Professor John McHale:

These are important questions. I will comment briefly on each of them and then allow my colleagues on the council to comment as well. The Acting Chairman is perfectly correct to say that we had one significant reservation in the endorsement process relating to the consumption profile.

Essentially, the consumption growth that would have been required to take place over the second half of the year looked implausibly high to achieve the forecast for annual consumption growth for 2013, unless one anticipated revisions to the consumption numbers for the first half of the year.

We really had a problem with the internal consistency of the forecasts because initially we asked the Department of Finance what it assumed about the revisions. It was taking them at face value, assuming that there was no bias in either direction. That was not consistent with the annual forecast, which would have required annualised growth in consumption of close to 8% over the second half of the year. Discussion with the Department of Finance made it clear that, because of recent indicators showing that the economy was stronger than it had appeared to be in the first half of the year, it was allowing for a likelihood that there would be upward revisions to the first half of the year. The agreement was that it would state that possibility explicitly and relate it to the more positive high-frequency indicators as a basis for anticipating the likelihood of that upward revision, although there was no certainty about that. This allowed us at least to see the forecast that we had been given as being internally consistent. We felt that particular reservation had been dealt with and that we were in a position to endorse it. We had set out a detailed memorandum of understanding in advance that was closely followed, so the process ran very smoothly. We are considering minor revisions to the memorandum of understanding, which mainly involve extending it for the next endorsement round, for the stability programme update. On the whole the process worked well.

In response to the question about the endorsable range, several inputs are involved, a key one of which is to examine historical forecast errors, because there will always be significant uncertainty around macroeconomic forecasts. To gauge what is an acceptable range for forecasts, it is important to examine those historical forecast errors. We do not treat those mechanically. We also use judgment. We did discuss at length whether we should publish our endorsable ranges, but because there is an element of judgment we did not want to make clear the range we would endorse because we did not want to create an incentive for a Department to push to the limits of that range in the future, although we certainly do not believe that applies at present. We use an endorsable range and we make several inputs into that, but we think it is better not to state it publicly.

The recent indicators certainly have been very positive, particularly on the employment front. The quarterly national household survey showed very strong employment growth year-on-year between the third quarter of last year and the third quarter of this year, with total employment up by 58,000, which is very encouraging. The recent live register numbers show that strong momentum in the labour market seems to have continued into the fourth quarter, with the unemployment rate dropping to a seasonally adjusted 12.5%. We have certainly seen strong growth momentum in the second half of this year. The improvement in growth for 2014 is largely based on the continuation of that momentum. The Department of Finance projection for growth next year is 2%. The even stronger than anticipated employment numbers, which seem to be supported by the recent Exchequer returns, which were particularly strong in November both for income tax and VAT, reinforces the impression that the momentum will continue, and if anything it seems to be strengthening.

House prices are another indicator. As everybody knows, house price growth has been particularly strong in the Dublin area, but there are strong signs of stabilisation and a return to house price growth nationally. From a macroeconomic perspective, that helps household balance sheets, which should help to underpin consumption growth further. It is also a positive for balance sheets in the banking sector in that it improves collateral and should make it more attractive to lend for mortgage purposes. The Deputy mentioned specifically the contingent liability in the banking sector. There are still some risks around contingent liability in the banking sector and the possible need for additional capital. Even though the most recent balance sheet assessments suggest that additional capital is not needed at least immediately, it remains something that we need to watch. However, to the extent that the housing market seems strong, it is moving in the right direction to limit the possibility of those capital needs.