Small open economies - vulnerabilities in a changing world

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Kieran McQuinn delivered this presentation at the Dublin Economics Workshop on Saturday, 14th September. More information about the event, including other presentations delivered at the workshop, can be found here: https://www.dublineconomics.com/
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  • 1. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Small open economies – vulnerabilities in a changing world DATE 13th September 2019 VENUE Clayton Whites Hotel, Wexford. AUTHORS K. McQuinn, C. O’Toole, M. Allen-Coghlan, P. Economides
  • 2. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie2 19 September 2019 Outline • Uncertainty and the Irish economy • Global issues and Brexit • Impact of Brexit on short-term forecasts • Recent examination of uncertainty in the QEC: • Consumption - impact of Brexit already? • Investment - US policy • Concluding comments
  • 3. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie3 19 September 2019 IMPACTS OF DIFFERENT BREXIT SCENARIOS ON THE IRISH ECONOMY Source: QEC Spring 2019, Box 1 LONG-TERM IMPACT (+10 years) SHORT-TERM COMMENTARY FORECASTS Scenario % Deviation from Baseline Withdrawal (FTA) -2.6 No Deal -4.8 Disorderly -5.0 Scenario Year GDP Level (Volume, €bn) Annual % Growth Baseline 2019 324.5 4.0 Baseline 2020 334.7 3.2 Disorderly 2019 316.1 1.2 Disorderly 2020 323.7 2.4
  • 4. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie4 19 September 2019 Personal Consumption of Goods and Services Source: Central Statistics Office 20,000 21,000 22,000 23,000 24,000 25,000 26,000 -6% -4% -2% 0% 2% 4% 6% Euro Mn Growth Y-o-Y
  • 5. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie5 19 September 2019 Consumer Sentiment Indicator Source: European Commission data and ESRI calculation 40 50 60 70 80 90 100 110 120 2011m1 2011m7 2012m1 2012m7 2013m1 2013m7 2014m1 2014m7 2015m1 2015m7 2016m1 2016m7 2017m1 2017m7 2018m1 2018m7 2019m1
  • 6. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie6 19 September 2019 Brexit and consumer sentiment I • Specify a model of consumer sentiment • Lovell and Tien (2000) specify • An economic discomfort index (EDI) EDI = ̇𝑝𝑝𝑡𝑡 + 𝑢𝑢𝑡𝑡 • ̇𝑝𝑝𝑡𝑡 is the absolute rate of inflation and • 𝑢𝑢𝑡𝑡 is the unemployment rate. • Compare performance of model with sentiment
  • 7. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie7 19 September 2019 Residuals from Sentiment Model Source: ESRI calculation -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 2013m7 2014m1 2014m7 2015m1 2015m7 2016m1 2016m7 2017m1 2017m7 2018m1 2018m7 2019m1
  • 8. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie8 19 September 2019 Brexit and consumer sentiment II • Over the period 1998 – 2019 • The model performs quite well • Captures the movements in consumer sentiment • However since mid 2018 • Marked dis-improvement in the performance of the model? • Sentiment declining while “fundamentals” still doing well? • Impact of Brexit?
  • 9. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie9 19 September 2019 Investment by Asset (%) Source: Central Statistics Office -15 -10 -5 0 5 10 15 20 25 30 GFCF Intangible Assets Machinery & Equipment Buildings & Construction Four Quarter Rolling Average Growth Rate
  • 10. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie10 19 September 2019 Global uncertainty and Irish investment? 0 50 100 150 200 250 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1 2014Q3 2016Q1 2017Q3 2019Q1 US Ireland Economic Policy Uncertainty – Based on media mentions of key phrases
  • 11. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie11 19 September 2019 COSMO accelerator model • ∆𝑙𝑙𝑙𝑙𝐼𝐼𝑡𝑡 = 𝛽𝛽1∆𝑙𝑙𝑙𝑙𝐼𝐼𝑡𝑡−1 + 𝛽𝛽2∆𝑙𝑙𝑙𝑙 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡−1 + 𝛽𝛽3∆𝑙𝑙𝑙𝑙𝑟𝑟𝑡𝑡−1 + 𝜎𝜎 𝑙𝑙𝑙𝑙𝐼𝐼𝑡𝑡−1 − 𝜑𝜑𝜑𝜑𝜑𝜑𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡−1 − 𝜐𝜐𝜐𝜐𝜐𝜐𝑟𝑟𝑡𝑡−1 • In an error correction model link investment to • output growth, the cost of capital and other factors • Then separately include US and Irish uncertainty indicators
  • 12. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie12 19 September 2019 Model estimates Long Run Equations Overall Construction M&E Intangibles ln(𝐸𝐸𝐸𝐸𝐸𝐸(𝑈𝑈𝑈𝑈)𝑡𝑡) -0.406*** -0.408*** -0.502*** -0.156+ (0.054) (0.063) (0.113) (0.081) ln(𝐸𝐸𝐸𝐸𝐸𝐸(𝐼𝐼𝐼𝐼)𝑡𝑡) -0.201* -0.163 -0.304*** -0.127 (0.081) (0.107) (0.076) (0.060) Short Run Equations Δln(𝐸𝐸𝐸𝐸𝐸𝐸(𝑈𝑈𝑈𝑈)𝑡𝑡−1) -0.271*** -0.170** -0.482*** -0.091 (0.047) (0.055) (0.080) (0.090) Δln(𝐸𝐸𝐸𝐸𝐸𝐸(𝐼𝐼𝐼𝐼)𝑡𝑡−1) -0.026 0.010 -0.107 -0.021 (0.030) (0.033) (0.067) (0.069) Observations 91 91 91 91 Models Including US & Irish Economic Policy Uncertainty
  • 13. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie13 19 September 2019 Implication of results  US economic policy uncertainty  Significant and negative impact on Irish investment  Both in the short and the long term  Long-term result:  One percentage point increase in uncertainty  Lowers investment by -0.4 percentage points  Holds for all investment types however  Noteworthy that machinery and equipment is most sensitive to US uncertainty  May be a factor in the slowdown in the short-run  Seen in this asset type recently
  • 14. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie14 19 September 2019 Concluding comments  Notwithstanding the recent strong performance of the Irish economy  Both Brexit and developments in the US  Appear to have had a contractionary impact already on domestic economic activity  Helped to cool an overheating economy?  However, going forward the impacts far less benign?
  • 15. Thank you
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