Mr. John McCarthy:

The chart showing household income is not as important as some of the others. What we are trying to do is to look at household disposable income and break it down into its individual components. The biggest component of household disposable income is labour income - what we all earn from wages. The key point is that after very sharp falls in disposable income in 2010 and 2011, disposable income now appears to be levelling off in the household sector.

The fiscal council is interested in modelling the labour market. Okun's law relates the unemployment rate to developments in GDP. The fit of the model is reasonably good from the 1960s onwards. There seems to be a little bit of a break in later years - in other words, the elasticity of unemployment with respect to GDP seems to be lower than the historical norm. That is probably explained by the composition of output.

The next chart illustrates what I was alluding to earlier. Negative productivity is very unusual both in Ireland and in many other countries. We are looking at negative productivity of the order of 1.25% to 1.5% for this year.

The following chart compares the unemployment rate projections at the time of the SPU last April with our current projections. As I said earlier, we are moving in the right direction, but an unemployment rate of between 13.5% and 12.5% is still far too high. Our key point is that we are moving in the right direction.

With regard to the labour market, one issue that needs to be borne in mind is what we call the endogeneity of labour supply in Ireland. Essentially, if employment growth picks up, we will typically see in an Irish context that labour supply also picks up. Once the demand for labour picks up, we will see people who have migrated returning to Ireland, as well as non-Irish nationals. We will also see participation rates pick up. We have seen a dramatic fall in participation rates, in layman's terms, during the downturn. During the bubble years, people aged 17 and 18 who did not go to college went straight into construction and the participation rate went up. They are now staying on in college, so the participation rate is going down. Once things begin to stabilise, we will see that the labour supply tends to increase. It is a feature of the Irish labour market and we try to incorporate it into our analysis. The key point is that even if there is employment growth, there will be an increase in labour supply, so we do not expect a dramatic reduction in the unemployment rate.

The next chart may be overly technical, for which I apologise. We try to model exports as a function of export market growth, based on GDP growth in the UK, the US and the eurozone as well as competitiveness variables such as unit labour costs. The model performs reasonably well. I have looked at research in other countries in which there is a better fit. The problem is that Ireland is so small that sector-specific issues can drive a wedge between model-based results and actual results. The model suggests that exports will be very strong in later years, but we know we have an issue in the pharmaceutical sector, which accounts for 25% of our exports, and this is having an impact.

It is just impossible to model that on a short-term basis.

The next chart shows something that we think is important. While we are incorporating downward revisions on the real side, we are also incorporating downward revisions to the deflator. There is less inflation in the system, which means that the overall money amount of GDP is actually lower than previously thought. That has implications for the debt ratio and for fiscal variables expressed as a percentage of GDP. It is something that we keep an eye on and it is important.

The next chart shows the current account and GNP projections. We are looking at GNP growth of about 1% this year. It is better than the GDP forecast. The profit outflows are not as large as in previous years due to some technical factors. We have had a very strong balance of payments surplus over the past couple of years. We have seen a big increase in exports, but we have seen a compression of imports because domestic demand has been so weak, and that has driven a very large current account surplus of 4.5%, which is one of the largest in the EU. Mr. Sweeney would now like to say a bit about inflation.