1. Topic 2: Recent developments and prospects IMF IMF (Article IV) Staff Report on Ireland (Article IV) Staff Report on Ireland European Commission European Commission Economic forecasts Economic forecasts Central Statistics Office Central Statistics Office Central Bank of Ireland Central Bank of Ireland Quarterly Bulletin Quarterly Bulletin Department of Finance Department of Finance ESRI ESRI Quarterly Economic Commentary Quarterly Economic Commentary

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

3. Source: CSO

4. GDP versus GNP GDP  factors of production located in Ireland GDP  factors of production located in Ireland GNP  factors of production owned by Irish residents GNP  factors of production owned by Irish residents GNP = GDP less net factor income from rest of the world

5. Source: CSO

6. Inflation rising

7. IMF Staff Report 2006 Ireland’s economic performance remains strong Ireland’s economic performance remains strong However, economic activity has become reliant on building investment and competitiveness has eroded However, economic activity has become reliant on building investment and competitiveness has eroded

8. Contributions to GDP growth When Y t = X t + …..., then % contribution of X to growth in Y = (X t – X t-4 )/X t-4  (X t-4 /Y t-4 )  100 = (X t – X t-4 )/Y t-4  100 Note: Chain-linked real components do not add up exactly to GDP. Note: Chain-linked real components do not add up exactly to GDP.

9. Competitiveness Real exchange rate (R) Real exchange rate (R) R = e × (P*/P) wheree = nominal exchange rate P* = foreign price level P = domestic price level

10. Real effective exchange rate (REER) a.k.a. trade-weighted real exchange rate REER = weighted average of the bilateral real exchange rates REER = weighted average of the bilateral real exchange rates weights are the value of Ireland's trade with the respective countries weights are the value of Ireland's trade with the respective countries

11. Labour productivity (LP) LP growth= %  Y - %  L = %  A +  %  K -  %  L = %  A +  %  (K/L)

12. Competitiveness What is happening to relative wage rates? What is happening to relative wage rates? http://www.bls.gov/news.release/ichcc.toc.htm http://www.bls.gov/news.release/ichcc.toc.htm http://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 foreign-MNC-dominated industries (see Honohan and Walsh) Problem: productivity exaggerated in some foreign-MNC-dominated industries (see Honohan and Walsh)

13. 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 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 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 Continued wage moderation and labor market flexibility are essential to support competitiveness

14. ESRI Quarterly Economic Commentary, Autumn 2006