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Topic 2: Recent developments and prospects

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. Recent data.

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Topic 2: Recent developments and prospects

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  1. 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

  2. Recent data • 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 GNP was up 9%! • Inflation rising

  3. Source: CSO

  4. 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

  5. Source: CSO

  6. Inflation rising

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

  8. 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.

  9. Competitiveness • Real exchange rate (R) R = e × (P*/P) where e = 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 • weights are the value of Ireland's trade with the respective countries

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

  12. 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)

  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 • 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

  14. ESRI Quarterly Economic Commentary, Autumn 2006

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