Mr. John McCarthy:

Short-term growth dynamics are benefiting from several tail winds - trading partner growth, which is fairly robust, especially in the United Kingdom and the United States; a fairly accommodative monetary policy stance and the associated depreciation of the exchange rate, which is beneficial to exporters; and trade gains associated with falling commodity prices, in particular oil prices and on the back of all these favourable developments we expect output growth of 6.2% for this year. This is yielding positive developments in the labour market. We expect employment growth of just under 3% this year, approximately 53,000 jobs, and an unemployment rate that will average approximately 9.5%.

For 2016, on the assumption of a continued recovery in our key export markets this should support export growth of approximately 7% for next year. Our base line assumption is that domestic demand continues to strengthen as headwinds subside further. In overall terms we expect output growth of approximately 4.2% for this year. On the nominal side, some of the factors that have been holding inflation back this year should begin to subside and we are expecting an inflation rate just north of 1% for next year. In the labour market we expect employment growth of 2.4%, which is approximately 47,000 jobs, and unemployment should average approximately 8.4% for the year.

Our assessment is that the risks to the baseline situation are tilted somewhat to the downside. There are some upside risks if oil prices fall further but on balance the risks are tilted to the downside. They are mainly external in origin. The main cloud on the horizon is China where growth dynamics are unclear. There are certainly mixed signals at the moment. What appears to be going on is that the investment-driven growth model is running out of steam with declining returns to investment and the transition from that sort of investment-driven growth model to a more sustainable growth model. There is a concern that it may not be an entirely smooth process. This is having a spill-over effect in terms of emerging market economies and we have seen capital outflows and pressure on currencies. Some currencies in emerging market economies are pegged and there have been devaluations, for others there have been depreciations. Advanced economies are potentially affected through several channels, the key ones being trade, exchange rate and, potentially, the financial market.

There is also the risk that the euro area could disappoint once again. Its performance in the past has to an extent flattered to deceive. There are risks in respect of financial markets. We are in a position of extraordinary monetary policies in advanced economies. The policy rate is at the lower bound and central banks in advanced economies have been adopting non-standard techniques, including quantitative easing, QE, and so forth and this has prompted a hunt for yield, capital inflows to emerging market economies and a compression of risk premia on the periphery of the euro area. Term and other risk premia are at historically low levels. There is a concern that, given the uncertainty in emerging market economies, the potential for monetary policy normalisation in the US, this could trigger capital flight and a decompression of risk premia with implications for the cost of capital. They are the main downside risks.

We acknowledge the uncertainty with regard to economic forecasts. Our forecasts, like all forecasts, are contingent. They are contingent on making various assumptions regarding world growth and so forth. What we try to do is to construct a fan chart around the central scenario and the probability distribution is based on previous forecast errors. The fan says that our baseline is that nominal gross domestic product, GDP, in 2016 will probably be of the order of €223 billion but there is a 90% probability that actual GDP will be within the range of €207 billion to €240 billion with a 50% probability of GDP being in the range €210 billion to €230 billion. We are trying to highlight the uncertainty of the forecasts and to model what that might mean in terms of where GDP could end up.

We provided another 20 slides to the council. They are econometric and technical in nature. We are quite happy to go through them but the main points of our narrative of the forecasts are contained in the 30 or so we have given the committee.