated business and travel

restrictions could derail this recovery. We also assume the UK does not opt for a

‘cliff-edge’ exit from the EU single market, with an extension of the transition

period still the most likely outcome.

May 27 2020 06:30 IST/BST

2 Davy Research: Irish economy

Ireland and COVID-19 Our new forecasts are for a deep and lingering impact of COVID-19 on the Irish

economy. We expect Irish GDP to initially contract by 20% in Q2 2020, rebounding

slowly, with the level still 10% below pre-COVID-19 levels by end-2020 and 5%

below by end-2021. This means the unemployment rate will average 16% in 2020

and 12% in 2021 with the government deficit equal to 9% of GDP in 2020 and 5% in

2021.

However, the outlook is very uncertain. There is still a lack of data to gauge the

immediate impact of COVID-19 business and travel restrictions on GDP. Ireland’s

PMI surveys are consistent with a 15% reduction but do not capture the impact of the

shutdown in activity in many sectors. Exports and industrial production held up well in

March, tentative evidence that the defensive nature of Irish trade will provide some

protection. However, Ireland’s labour market data, showing an unemployment rate of

28% in April, are far worse than in other countries.

We assume the economy re-opens consistent with the Irish government’s roadmap,

starting on May 18th, with the final phase beginning on August 10th. Nonetheless,

social distancing restrictions are likely to hinder activity in many sectors well beyond

these dates. The Department of Business, Enterprise and Innovation’s ‘Economic

Considerations for Reinstating Economic Activity’ concedes that Ireland’s lockdown

has been longer and more severe than in other EU countries with a more

conservative plan to re-open the economy.

Ireland’s labour market data look far worse than in the UK. The Central Statistics

Office (CSO) reported a 28% unemployment rate in April. Currently, there are

585,000 claimants of the €350 per week Pandemic Unemployment Payment (PUP),

of which 38% had incomes less than €300 per week prior to the COVID-19 outbreak.

This incentive problem may have persuaded many workers not to participate in the

Temporary Wage Subsidy Scheme (TWSS).

Nonetheless, Figure 1 illustrates that the hit to activity has been concentrated in

accommodation & food services, construction, admin & support services and

wholesale & retail (sectors in which almost all activity has been shut down until now),

where the combined total of PUP and TWSS claimants exceeds 60%.

We expect Irish GDP to initially contract by 20% in Q2 2020, rebounding slowly so that the level is still 10% below pre-COVID-19 levels by end-2020 and 5% below by end-2021

Figure 1: PUP and TWSS claimants as percentage of employment by sector

Source: Central Statistics Office; Department of Social Protection; Irish Revenue

0% 20% 40% 60% 80% 100%

Agriculture

Public Administration

Health

Information and Communications

Education

Financial, Insurance and Real Estate

Industry

Transport and Storage

Total

Professional and Scientific

Other Nace activities

Wholesale & Retail

Administrative and Support Services

Construction

Accomodation and Food Services

May 27 2020 06:30 IST/BST


It is difficult to gauge specific dates for sector re-openings from the Irish

government’s roadmap. Construction activity has resumed from May 18th. However,

retail activities will not fully resume until phases 3, 4 and 5, beginning June 29th

through to August 10th. Cafes and restaurants can begin to re-open from June 29th

and hotels from July 20th. However, in many cases, social distancing restrictions will

mean that many services (e.g. entertainment, cinemas, etc) will not be available or

will continue to be impaired.

Our forecasts for 2020 rest on assumptions regarding how quickly activity returns to

pre-COVID-19 levels across different sectors. In framing these assumptions, we have

contacted a range of industry bodies and drawn on the evidence from the

government roadmap and the Department of Business, Enterprise and Innovation’s

analysis of the re-opening of the economy. Figure 2 illustrates how we see the key

sectors’ output recovering (as a percentage of pre-COVID-19 output) in 2020 and

2021.

Our forecasts for 2020 rest on assumptions regarding how quickly activity returns to pre-COVID-19 levels across different sectors

Figure 2: Forecasts for output by sector (as % of pre-COVID-19 output)

Agri. Industry Construction Distribution

Transport,

Hotels and

Restaurants

Information

and Comm.

Restaurants

Financial

and

Insurance

Real Estate

Activities

Prof, Admin

and Support

Services

Public

Admin,

Education

and Health

Arts, Ent,

Other

Services

2020 96% 94% 68% 61% 94% 94% 66% 88% 99% 55%

2021 100% 96% 92% 83% 97% 93% 90% 92% 101% 78%

Source: Central Statistics Office; Davy

May 27 2020 06:30 IST/BST


New Irish economic forecasts Due to the enormous disruption from the COVID-19 pandemic, we have revised our

forecasts for Irish GDP growth to a 10.3% contraction in 2020 followed by a partial

rebound in 2021, with GDP expanding by 7.1%. Our forecast is for an initial 20% hit

to Irish GDP in Q2 2020, with GDP still 10% below its pre-COVID-9 level by end-

2020 and 5% below by end-2021.

We expect 2020 GDP to initially contract by 20%, rebounding gradually through the

second half of the year. Similarly, we expect employment to initially decline by 23% in

Q2 2020, finishing the year 12% down on pre-COVID-19 levels.

Key features of our new Irish economic forecasts

▪ Irish GDP to contract by 10.3% in 2020 and rebound by 7.1% in 2021.

▪ Consumer spending to contract by 12.5% in 2020 and rebound by 7.3% in 2021.

▪ Investment to decline by 50%, reflecting weaker imports of intellectual property,

with building and construction to fall by 37%.

▪ Exports to contract by 7% in 2020, slower than the likely double-digit decline in

world trade.

▪ Government deficit to grow to €29bn, 9% of GDP, in 2020 and fall to €18bn, 5%

of GDP, in 2021.

▪ Unemployment rate to peak at 25% in Q2 2020 but fall back to average 12% in

2021.

Our new forecast is for the Irish economy to contract by 10.3% in 2020

Figure 3: Davy forecasts for the Irish economy

2019 2020 2021

Consumer spending 2.8 -12.5 7.3

Government expenditure 5.6 9.1 -4.0

Investment 94.1 -50.3 8.4

Building & construction 6.8 -36.6 20.5

Machinery & equipment (core) 2.7 -40.0 22.5

Exports 11.1 -7.4 7.2

Imports 35.6 -21.0 6.0

GDP 5.5 -10.3 7.1

Government balance, % GDP 0.4 -9.2 -5.3

Government debt, % GDP 58.8 70.4 69.2

Employment growth 2.9 -11.3 4.7

Unemployment rate, % 5.0 15.8 12.4


May 27 2020 06:30 IST/BST


What do we know so far about the COVID-19 impact? There have been few data so far to gauge the impact of COVID-19. Ireland’s

Composite (17.3), Manufacturing (36.0) and Services (13.9) PMIs have fallen to

unprecedented levels in April. On past form, this points to at least a double-digit

decline in Irish GDP in Q2.

Monthly data on exports and industrial production have held up better – pointing to

some protection from the defensive nature of the sectors. Nominal goods exports

reached a record high in March at €16bn, including an 81% rise in pharmaceuticals to

€10bn. Industrial production was up 39% in March.

Retail sales (excluding motor trades) held up well in March, down 0.5%; within this,

total food stores sales were up 19% but department stores (-28%), clothing &

footwear (-51%), furniture & lighting (-14%) and books, newspapers & stationery

(-29%) all saw enormous declines. Central Bank data on debit card spending showed

a 40% annual contraction in early April.

Ireland’s labour market data look especially weak. The CSO’s COVID-19 adjusted

unemployment rate rose to 28% at end-April, reflecting 600,000 claimants of the new

PUP. However, the generosity of the payment (€350 per week) has created a

financial incentive not to participate in the government’s TWSS.

The Irish PMI surveys point to a large double-digit decline in GDP in Q2 2020

Figure 4: Short-term indicators on the Irish economy

2018 2019 2020 Date

Composite PMI (50 = no change) 57.1 52.9 17.3 April

Manufacturing 55.8 50.9 36.0 April

Services 58.0 54.6 13.9 April

Construction 58.2 53.0 4.5 April

Industrial production, yoy % 0.1 1.6 22.9 March

Modern sector -0.7 1.2 35.3 March

Traditional sector 2.6 7.4 -4.8 March

Goods exports, yoy % 14.5 8.6 39.2 March

ex-pharma & other transport equipment 2.6 5.6 0.2 March

Retail sales, yoy % 3.7 1.6 -11.2 March

ex-motor trades 3.7 4.4 -0.5 March

Tax revenues, yoy % 9.5 6.8 -8.0 April

Unemployment rate, % 5.8 4.8 28.0* April

Source: Central Statistics Office; Thomson Reuters DataStream

Ireland’s labour market data look especially weak, but the apparent damage may have been accentuated by design features in the scheme

May 27 2020 06:30 IST/BST


Defensive Irish exports provide some protection The European Commission’s Spring 2020 projections were for double-digit declines

in imports for Ireland’s most important trading partners: euro area (-13%), UK (-10%)

and US (-13%). This is clearly a very difficult environment for Irish exporters.

However, Figure 5 illustrates that although Irish export markets contracted by 11% in

2009, Irish export volumes rose 4.5%, albeit after a 3.6% decline in 2008. This

defensive nature of Irish exports - specifically, concentration in agri-food,

pharmaceuticals, information & communications technology and medical technology -

makes their performance less sensitive to global trade.

The early data indicate that Irish trade has fared relatively well so far. Nominal goods

exports rose to a record high of €16bn in March, benefiting from an 81% surge in

pharmaceutical goods exports. Hence, Irish industrial production was also up by 23%

in March.

Nonetheless, we still expect that COVID-19-related disruption will hurt Irish exports in

2020. Our forecast is for a 7.4% contraction in 2020 followed by a 7.2% rebound in

2021 – still implying that Ireland will outperform the broader slowdown in global trade.

Pharmaceuticals and ICT services exports should hold up better than a likely double-digit decline in world trade

Nominal goods exports in March were up 39% on the year to €16bn, helped by buoyant pharmaceuticals

Figure 5: Irish exports and world trade volumes

Source: Central Statistics Office; OECD

Figure 6: Davy trade forecasts

2018 2019 2020 2021

Exports 10.4 11.1 -7.4 7.2

Irish export markets 3.0 1.4 -12.5 10.5

Source: Central Statistics Office; OECD; Davy

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35

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Goods Exports Services Exports OECD Export Markets Ireland

yoy %

May 27 2020 06:30 IST/BST


Labour market At face value, Ireland’s labour market data look considerably worse than in other

countries. The CSO has published a ‘COVID-19 adjusted unemployment rate’, which

rose to 28.2% in April. In addition, at end-April there were 425,000 employees paid

via the TWSS.

However, the apparent damage to the Irish labour market may have been

accentuated by incentivisation problems with the €350 per week PUP payment. The

government now estimates that 38% of PUP claimants were previously paid less than

€300 per week. Also, unlike the UK’s scheme, employees paid via the TWSS scheme

may still be at work.

This implies that Irish unemployment benefit claimants could quickly fall as sectors of

the economy are re-opened and as eligibility for the schemes is tightened.

Hence, we are forecasting a very deep cut in employment in Q2 2020 followed by a

sharp recovery in Q3 and Q4. Nonetheless, this still leaves the unemployment rate

averaging 16% in 2020 and 12% in 2021. By end-2021, we expect the level of

employment to still be 5% lower than its pre-COVID-19 outbreak level.

At end-April, 1.2m people, or 53.5% of pre-COVID-19 employment, were claiming benefit payments

Figure 7: Irish labour market indicators


Figure 8: Irish labour market forecasts

2019 2020 2021

Employment growth 2.9 -11.3 4.7

Labour force growth 2.0 0.1 0.6

Unemployment rate 5.0 15.8 12.4

Wages per head 4.7 -2.0 3.0


0

500

1000

1500

2000

2500

Live RegisterJob Seekers

PandemicUnemployment

Payment

TemporaryWage Scheme

Unemployed 2019Employment

March April

000s

May 27 2020 06:30 IST/BST


Consumer spending set for large contraction Retail sales volumes in March actually held up reasonably well, with core sales down

only 0.5% on the year, held up by buoyant food stores but with other sectors seeing

far bigger declines in revenues. However, more timely Central Bank data paint a far

more negative view – pointing to spending being down by circa 40% in April.

This isn’t surprising given the closure of large swathes of the retail sector. We expect

retail spending should rebound in June and July as the sector re-opens.

Nonetheless, consumer spending should see a hit through 2020 given the 10.5%

decline in employment on average through 2020. That said, the PUP has helped to

protect incomes.

Our forecast is that Irish consumer spending will contract by 12.5% in 2020 followed

by a 7.3% rebound in 2021. This forecast rests on a sharp rise in the savings ratio to

12%, up from 6% in 2019, falling back to 7% in 2021.

Central Bank of Ireland data point to spending being down 40% in early April

Figure 9: Irish consumer spending


Figure 10: Davy household income forecasts

2018 2019 2020 2021

Employment 2.9 2.9 -11.3 4.7

Wages per head 2.9 4.7 -2.0 3.0

Household disposable incomes 5.2 7.0 -7.4 2.9

Household savings rate 3.7 5.7 12.0 7.2


-20

-15

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10

15

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

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2021

%

May 27 2020 06:30 IST/BST


Investment spending to collapse Irish investment will undergo a sharp contraction as capital investment projects are

delayed or cancelled and given that construction activity has been depressed by the

shutdown for the best part of three months.

Our forecasts are based on a 35% drop in dwellings investment, or housing

completions falling to 13,800 units in 2020. In addition, we assume non-residential

construction activity declines by 36%. In both cases, we assume a partial rebound in

2021 with activity up 22.5%.

Our forecast for total investment is a 50% contraction in 2020. However, this largely

reflects the close to €100bn of investment in intellectual property assets in 2019 not

being repeated in 2020. We expect core investment spending to decline by 37.6% in

2020 before rebounding by 22.5% in 2021.

We expect homebuilding to drop to 13,800 units in 2020

Figure 11: Irish housing completions


Our forecast is for core investment spending to contract by 38% in 2020

Figure 12: Investment spending forecasts

2018 2019 2020 2021

Residential 25.8 2.6 -35.4 21.6

Non-residential construction 6.9 9.1 -36.0 20.0

Core machinery & equipment 14.4 2.7 -40.0 22.5

Other transport equipment 60.6 -36.2 4.0 3.0

Intangible assets -52.6 140.0 -60.0 3.0

Total investment -21.1 94.1 -50.3 8.3

Core investment 13.0 5.9 -37.6 21.0


0

10

20

30

40

50

60

70

80

90

100

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

000s

May 27 2020 06:30 IST/BST


Housing market: price falls now likely The latest updates of the Irish Property Price Register show normal transaction levels

down 50%, and this looks set to fall further as the impact of business/travel

restrictions is felt. New listings on MyHome in May were down circa 85% on normal

levels.

Transactions will only resume gradually as restrictions are lifted through the summer.

It will also take time for consumer confidence to rebound sufficiently for many

households to follow through on transactions. Hence, we expect mortgage lending to

equal just €5.2bn in 2020, picking up to €8.4bn in 2021.

In this context, price movements may be difficult to measure or unrepresentative,

biased perhaps towards cash purchases and vendors willing to provide a discount in

a very illiquid market. So far, the evidence from MyHome does not point to an

unusually high number of instances of asking prices being cut or transactions at a

discount.

Our contacts suggest that estate agents our now expecting price falls through 2020.

Price falls may be sharper in the near term but dissipate as the housing market re-

opens. Our forecast is for average wages to drop by 2%. We also know Irish banks

have been tightening credit standards, particularly for loans exceeding the 3.5x loan-

to-income multiple. Hence, our forecast is for a 5% drop in Irish house prices through

2020 followed by a 3.5% rebound in 2021.

Housing market transactions will effectively cease in May-June

Figure 13: Ireland residential property price inflation

Source: Central Statistics Office

Our baseline forecast is for a 5% drop in Irish house prices through 2020

Figure 14: Irish house price inflation and mortgage lending forecasts

2019 2020 2021 2022

House price inflation (yoy %) 6.3 0.3 -5.0 3.5

Mortgage lending, €bn 9.5 5.2 8.4 11.1


-40

-30

-20

-10

0

10

20

30

40

2006 2008 2010 2012 2014 2016 2018 2020

National Dublin Ex Dublin

May 27 2020 06:30 IST/BST


Public finances: deficit worth 9% of GDP in 2020 April’s Stability Programme Update forecast was for a deficit of €23.1bn (or 7.4% of

GDP) in 2020, narrowing to €13.8bn (4.1% of GDP) in 2021. This forecast was based

on a 10.5% contraction in Irish GDP in 2020 and a 6% rebound in 2021, with gross

current expenditure expected to grow by 17% in 2021 but tax revenues to decline by

16% from €59.3bn in 2019 to €49.6bn in 2020.

However, since the publication of the Stability Programme Update, Irish Taoiseach

Leo Varadkar has announced that the PUP and TWSS will be extended beyond the

initial 12-week period. These supports are estimated to cost €4-4.5bn per quarter.

Media also widely reported that, within the context of government formation talks,

Minister for Finance Paschal Donohoe had presented an updated forecast for a

deficit of €30bn (10% of GDP) in 2020.

Exchequer returns for April showed tax revenues of €2.8bn, down 8% on the year,

and €15.6bn in the first four months of 2020, down 0.6%. While clearly showing a

marked downturn in revenues, these out-turns were actually slightly better than the

Department of Finance’s revised forecast for €15.5bn of tax revenues in the first four

months. Gross expenditure was €4.2bn in April, up 21% on the year. Our forecast is

for a deficit of €29bn in 2020, or 9.2% of GDP, falling to €18bn, or 5.3% of GDP, in

2021. This means that Ireland’s gross debt/GDP ratio will rise to 70% in 2020 and fall

marginally to 69% in 2021.

Irish Taoiseach Leo Varadkar has said a deficit close to €30bn in 2020 is now likely, up from €23bn forecast in Ireland’s Stability Programme Update

Figure 15: Ireland’s General Government Deficit

Source: Davy; Department of Finance

We expect the deficit to equal €29bn (9% of GDP) in 2020, falling to €18bn (5% of GDP) in 2021

Figure 16: Davy forecasts for the public finances

2019 2020 2021

Deficit 1.3 -29.0 -18.0

% GDP 0.4% -9.2% -5.3%

Gross debt 204.0 222.5 236.5

% GDP 58.8% 70.4% 69.2%

% GNI 99.2% 122.9% 119.7%


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Deficit

May 27 2020 06:30 IST/BST


Important Disclosures

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Neutral 30 29 3 8

Underperform 4 4 0 0

Under Review 2 2 1 3

Suspended 0 0 0 0

Restricted 1 1 0 0

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Transport and logistics

Stephen Furlong [email protected] +35316148924

Ross Harvey [email protected] +35316149145

Allan Smylie [email protected] +35316148701

Andrew Young [email protected] +35316148764

Food

Cathal Kenny [email protected] +35316149109

Roland French [email protected] +35316724280

Katy Hutchinson [email protected] +35316148819

Leisure

Michael Mitchell [email protected] +35316724226

Jack O’Halloran [email protected] +35316149942

RESEARCH OPERATIONS

Research Operations Manager

Jim O’Neill [email protected] +35316148919

Jenny Campbell [email protected] +35316149153

Laura Chambers [email protected] +35316149132

Zara Copeland [email protected] +35316148826

Deirdre Dunne [email protected] +35316148766

Brid Frain [email protected] +35316148827

Orla O’Flynn [email protected] +35316148820

Aoibhinn O’Reilly [email protected] +35316143383

Shane Reilly [email protected] +35316143389

Institutional Equity Sales

Telephone: +353 1 679 2816 Email: [email protected]

Chief Operating Officer, Institutional Group

Damian Roddy [email protected] +35316148759

EQUITY SALES

Head of Equity Sales

Kieran Canny [email protected] +35316724232

Patrick Dempsey [email protected] +35316724124

Cian Fanning [email protected] +35316724249

Siobhan Gaunt [email protected] +442074488870

John Hickey [email protected] +35316148959

Ronan Hurley [email protected] +35316724239

Niall Kearns [email protected] +35316149924

Mannie Larchet [email protected] +35316724215

Adam O’Maoldomhnaigh [email protected] +35316724248

EQUITY TRADING

Head of Equity Trading +35316792816

Andrew Arnott [email protected] +35316724231

Stephen Church [email protected] +35316724238

Fran O’Connor [email protected] +35316148961

Ivan Cummins [email protected] +35316724247

Cathal Kielty [email protected] +35316724235

Edward O’Flynn [email protected] +35316792816

EQUITY SALES TRADING

Turlough Carolan [email protected] +35316724236

Dara Cosgrave [email protected] +35316148969

Aidan McSweeney [email protected] +35316724230

Geoff McEvoy [email protected] +35316724218

Lionel McCarthy [email protected] +35316149065

FIXED INCOME

Head of Fixed Income

Barry Nangle [email protected] +35316148982

Fixed Income Sales

Paul Benson [email protected] +35316148840

Anthony Childs [email protected] +35316148993

Fiona Howard [email protected] +35316148986

Barry Murphy [email protected] +35316148984

Eamonn Reilly [email protected] +35316148989

CORPORATE BROKING

Head of Corporate Broking

Ronan Veale [email protected] +35316148843

Orla Cowzer [email protected] +35316724233

Sean McKeon [email protected] +35316724246

Oisin Morgan [email protected] +35316148712

Tom Tynan [email protected] +35316148871

Corporate Access and Events

Paula Mulhern [email protected] +35316148829

Rita Murphy [email protected] +35316148740

Amy O’Dwyer [email protected] +35316144997

Lynda Rogers [email protected] +35316144422

Paula Thornton [email protected] +35316143373

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Documents

New forecast for Irish GDP to contract by 10% in 2020 · Due to the enormous disruption from the COVID-19 pandemic, we have revised our forecasts for Irish GDP growth to a 10.3% contraction