Topic 2: Recent developments and prospects

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Topic 2 Recent developments and prospects

• IMF
• (Article IV) Staff Report on Ireland
• European Commission
• Economic forecasts
• Central Statistics Office
• Central Bank of Ireland
• Quarterly Bulletin
• Department of Finance
• ESRI
• Quarterly Economic Commentary

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Recent data

• Quarterly National Accounts data for Quarter 2
  2006 released by CSO on 28/9
• Real GDP was up 5 in 2006Q2 compared with
  2004Q2 (year-on-year)
• Real GNP was up 9!
• Inflation rising

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Source CSO
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GDP versus GNP

• GDP ? factors of production located in Ireland
• GNP ? factors of production owned by Irish
  residents
• GNP GDP less net factor income from rest of the
  world

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Source CSO
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Inflation rising
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IMF Staff Report 2006

• Irelands economic performance remains strong
• However, economic activity has become reliant on
  building investment and competitiveness has
  eroded

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Contributions to GDP growth

• When Yt Xt ..., then
• contribution of X to growth in Y
• (Xt Xt-4)/Xt-4 ? (Xt-4/Yt-4) ? 100
• (Xt Xt-4)/Yt-4 ? 100
• Note Chain-linked real components do not add up
  exactly to GDP.

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Competitiveness

• Real exchange rate (R)
• R e (P/P)
• where e nominal exchange rate
• P foreign price level
• P domestic price level

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Real effective exchange rate (REER)

• a.k.a. trade-weighted real exchange rate
• REER weighted average of the bilateral real
  exchange rates
• weights are the value of Ireland's trade with the
  respective countries

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Labour productivity (LP)

• LP growth ?Y - ?L
• ? A a ? K - a? L
• ? A a ? (K/L)

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Competitiveness

• What is happening to relative wage rates?
• http//www.bls.gov/news.release/ichcc.toc.htm
• Why not use unit labour costs (ULC)?
• Problem productivity exaggerated in some
  foreign-MNC-dominated industries (see Honohan and
  Walsh)

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Key policy issues

• The FSAP Update found that the financial system
  continues to perform well, but rapid credit
  growth is a vulnerability. The strengthening of
  the regulatory and supervisory framework should
  continue
• Staff recommends modest fiscal tightening, given
  the need to dampen aggregate demand, build a
  cushion against the risk of a hard landing, and
  prepare for population aging
• Continued wage moderation and labor market
  flexibility are essential to support
  competitiveness

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ESRI Quarterly Economic Commentary, Autumn 2006