Irish GDP falls 6.1% in q2 but consensus for 2020 will be revised up.

Irish GDP contracted in q2, as universally expected, but the 6.1% quarterly fall was not as severe as many predicted, although the first quarter is now also seen to have contracted, by 2.1%, instead of the initial 1.2% rise. On an annual basis GDP fell by 3.0% in q2 but this followed a 5.7% rise in the first quarter, leaving the average annual change over the first half of the year in positive territory, at 1.4%. The economy probably grew again in q3 and forecasts of contractions in the 8%-10% range over the full year now look far too pessimistic, with the consensus likely to move higher. Indeed our own forecast of -3.5% looks a tad low and we will revisit the forecast again, although with the caveat that the path of the virus remains the key uncertainty.

We have consistently emphasisied that Ireland’s GDP is largely dependent on exports and that the composition of that sector ( heavily weighted to Pharma, medical devices, organic chemicals and ICT) renders it far more resilient than both domestic spending and the export sector in most other developed economies. Consequently , although exports did fall in q2, the decline was modest compared to the trend elsewhere and left the annual change at zero, following a 6.5% rise in q1, which means that the substantial annual fall in exports envisaged by most forecasters is unlikely to materialise.

The Lockdown did have a significant impact on domestic spending of course, with personal consumption plunging by some 20% in the quarter, taking the annual fall to 22%. Spending on Building and Construction also collapsed, by an annual 35%, with a similar fall in residential construction. The other components of investment ( spending on machinery and equipment plus intangibles) also fell precipitously, by 75%, leaving total capital formation 71% below its level a year earlier. The only spending component of domestic demand to grow was government consumption, with an annual increase of 12%, a big acceleration from the 3% recorded in the first quarter.

The plunge in domestic demand was also reflected in Irish imports, with an annual fall of 37% in the second quarter. Imports are strongly affected by the capital spend from multinantionals, with most of the Intangibles component captured as a service import and as such GDP neutral, although adding huge volatility to the investment and domestic demand figures as well as the balance of payments.

The overall picture them is one in which domestic spending plummeted as a result of the pandemic and the lockdown but with an offset fom the export sector. The latter is what differentiates Ireland from its EU peers and is likely to ensure that the GDP fall here is much less severe than elsewhere, if indeed it falls at all.

Irish Unemployment: 131,000 or over 1 million?

Unemployment in Ireland is officially measured in the quarterly Labour Force Survey(LFS), based on a sample of households, and the numbers in that category have to be both available for work and to be actively seeking it. The Survey also captures total employment, with the sum of those in work and unemployed defined as the labour force.

Prior to the Covid Pandemic and Economic Lockdown the unemployment figure had fallen to a 115,000-120,000 range, with the unemployment rate hitting a cycle low of 4.7% in late 2019. The first quarter of 2020 saw a modest tick up, to 123,000 , and an unemployment rate of 5%, with the universal belief that the following months would see a massive spike , a view reflected in most economic forecasts, which envisaged average unemployment rates of 15%-20% over the year.

The CSO issues a monthly estimate of unemployment, which is often revised based on the LFS when published, and it was a surprise to many that the increase in April and May was very modest ( a rise to 138,000) followed by a fall in June, to 131,000, with the unemployment rate easing back to 5.3% from 5.6%. On the face of it then, these figures are wildly at odds with consensus forecasts.

The CSO does provide an alternative measure, which takes account of those in receipt of the Pandemic Unemployment Payment, and that figure rose to a peak of around 600,000 in early May. However, those recipients do not meet the definition of unemployed as per the LFS so are not captured in the official figure. One option is to assume all are in fact unemployed ( which is unlikely to be the case)and so adding them to the official figure. The CSO use that approach to give an ‘upper bound’ for unemployment , resulting in a total of 695,000 in April and an unemployment rate of 28%.

The numbers in receipt of the PUP have fallen steadily over the past two months, as Lockdown eased, so the upper bound unemployment total in June had fallen to 560,000, with an unemployment rate of 22.5%. Two competing forces will impact that figure from here- the PUP figure will continue to fall as the economy re-opens but some firms wil either not emerge from Lockdown or do so with a reduced workforce, so boosting the official unemployment total.

The Live Register adds an additonal twist . This measures those claiming unemployment Benefit and Assistance and although not the official measure of unemployment ( the cycle low there was 182,000) the trend is used by the CSO to estimate the monthly unemployment figure . Again the Register picked up sharply in April and May ( to 226,000) but fell back again in June, to 221,000. When the PUP figure is added that total rises to 660,000, None of these figures take acount of those on a Wage subsidy scheme , numbering 382,000 in June, so if they are also added we arrrive at a grand total 1,041,822, with a peak of over 1,250,000 in April.

It is highly unlikely that everyone on a wage subsidy and in receipt of the PUP will end up unemployed so the 1 million figure is hopefully not reflective of things to come. At the other end of the scale it is not plausible that all will resume employment as before, so the official unemployment data may well start to tick up over the second half of the year. Nonetheless, estimates of the official unemployment rate for the year now look far too high , and it also may well be the case that unemployment on that definition will keep rising well into 2021, which again is contrary to the consensus .

Ireland only Euro economy to grow in first quarter.

Most developed economies saw contractions in the first quarter, with the Euro Area (EA) decline at 3.8%. A fall in Irish GDP was also widely expected ( the Department of Finance projected -5.0%), reflecting the lockdown which began in March, although the most recent data had shown quarterly  growth in industrial production,  a substantial gain in employment and  very strong performance from merchandise exports, driven by pharmaceuticals and medical devices. In the event Ireland appears unique in  the EA during the early phase of the Covid pandemic as the only country to record GDP growth, with output rsing by 1.2%. This  left the annual change in GDP at 4.6%,  and although it does not mean that the average figure for the year will also be positive ( the q2 decline in domestic demand is likely to be large) , it does reduce the possibility of a double digit decline, as seen by some forecasters.

In truth a wide range of outcomes is possible given that exports account for 130% of GDP, so dwarfing any impact from consumer spending or domestic investment. The type of  exports produced here by multinationals ( chemicals, pharma, business and computer services) does render them more resilient in the type of lockdown seen globally as a result of the pandemic, although contract or offshore manufacturing (largely in China) adds an additional degree of uncertainty to the export outlook. Indeed, the latter fell in the first quarter so reducing mechandise export growth to an annual 4% from the 12% recorded dometically. Service exports grew by over 10% and the volume growth for exports overall was 5.9% in annual terms, which clearly provides a massive boost to total GDP.

Imports must be captured as domestic demand or as an input into exports and so have no net impact on GDP. In the first quarter merchandise imports were flat but service imports rose by 69%,  driven  by  a very large increase in  the import of intellectual property, by a small number of firms. The corollary was a very strong increase in investment in Intangibles, and the CSO did not provide a figure for this or for spending on mechinery and equipment. We know that overall investment spending rose by 197% to €46bn, and that construction increased by over 8% to €5.6bn, leaving a residual of   over €40bn for Machinery, Equipment and Intangibles , and an annual rise of  286%.

Retail spending fell by 5.5% in the quarter, weighed down by a collapse in car sales,  and so a hefty fall in consumer spending was likely and duly emerged, with a 4.7% decline, taking the annual change also into negative territory at -2.5%. Consumption now accounts for less than a third of GDP however, and so even a fall of that magnitude was not sufficient to generate a negative print for GDP, although modified domestic demand, the CSO’s measure of domestic spending excluding the impact of multinationals on investment, did fall by an annual basis. by 1.2%.

The second quarter may well be different in that the fall in consumption and domestic demand is likely to prove strong enough to override  exports  and a double digit decline in GDP is widely expected , both for Ireland and across the EA. That may be the case  but an offseting factor here  may be a recovery in contract manufacturing exports from China. To reiterate; exports are key.

 

Fiscal support is from taxpayers, not helicopters

The economic impact from  Covid-19 has already been unprecedented in its severity and speed, prompting governments across the globe to offer  extraordinary levels of fiscal support to ameliorate the impact on households and businesses. As a consequence budget deficits will soar, raising the question of how they will be funded. The fact that some of the additional government spending has come in the form of cash payments to households or direct wage support has prompted references to ‘Helicopter money’, although that is to misunderstand the concept and indeed how these deficits will be funded,which as it stands will be from existing and future tax payers  albeit with the caveat that central bank actions can reduce the interest bill.

The term ‘Helicopter money’ was coined in 1969 by Milton Friedman, musing on the impact of  a one-off increase in the money supply, in this case via the drop of €1,000 dollar bills from the sky (it would simpy raise prices he thought). More recently the idea re-emerged  in the noughties as central banks started to worry about deflation and  has also become associated with Modern Monetary Theory or as some call it, the ‘Magic Money Tree’. This contends that money is essentially a fiscal creation and that a government with monetary sovereignty, such as the US or UK,  can fund additional spending by printing money rather than through taxes, albeit in the modern world through the central bank simply crediting a balance in the State’s account at the bank. Note that euro member states do not have monetary sovereignty and the ECB is prohibited from monetary financing.

What is striking  though is that,to date at least, the huge sums that governments have committed to spend are seen to be funded by borrowing. The partial payment of wages by the State, for example, is no different from the payment to recipients of unemployment or other social welfare i.e. it is  a transfer from tax payers, paid out of current tax receipts or from future tax receipts by borrowing.

Consequently, Government debt levels will rise steeply, as in many cases deficit ratios  will balloon to double digit levels, although that depends on the duration and  severity of the recession unfolding before us.  In Ireland’s case the Central Bank (CB) has  recently projected an Exchequer  deficit around €20bn this year, which if broadly right implies a major increase in debt issuance. That had been put at up to €14bn, against €19bn due for redemption because  the NTMA had intended to run down some of its cash balances which amounted to €15bn at the beginning of the year. The implication now  is that a €10bn reduction in cash balances would still require around €30bn in issuance of new debt.

The NTMA have already issued €11bn to date and of course the interest rate on the debt is very low, albeit higher than it was a few months ago, so debt is being redeemed and replaced at a much lower cost, reducing the average interest rate on the outstanding debt, which is now down around 2%. QE is helping of course, which allows the ECB and the (CB) to buy up to a third of any issuance and hold up to a third of debt issued. That means that most of the interest on that QE debt is paid to the CB , boosting its income and hence largely returned to the Exchequer as CB profit.

This is not helicopter money as the bonds at issue will have to be repaid, most likley by  issuing new debt on redemption, which implies QE will be never ending unless economies are strong enough for private investors to buy all of the new debt issued. There is also an additional contraint on QE in the euro area  in that bond buying is broadly proportionate to each member’s population and GDP, which determines the ‘Capital Key’ ( share of the ECB’s capital subscription). In Ireland’s case it is around 1.5%, so Irish government bonds held under QE amount to €34bn out of a total of €2261bn .

The Covid pandemic and resulting economic crisis has prompted the ECB’s new Pandemic Emergency Purchase Programme  (PEPP)  which does  appear to include the capital key constraint but not the issue limit. It is designed to run this year with a size of €750bn  and therefore in theory could buy most or all of a new bond. Ireland might  issue €15bn in a  30 year pandemic bond, for example,   and the ECB could buy say €12bn, with most of the interest therefore paid to the CB. All this helps to reduce interest costs but is not the same as printing money to give to individuals, via bank transfer or from a helicopter.

V, U or L

The Covid -19 pandemic has taken many lives and threatens many more, prompting an unprecedented policy response across the globe , generally intended to slow the spread of the virus and ‘flatten out the curve’ by reducing the risk of a short term spike in hospitalisations overwhelming the health system. Many economies, although not all,  are in various forms of lockdown and the economic impact will be severe, to an extent impossible to quantify with any degree of certainty, although in some cases data is now emerging which allows economists to make a stab at the impact.

Crucially though, a question which cannot be answered at this stage is how long the hit to economic activity will last. Stock markets have plummeted but the scale of the fall to date implies that investors are betting on a V shaped  recession i.e. a very sharp fall in activity for a couple of quarters, followed by a rapid recovery at least approaching  pre-crisis levels.That also seems to be the consensus view in terms of US analysts, with Goldman Sachs, for example, projecting a 1.5% fall in GDP in the first quarter, followed by a 6% decline in q2 and then a 3% rise in q3 and q4 . That leaves the average fall in  US GDP in 2020 at -3.8%, with a projected rise in the unemployment rate to around 9% from the current 3.6%.

The same  V pattern appears to be underpinning  expectations in the Euro Area (EA), although again the fall in annual GDP is huge. Germany. for example, appears to be  predicating its fiscal response to the crisis on a 5% fall in GDP. The March PMI for the EA (31.4) does provide sime guidance, with the average for the first quarter implying a 0.7% decline in  q1 GDP, followed by  around 2.7% in q2 if the PMI figure averages around 30  over the next few months. A 0.5% decline in q3 followed by a 1.5% bounce in q4 would leave the average fall in  EA GDP in 2020  at 2.5%.

In Ireland’ case the PMI indices do not correlate highly with recorded GDP but in any case we do not have a March reading anyway  so  we have little to go on in estimating the economic impact of the virus on the economy. Assuming a V shaped recession, however, with  heroic assumptions on the scale of very steep falls in non-food domestic spending till June,  yields a €10bn (9% )drop in consumption and a €15bn (8%) drop in modified domestic demand in 2020, assumimg a modest recovery in the latter part of the year.A similar  percentage fall in private sector employment would  push the average unemployment rate up to 12%. The impact on overall GDP largely depends on exports, however, including contract manufacturing, which amounts to some €70bn, with most originating in China. A collapse in that figure could throw up an enormous fall in recorded GDP but again if we assume that V shape for exports as a whole the overall fall in  fall in GDP is around 5%, which would be less than half the slump recorded during the financial crash because it would be short and sharp rather than over two years.

How long the recessions will last depends on the path of the virus and how quickly activity returns to ‘normal’ which are unknowns of course. So a U shaped cycle is certainly possible, with any material recovery in spending and output pushed out from two to say four quarters. That would clearly render the above estimates  very optimistic and pose big choices for governments in terms of fiscal supports designed to be short-lived.

Finally, there is also the prospect that the virus takes much longer to pass through the population and that the return to ‘normal’ patterns of social and economic activity does not occur for  a prolonged period, giving an L shaped cycle i.e. any upturn takes well  over a year to eighteen months to materialise. Clearly that would result in much steeper falls in  equity markets than seen to date, much larger increases in unemployment, massive credit issues and much larger fiscal hits to governments. Of course we have seen unprecedented levels of policy response on the monetary side, designed to pump liquidity into the system and limit the scale of any rise in long term borrowing cost for governments. Media headlines have also highlighted huge fiscal ‘stimulus’ packages but to date most of this relates to State guarantees for bank loans, which may carry fiscal  implications down the line but is effectively monetary in seeking to supply credit to the business sector. Nonetheless, we have also seen governments now also turning to more direct measures , including enhanced unemployment assistance and in some cases, including Ireland, wage support. As yet these massive increases in fiscal deficits are seen to be financed by borrowing rather than money creation, albeit with the resumption of QE in many cases meaning that  the private sector will not be alone in buying the debt.

Irish GDP grew by 5.5% in 2019 but consumer spending surprisingly weak.

Irish real GDP grew by 5.5% in 2019, a slowdown from the 8.2% recorded the previous year. The nominal value of GDP rose by 7.2% and now stands at €347bn, which is double the level seen in 2012, a surge which has precipitated a huge fall in the Government debt ratio, which probably ended 2019 at 58.6% and hence  below the 60% limit as set out in the EU’s Stability and Growth pact.

The growth outcome was actually  below consensus expectations ( the Central Bank expected 6.1% and the Department of Finance 6.3%) despite a strong 1.8% increase in the final quarter and this was in part due to downward revisons to growth in the earlier part of the year. This included consumer spending, which is now seen to have risen by only 2.8% in 2019 , with the annual change slowing sharply to only 2.0% in the final quarter. Given booming employment and  stronger wage growth the implication is that precautionary savings rose, as also indicated by the growth in household bank deposits. In contrast, Government consumption was revised up and grew by 5.6%, or double that of personal consumption, a rare combination.

In terms of the other components of domestc demand , building and construction grew by 6.8% in 2019, with housebuilding up 18%, but the pace of expansion is slowing, as might be expected given the small starting base of completions. Spending on housing improvements surprisingly fell but spending on non-residential building continued to grow, by 9%. The prevailing uncertainty about Brexit last year also impacted spending by domestic firms on machinery and equipment, which fell by 15%, with the result that what the CSO deem modified capital formation (total investment excluding the impact of multinationals on various components) rose by just 1.3%, which with the sluggish increase in consumer spending meant that modified domestic demand grew by just 3%  from 4.7% in 2018.

That concept is a CSO  construct and the actual GDP  figure as recognised internationally includes all spending on investment, including aircraft leasing and that undertaken by multinationals on R&D (captured as Intangibles), which can be both enormous and extremely volatile relative to the small scale of the underlying Irish economy. In 2019 Intangibles alone rose by over €70bn, or  270% with the result that overall capital formation increased by an extraordinary 94% having fallen by 21% the previous year.On the face of then, Capital Formation now accounts for over 40% of Irish GDP, with consumer spending less than a third, an unusual if not unique configuration.

That Intangibles figure is broadly neutral for GDP  however, as virtually all of it  is captured as a service import , so total imports rose very strongly in 2019, by 35%. Exports continued to perform strongly , rising by over 11%, so massively outperforming the growth in global trade, but the result was a large Balance of Payments deficit of €33bn or 9.5% of GDP. Normally a large deficit like that would imply problems, in that  the  economy is consuming more than it is producing but in Ireland’s case is a useless indicator.

The  economy finished the year strongly according to the GDP data, despite the weak consumer, with the quarterly increase of 1.8% bringing the annual change in q4 to 6.2%. This therfore provides a strong positive carryover into 2020 but there are fresh risks alongside the ongoing possibility of a no-deal Brexit. One is political (it is still unclear if a governmnet will be formed or that an election will be required) but the most pressing now is the economic impact of  COVID-19. That may be domestic ( reduced consumer spending and a supply side hit to output across all sectors) , external ( a global recession ) and/or company specific. The latter tends to be overlooked, but the impact of contract manufacturing on Irish exports is substantial; total merchandise exports in 2019 amounted to €227bn, against €144bn actually shipped from Ireland, with the difference largely deemed to be accounted for by production in China. On that basis the first quarter export figure could be a shock.

 

 

Spending rather than tax cuts: General Election fiscal proposals

Ireland goes to the polls on February 8th and the main political parties have outlined their fiscal proposals, although some in greater detail than others, at least to date. A universal feature is the pledge to devote substantially more resources to  additional government spending rather than tax cuts, with the promised ratio far higher than was the norm in recent years. The plans are also  predicated on what are in effect pretty conservative projections for economic growth, although of course with no presumption that Ireland will experience a recession, either Brexit related or following a global setback.

For context it is worth noting that 2019 ended with Irish current revenue exceeding current exchequer spending by  €7.9bn, or around €13bn if debt interest is excluded, with a capital deficit of €7.3bn. That implies that if current   revenue rises broadly in line with projected GDP, the current budget surplus will continue to increase, allowing the sitting government the option to raise spending, be it current or capital, and/or to cut taxes, whilst still running an overall budget surplus.

That is exactly the position outlined in early January by the outgoing Government, envisaging €16.6bn in available resources in the five years to 2025, a figure which all the parties have taken as their benchmark. That sum is also consistent with an annual fiscal surplus of just over 1% of  GDP, although it should be noted that what is relevant for EU fiscal rules is the Budget adjusted for the economic cycle (the structural balance) and on that criterion the structural deficit might well be  in deficit and indeed worse than the 0.5% of GDP curently set as Ireland’s  fiscal objective, given that the EU believes that the Irish economy is operating much higher above capacity than seen by the Department of Finance.

That said, it also notable that the forecasts envisage a sharp deceleration in growth, from 3.9% this year to under 3% and then 2.5% by 2025.This is supply rather than demand related; the Department of Finance believes the economy is at full employment and so employment growth is forecast to slow , constrained by the growth of the labour force, with no pool of unemployed workers from which to draw.

On the various fiscal plans, Fine Gael augment the €16.6bn figure modestly to €17.1bn via higher taxes on tobacco and vaping,with additional compliance also assumed to add revenue. From the new figure  €2.8bn is allocated to tax cuts, largely to fund increases in the standard tax band, with  €14.3bn in additional spending, a ratio of over 5 to 1. On spending, €5.6bn is pre-committed (€3bn current and €2.6bn capital)  and the biggest slice of the €8.7bn unallocated is set to go on Health (€3.1bn) . The plan also includes €2bn specifically earmarked for higher  public sector pay.

The Labour Party have also set out a detailed fiscal plan, which envisages bolstering the available resources by €2bn, to €18.6bn, by raising tax receipts via higher stamp duty on shares and commercial property alongside a higher bank levy. Some €3bn of this €18.6bn will be set aside for indexing the personal tax system, implying raising allowances and the standard tax band by around 2% a year, leaving €15.6bn, of which €5.6bn is deemed pre-committed with the remaining €10bn for additional expenditure (€8bn current and €2bn capital).

Fianna Fail have not (as yet) set out a detailed fiscal plan as above but from their manifesto is is clear they are taking the €16,6bn figure as given, although arguing that the €5.6bn deemed as pre-committed by the outgoing adminstration is too low, including an underestimation of demographic pressures. Consequently FF would set aside an additional €1.2bn to also  include unforeseen expenditure, leaving €9.8bn to be allocated overall. FF pledge a 4:1 ratio of spending to tax reductions, with €1.3bn of the unallocated figure  earmarked to fund personal tax cuts, including a lower USC rate and an increase in the standard tax band.

Of course these are all manifesto promises and not all will see the light of day, particularly as the opinion polls suggest that a coalition government is the most likely outcome. Events may also intrude, throwing any fiscal plans off course. Interesting to note, though, the big move by all parties towards higher spending and away from any notion of cutting income tax rates.

Sterling’s big impact on Irish car market

The CSO data on private cars licensed shows 2019 was another difficult year for Irish motor dealers, with new cars  sold down 6.5% to 113,000. This was the third consecutive annual decline from the 2016 high of 142,000 and a long way from the pre-crash figure of over 180,000.

At first glance this weakness appears inconsistent with the  surge in  household income, which has probably risen by a cumulative 20% over the last three years, while interest rates are at very low levels. One answer lies in the number of imported used cars, which in contrast has risen strongly, increasing by 9.5% in 2019 and a cumulative 132% since 2015. Indeed, last year’s total of 109,000 is only marginally below the new car figure.

Factors specific to the Irish and UK car markets can be important in the import decision and one clear factor of late is the plunge in diesel sales in the UK, leading to lower prices  there relative to petrol and hybrid models. The sale of new diesel car sales in Ireland also fell last year but imports of diesel actually rose, far outstripping domestic sales, and accounted for 72% of all imported cars, against a 47% share of the new car market.

What is striking though, looking at the total import figures, is the very close correlation (0.92) between the euro/sterling rate and  the share of car imports in the  overall market. The latter fell sharply between 2013 and 2015 for example, to 28% from over 40%, against a backdrop of a steep slide in the euro, from 85 pence sterling to 73 pence. The UK currency subsequently fell sharply following the Brexit referendum, with the euro averaging around 88 pence over the last few years, which obviously makes importing anything from the UK cheaper, including cars.

Sterling has rallied in recent months and all else equal a weaker euro/sterling rate will translate into a fall in imported cars as a share of the market. However, a no-deal Brexit is still possible by end-2020 and the UK economy has slowed significantly of late, with the market now expecting a rate cut by the BoE, which is putting renewed downward pressure on sterling. So it is not certain that the euro sterling rate will fall, although that is the consensus view in the market. Car imports will also be affected by changes  announced in the Irish 2020 Budget, introducing a new VRT levy based on nitrogen oxide emissions, applicable to both new and imported cars. This may well dampen the import demand for older diesel cars so the close link to the sterling exchange rate may become less pronounced, albeit still evident.

Ireland’s plunging birth rate and rising unemployment challenges narrative on economy

The CSO has just published two significant data sets , one relating to  the latest demographics and the other to the labour market in the second quarter of the year. The former was broadly as expected,  but the latter came as something of a shock, challenging the recent narrative on the economy.

The Irish population has been growing strongly again after a softer period following the financial crash and that trend continued in the twelve months to April, with a 65,000 increase (1.3%) taking the total to a fresh high of 4.92m. In general, official estimates and projections have tended to underestimate population growth, in large part because of the signifcance and volatility  of migration in the Irish data. In this case  the scale of emigration was largely unchanged from the previous year, at 55,000, but  offset by  substantial immigration of some 89,000, again similar to 2018, to give a net migration figure of 34,000. The latter is now larger than the natural increase ( births – deaths) which has slowed significantly  of late, to 31,000 from 49,000 at the turn of the decade. Indeed, the Irish birth rate ( births per 1,000 population)  although still very high by EU standards is falling rapidly , to 12.4 from 16.6 a decade ago.

Nonetheless, the robust pace of overall population growth allied to the boom in economic activity has resulted in  the emergence of massive capacity constraints across many areas of the economy, most nobaly housing but also in education, health care, public transport and the  infrastructure  around the main cities. The current make-up of that population growth ( a falling birth rate offset by  high net immigration ) makes it particularly difficult to plan for the future, however, as a period of weaker growth in Ireland might have a very significant impact on migration flows and hence total population.

The boom in the economy had propelled employment  to record highs and prompted much discussion about the level of full employment, as the unemployment rate had fallen to a cyle low of 4.5% in June. In that context the other main CSO release, the quartely Labour Force Survey, was a shocker. Headline employment fell marginally in q2  from the previous quarter but normally rises for seasonal reasons and so the adjusted figure saw a 21,000 decline, spread over half of the fourteen industry sectors categorised by the CSO. The labour force continued to rise  in the quarter so the numbers unemployed rose, as did the unemployment rate, to 5.2% from 5.1%. A marginal change in that context but it did result in a much more significant revision to the previously published monthly estimates, as unemployment in July is now 18,000 higher than previously thought and has been rising for the past four months, taking the unemployment rate to 5.3% instead of 4.6%.

Coverage of the data tended to emphasis the annual growth in headline employment, which is still impressive at 40,000 or 2.0%, although this is the slowest annual growth rate since early 2013. The seasonal  adjusted fall in q2 also followed a strong rise of 49,000 in q1 giving a net positive figure over the first half of the year of 28,000, so one might put all this down to a quirk in the data ( which is based on a household survey) particularly as the numbers claiming unemployment  benefit are still falling, albeit at a much reduced pace.

However, confidence surveys have weakened of late and some of the hard data has pointed to slower domestic activity, notably retail sales which fell by a cumulative 6.5% in the three months to July. One obvious culprit behind this caution is Brexit, which may also be impacting the demand side of  the  housing market. Indeed one other surprising feature of the Labour Force data was that construction employment has flatlined for the past nine months, which may be due to a scarcity of labour but also to caution from builders and developers as well.

All in all, food for thought- has unemployment bottomed in this cycle or is this just a short term hiccup which a Brexit resolution  might help to cure? On population, the Irish birth rate may still be the highest in Europe but is heading rapidly towards the EU average which is under 10.

Are estimates of Irish housing demand far too high?

The consensus view on Irish housing is that demand exceeds supply by a considerable margin and that the gap is closing, which many conclude is the key factor in the clear deceleration in residential property price inflation seen over the past year. Yet the increase in supply is not that pronounced and it may well be that demand is not as  substantial as generally believed, particularly into the medium term..

The latest figures on housing completions from the CSO, covering the second quarter of the year, show a half- year total of 9,100  which implies the full year figure will be above the 18,000 recorded in 2018,  albeit pointing to a outturn below 21,000. Supply is therefore still rising but at a sluggish pace, and certainly still a long way from the 30,000-35,000 widely seen as a good estimate of the annual demand over the medium term.

That figure is largely based on projections for household formation but there is an obvious circularity in that households are defined as occupying a house or an apartment. In other words  housing supply creates household formation so  the latter is not an independent estimate of demand. For example, the number of  households in Ireland rose by just 48,000 in the five years to the 2016 census, or by less than 10,000 per annum, but the numbers living in those households increased by 166,000, indicating a rise in the average household size. Housing demand projections  generally assume that the size of households will fall over the medium term.

So household formation averaging 30,000 or more a year implicitly assumes  housing supply around that figure , and lower supply would mean lower household formation. A look at the latest population projections by the CSO also gives food for thought. On the assumption of unchanged fertility and an annual net migrant inflow of 30,000 per year the population between 25 and 44 increases by just 8,000 in total by 2025, with the numbers between 30 and 40 years old declining sharply. If migration was much lower, at 10,000 per annum, and fertility declined, the CSO projection shows a 100,000 fall in the 25-44 age group which is the cohort one generally associates with house purchase and household formation.

If supply is the main determinant of demand  the recent data on planning permissions, showing a fall in the annual figure to below 29,000, casts doubt on whether supply will exceed 30,000 a year and , if so , household formation will be much lower than the received wisdom. The average number per household may in fact continue to rise .