Mr. John McCarthy:

I thank the Chairman for the opportunity to present the short-term economic outlook in advance of the 2017 Budget Statement. As the Chairman mentioned, I am accompanied by my colleagues, Mr. Feargal Ó Brolcháin, Ms Laura Weymes, Dr. Javier Papa and Mr. Ian Power from the macroeconomic forecasting team in the Department.

By way of background, since 2013, reforms to economic governance mean that budgetary policies for euro area member states must be based on macroeconomic forecasts that are either independently produced or are endorsed by an independent body. This is contained in the so-called two-pack. In Ireland, as in the majority of euro area member states, we have gone down the endorsement route with the endorsement function assigned to the Irish Fiscal Advisory Council. The endorsement process has been under way since mid-September. We have a memorandum of understanding between the Department and the council and on that basis, we will present our assessment of the short-term outlook to the council this afternoon.

For the budget, the council has a role in assessing the short-term projections, namely, those for this year and for next year.

We have provided for the committee the exact same presentation that will be provided for the council, although I do not propose to go through every slide, unless members are willing to do so. We will publish the information on the Department's website this evening. The economic projections we are presenting are based on the assumption that there will be a budgetary package amounting to €1 billion for 2017, to be split two to one between expenditure increases and taxation reductions, as set out in the Government's summer economic statement which was published in June.

This is our third or fourth time to appear in front of an Oireachtas committee. As is the norm, we will comment purely on the technical aspects of the forecasts. We will not discuss policy issues, or the fiscal situation. We will not discuss either of these issues with the council either.

In high-level terms we are projecting GDP growth of 4.2% this year and 3.5% next year. We have reduced the forecast for next year by around half a percentage point to take into account the uncertainty associated with Brexit. These are contingent forecasts. They are contingent on continued growth in external markets, particularly key external markets, namely, the United Kingdom, the United States and the euro area. In this context, it is fair to say the current outlook is characterised by considerable uncertainty, with the impact of Brexit still unfolding. However, there are other issues, including a prolongation of relatively subdued growth in many advanced economies. This has led some to question whether the world economy has entered a permanently lower growth phase, or so-called "secular stagnation".

In overall terms, it is our assessment that the balance of risk to our central scenario is tilted firmly towards the downside. An important issue I shall highlight is that there are, as members are aware, problems in setting trends in the economy at the current juncture, given that the information content in key aggregates such as GDP and GNP is much more limited than elsewhere. This is most evident in the exceptionally high growth figure published in July, 26%, with which members will be familiar. Clearly, this figure is misaligned with actual developments in terms of employment, per capitaincome developments and so forth.

More generally, the highly globalised nature of the economy and the concentration of economic activity mean that confidence bands around any short-term forecast will necessarily be wide. Therefore, it is fair to say in these circumstances that it is necessary to look beyond simple aggregates such as GDP and GNP in order to gauge properly what is happening in the economy. By this I mean the consideration of employment and consumption levels and so forth.

Turning to the actual presentation, Mr. Power will outline the latest domestic developments. Ms Weymes will discuss the labour market, while Dr. Javier Papa will discuss price dynamics. I will then summarise the key trends and what they mean for the short-term economic outlook.

On the external circumstances, the slide shows some of the key variables that have an input. Members will be familiar with the decline in inflation in recent times. This is partly attributable to the very sharp decline in oil prices. Two years ago the average price of oil was approximately $100 per barrel. This year it will be about $44 or $45 per barrel. This is having a big impact in supporting disposable income but in also reducing inflation.

A significant issue to which I wish to point for the committee is evident in the green bar which shows the year-on-year change in the euro–sterling exchange rate. One can see that there has been a very sharp appreciation of the euro against sterling over the course of the year. It is approximately 12% in year-on-year terms. This obviously negatively affects the exporting sectors of the economy, especially those involved in the indigenous sector which are more regionally based and labour intensive.

It is fair to say, as I have mentioned, that demand in key external markets is relatively subdued. What we show in the slide is the quarter-on-quarter growth rates in the United Kingdom, the United States and the euro area.

This shows the quarter-on-quarter growth rate in the UK, the US and the euro area. The US had fairly modest growth in the opening part of this year. In the UK things were not too bad in the lead-up to Brexit and certainly since Brexit some of the high-frequency data have held up. In the euro area the legacies of the crisis - high levels of public and private debt and so forth, and some problems in the banking sector - are restraining growth.

In terms of key external assumptions, we are projecting for next year growth of about 1% in the UK, about 1.5% in the euro area and about 2.25% in the United States. All member states fix their euro-dollar and euro-sterling exchange rates at levels at mid-September, implying that €1 would buy 85 pence sterling for next year. As I mentioned at the outset, a very modest increase in oil prices is assumed for next year.

I will ask Mr. Power to speak about domestic developments and I will summarise at the end.