Chairman, committee members, good afternoon.

I’m pleased to be here today and I’d like to introduce my colleagues, John Flynn, Head of the Irish Economic Analysis Division in the Bank and his deputy, Terry Quinn. I will give a brief summary of the outlook for the economy as the Bank sees it.

A wide range of available indicators - from the labour market to consumer spending and investment spending excluding aircraft and intangible assets – confirms that the economy is performing well. However, two factors in particular have made it more difficult to get a clear picture of both the performance and the outlook for the economy.  The first of these is the recent very large revisions to the Irish National Accounts, in particular the very large upward revisions to the value of GDP and GNP in 2015.  Second, the outcome of the UK referendum on membership of the European Union has introduced significant risk and uncertainty to the outlook for the economy.

While recent GDP and GNP measures significantly overstate the growth of domestic economic activity in Ireland in 2015, this should not overshadow the tangible improvement that has taken place. A wide range of more reliable domestic spending and activity indicators suggest that domestic economic activity continues to expand at a reasonably healthy pace. In particular, consumer spending has continued to grow at a relatively strong pace, supported by solid gains in employment and rising earnings. Investment, net of intangibles and aircraft, has also been contributing to strong domestic demand with both core machinery and equipment and construction recording double-digit annual growth rates.

A better reflection of what is happening in the domestic economy is provided by an indicator developed recently by economists at the Bank: underlying domestic demand. This is defined as the sum of personal expenditure on goods and services, net government expenditure on goods and services, and investment excluding aircraft and intangible assets. This measure grew at a strong pace, close to 5 per cent in 2015, and the strength of the domestic economy was also reflected in a rise in employment of 2.5 per cent. These underlying developments present a more accurate picture of the underlying growth dynamic of the domestic economy.

However, such estimates are only rough approximations and, in view of the distortions now associated with the conventional GDP and GNP aggregates, there is a need to develop a more meaningful, commonly agreed measure of the actual level of Irish economic activity that accurately mirrors developments within the economy. In this context the Bank welcomes the initiative by the CSO to establish a consultative group that will consider, among other things, the potential for the development of new indicators which will enhance our understanding of the Irish economy. This group will be chaired by the Governor of the Bank.

Looking ahead, assessing the outlook for the economy is further complicated by the outcome of the Brexit referendum in the UK.  The economic impact of Brexit on Ireland is difficult to estimate with precision.  It is clear, however, that the impact on the Irish economy will be negative and material, both in the short-term and in the longer term.

The long-run economic impact of Brexit on Ireland will be influenced by the nature of the withdrawal agreement between the EU and the UK and the subsequent evolution of both economies. The nature and scale of the eventual macroeconomic impact of Brexit for the Irish economy will reflect the extent to which the exit arrangements bring about any change to the free movement of goods, services, capital and labour. Trade, FDI and the labour market are the key channels for the macroeconomic effects of Brexit. Any agreement which keeps the UK access to the single market largely intact would have a more limited impact but the scale of the impact could be much more significant under a more restrictive agreement.

In the short-term, adverse effects on the Irish economy, the UK and the broader European economies arise mainly from the macroeconomic, financial and currency market effects of Brexit-related uncertainty. An important element of this uncertainty revolves around the terms of the relationship between the UK and the EU, how long it will take to work out that relationship and how it will impact in the interim.  This heightened uncertainty is likely to dampen consumer demand and investment decisions by firms.

While the Irish economy has become less reliant on the UK for trade over recent decades, the UK remains a particularly important market for many indigenous firms. Some sectors, particularly agri-food, clothing and footwear and tourism, continue to have a relatively high dependency on the UK and, consequently could be affected disproportionately. 

The Bank’s latest forecast was published in our Quarterly Bulletin in July. It covers the years 2016 and 2017. As well as taking into account information from the latest economic indicators, the forecasts are based on a set of technical assumptions regarding variables such as exchange rates and foreign demand.  The forecasts also incorporate an estimated negative Brexit effect on the Irish economy (-0.2pp in 2016 and -0.6pp in 2017).  Overall, we forecast GDP growth rates of just under 5 per cent in 2016 and 3.6 per cent for 2017. We see continuing employment growth, with total numbers employed expected to rise by around 70,000 over the two years. Unemployment is expected to decline towards 7 per cent next year. Supported by continued solid gains in employment, underlying domestic demand is projected to grow by 4 per cent this year, slowing to 3 per cent in 2017. This slowdown reflects a projected negative impact from Brexit-related factors, some normalisation of the catch-up growth seen in earlier years and the fading of the positive effects of lower oil prices on household incomes.

Notwithstanding this slowdown in domestic demand, the outlook for the Irish economy remains broadly favourable, with unemployment set to continue to fall further. The forecasts are deemed to be the most likely outcome given the available information. However, they are subject to risks. At the current juncture, the risks are clearly weighted to the downside. This reflects the possibility of a more adverse Brexit impact on the UK economy, a larger spill-over to the broader international economy or the potential for more negative domestic confidence and labour market effects than we have incorporated into the forecasts.