Topic 2: Recent developments Topic 2: Recent developments and prospectsand prospects

IMFIMF (Article IV) Staff Report on Ireland(Article IV) Staff Report on Ireland

European CommissionEuropean Commission Economic forecastsEconomic forecasts

Central Statistics OfficeCentral Statistics Office Central Bank of IrelandCentral Bank of Ireland

Quarterly BulletinQuarterly Bulletin Department of FinanceDepartment of Finance ESRIESRI

Quarterly Economic CommentaryQuarterly Economic Commentary

Recent dataRecent data

Quarterly National Accounts data for Quarterly National Accounts data for Quarter 2 2006 released by CSO on Quarter 2 2006 released by CSO on 28/928/9

Real GDP was up 5% in 2006:Q2 Real GDP was up 5% in 2006:Q2 compared with 2004:Q2 (year-on-compared with 2004:Q2 (year-on-year)year)

Real GNP was up 9%!Real GNP was up 9%! Inflation risingInflation rising

Source: CSOSource: CSO

GDP versus GNPGDP versus GNP

GDP GDP factors of production factors of production locatedlocated in Irelandin Ireland

GNP GNP factors of production factors of production ownedowned by Irish residents by Irish residents

GNP = GDP less net factor income GNP = GDP less net factor income from rest of the worldfrom rest of the world

Source: CSOSource: CSO

Inflation risingInflation rising

IMF Staff Report 2006IMF Staff Report 2006

Ireland’s economic performance Ireland’s economic performance remains strongremains strong

However, economic activity has However, economic activity has become reliant on building become reliant on building investment and competitiveness has investment and competitiveness has erodederoded

Contributions to GDP growthContributions to GDP growth

When YWhen Ytt = X = Xtt + …..., then + …..., then

% contribution of X to growth in Y % contribution of X to growth in Y

= (X= (Xtt – X – Xt-4t-4)/X)/Xt-4t-4 (X (Xt-4t-4/Y/Yt-4t-4) ) 100 100

= (X= (Xtt – X – Xt-4t-4)/Y)/Yt-4t-4 100 100

Note: Chain-linked real components do not Note: Chain-linked real components do not add up exactly to GDP.add up exactly to GDP.

CompetitivenessCompetitiveness

Real exchange rate (R)Real exchange rate (R)

R = e R = e × (× (P*/P)P*/P)

wherewhere e = nominal exchange rate e = nominal exchange rate

P* = foreign price levelP* = foreign price level

P = domestic price levelP = domestic price level

Real effective exchange rate Real effective exchange rate (REER) (REER)

a.k.a. trade-weighted real exchange a.k.a. trade-weighted real exchange raterate

REER = weighted average of the REER = weighted average of the bilateral real exchange rates bilateral real exchange rates weights are the value of Ireland's trade weights are the value of Ireland's trade

with the respective countrieswith the respective countries

Labour productivity (LP)Labour productivity (LP)

LP growthLP growth = %= %Y - %Y - %LL

= = %% A + A + % % K - K - %% L L

= = %% A + A + % % (K/L) (K/L)

CompetitivenessCompetitiveness

What is happening to relative wage What is happening to relative wage rates?rates?

http://www.bls.gov/news.release/ichcc.toc.htmhttp://www.bls.gov/news.release/ichcc.toc.htm

Why not use unit labour costs (ULC)?Why not use unit labour costs (ULC)? Problem: productivity exaggerated in some Problem: productivity exaggerated in some

foreign-MNC-dominated industries (see foreign-MNC-dominated industries (see Honohan and Walsh) Honohan and Walsh)

Key policy issuesKey policy issues

The FSAP Update found that the financial system The FSAP Update found that the financial system continues to perform well, but rapid credit growth continues to perform well, but rapid credit growth is a vulnerability. The strengthening of the is a vulnerability. The strengthening of the regulatory and supervisory framework should regulatory and supervisory framework should continuecontinue

Staff recommends modest fiscal tightening, given Staff recommends modest fiscal tightening, given the need to dampen aggregate demand, build a the need to dampen aggregate demand, build a cushion against the risk of a hard landing, and cushion against the risk of a hard landing, and prepare for population agingprepare for population aging

Continued wage moderation and labor market Continued wage moderation and labor market flexibility are essential to support flexibility are essential to support competitivenesscompetitiveness

ESRI Quarterly Economic ESRI Quarterly Economic Commentary, Autumn 2006Commentary, Autumn 2006