Quarterly Economic Commentary, Autumn 2018

McQuinn, Kieran; O’Toole, Conor; Economides, Philip Research Report Quarterly Economic Commentary, Autumn 2018 ESRI Forecasting Series Provided in Cooperation with: The Economic and Social Research Institute (ESRI), Dublin Suggested Citation: McQuinn, Kieran; O’Toole, Conor; Economides, Philip (2018) : Quarterly Economic Commentary, Autumn 2018, ESRI Forecasting Series, ISBN 978-0-7070-0467-9, The Economic and Social Research Institute (ESRI), Dublin, https://doi.org/10.26504/qec2018aut This Version is available at: https://hdl.handle.net/10419/197521 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ QUARTERLY ECONOMIC COMMENTARY AUTUMN 2018 KIERAN MCQUINN, CONOR O'TOOLE AND PHILIP ECONOMIDES MACRO ECONOMIC FORECASTING September 2018 E V I D E N C E F O R P O L I C Y QUARTERLY ECONOMIC COMMENTARY Kieran McQuinn Conor O’Toole Philip Economides Autumn 2018 The forecasts in this Commentary are based on data available by 13 September 2018 Draft completed on 17 September 2018 A subscription to the Quarterly Economic Commentary costs €327 per year, including VAT and postage. © The Economic and Social Research Institute, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2. ISBN 978-0-7070-0467-9 ISSN 0376-7191 DOI https://doi.org/10.26504/qec2018aut This Open Access work is licensed under a Creative Commons Attribution 4.0 International License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly credited. ABOUT THE ESRI The Economic and Social Research Institute is an independent research institute working towards a vision of ‘Informed policy for a better Ireland’. The ESRI seeks to support sustainable economic growth and social progress in Ireland by providing a robust knowledge base capable of providing effective solutions to public policy challenges. The Institute was founded in 1960 by a group of senior civil servants, led by Dr T.K. Whitaker, who identified the need for independent and in-depth research to support the policymaking process in Ireland. Since then, the Institute has remained committed to independent research and its work is free of any expressed ideology or political position. The Institute publishes all research reaching the appropriate academic standard, irrespective of its findings or who funds the research. The ESRI brings together leading experts from a variety of disciplines who work together to break new ground across a number of research initiatives. The expertise of its researchers is recognised in public life and researchers are represented on the boards and advisory committees of several national and international organisations. ESRI researchers uphold the highest academic standards. The quality of the Institute’s research output is guaranteed by a rigorous peer review process. Research is published only when it meets the required standards and practices. Research quality has also been assessed as part of two peer reviews of the Institute, in 2010 and 2016. ESRI research findings are disseminated widely in books, journal articles and reports. Reports published by the ESRI are available to download, free of charge, from its website. ESRI staff members communicate research findings at regular conferences and seminars, which provide a platform for representatives from government, civil society and academia to discuss key findings from recently published studies and ongoing research. The ESRI is a company limited by guarantee, answerable to its members and governed by a Council, comprising a minimum of 11 members and a maximum of 14 members, who represent a cross-section of ESRI members: academia, civil service, state agencies, businesses and civil society. THE AUTHORS The Commentary is edited by Kieran McQuinn and Conor O’Toole. Kieran McQuinn is Research Professor and Conor O’Toole is a Senior Research Officer at the Economic and Social Research Institute (ESRI). Philip Economides is a Research Assistant at the ESRI. Special Articles are published in the QEC in order to foster high-quality debate on various aspects of the Irish economy and Irish economic policy. They are subject to refereeing prior to publication. The Quarterly Economic Commentary has been accepted for publication by the Institute, which does not itself take institutional policy positions. It has been peer reviewed by ESRI research colleagues prior to publication. The authors are solely responsible for the content and the views expressed. Quarterly Economic Commentary – Autumn 2018 | i TABLE OF CONTENTS Summary Table ............................................................................................................................. ii National Accounts 2017, 2018, 2019 ........................................................................................... iii CHAPTERS The Irish Economy – Forecast Overview ....................................................................................... 1 The International Economy .......................................................................................................... 3 The Domestic Economy .............................................................................................................. 17 General Assessment ................................................................................................................... 57 Detailed Forecast Tables ............................................................................................................. 61 SPECIAL ARTICLES Exploring SME Investment Patterns in Ireland: New Survey Evidence E. Gargan, M. Lawless, M. Martinez-Cillero and C. O’Toole ....................................................... 69 ii | Quarterly Economic Commentary – Autumn 2018 SUMMARY TABLE 2015 2016 2017 2018 2019 Output (Real Annual Growth %) Private Consumer Expenditure 3.6 4.0 1.6 2.9 2.5 Public Net Current Expenditure 1.4 3.5 3.9 4.0 4.5 Investment 50.8 51.7 -31.0 -6.3 9.8 Exports 39.3 4.4 7.8 7.5 5.2 Imports 33.2 18.5 -9.4 -0.7 6.0 Gross Domestic Product (GDP) 25.1 5.0 7.2 8.9 4.5 Gross National Product (GNP) 13.8 11.5 4.4 8.9 4.7 Prices (Annual Growth %) Consumer Price Index (CPI) -0.3 0.0 0.3 0.7 1.1 Growth in Average Hourly Earnings 2.8 2.5 1.5 2.5 2.9 Labour Market Employment Levels (ILO basis (‘000)) 2,057 2,132 2,194 2,257 2,313 Unemployment Levels (ILO basis (‘000)) 226 195 158 136 123 Unemployment Rate (as % of Labour Force) 10.0 8.4 6.7 5.7 5.1 Public Finance General Government Balance (€bn) -4.9 -1.4 -1.0 -0.7 0.3 General Government Balance (% of GDP) -1.9 -0.7 -0.3 -0.2 0.1 General Government Debt (% of GDP) 76.8 73.5 68.4 64.2 60.7 External Trade Balance of Payments Current Account (€bn) 11.6 -11.4 24.9 40.6 45.6 Current Account (% of GNP) 5.8 -5.1 10.7 16.0 16.6 Note: Detailed forecast tables are contained in an Appendix to this Commentary. Quarterly Economic Commentary – Autumn 2018 | iii NATIONAL ACCOUNTS 2017 A: EXPENDITURE ON GROSS NATIONAL PRODUCT 2016 2017 Change in 2017 € bn € bn Value Price Volume Private Consumer Expenditure 96.6 99.9 3.1 1.3 1.6 Public Net Current Expenditure 27.8 29.6 6.5 2.5 3.9 Gross Fixed Capital Formation 97.6 69.0 -29.3 2.4 -31.0 Exports of Goods and Services 328.2 352.6 7.4 -0.3 7.8 Physical Changes in Stocks 6.4 3.5 Final Demand 557.0 554.6 -0.4 0.5 -0.9 less: Imports of Goods and Services 271.1 263.3 -7.9 1.6 -9.4 Statistical Discrepancy 2.1 2.8 GDP at Market Prices 273.2 294.1 7.6 0.4 7.2 Net Factor Payments -51.1 -61.0 GNP at Market Prices 222.2 233.1 4.9 0.5 4.4 B: GROSS NATIONAL PRODUCT BY ORIGIN 2016 2017 Change in 2017 € bn € bn € bn % Agriculture 3.3 4.2 0.9 27.0 Non-Agriculture: Wages, etc. 81.8 85.7 3.9 4.7 Other 102.2 113.3 11.1 10.8 Adjustments: Stock Appreciation 1.1 0.0 Statistical Discrepancy 0.5 -2.8 Net Domestic Product 236.7 250.6 13.9 5.9 Net Factor Payments -51.1 -61.0 -9.9 19.3 National Income 185.6 189.6 4.0 2.2 Depreciation 63.9 72.0 8.1 12.6 GNP at Factor Cost 249.5 261.6 12.1 4.8 Taxes less Subsidies -27.4 -28.4 -1.1 3.9 GNP at Market Prices 222.2 233.1 11.0 4.9 C: BALANCE OF PAYMENTS ON CURRENT ACCOUNT 2016 2017 Change in 2017 € bn € bn € bn X – M 42.4 89.3 46.9 F -49.9 -59.8 -9.9 Net Transfers -3.8 -4.6 -0.8 Balance on Current Account -11.4 24.9 36.3 as % of GNP -5.1 10.7 15.6 4 | Quarterly Economic Commentary – Autumn 2018 led to downward revisions in UK growth forecasts across leading economic institutions. As of July 2018, HM Treasury’s consensus forecast produced medians of 1.3 per cent growth in 2018 followed by 1.5 per cent growth in 2019. Since June 2016, the Pound Sterling (GBP) has lost roughly 10 per cent of its value relative to the Euro. This has increased the cost of imports and introduced significant inflationary pressure (2.5 per cent inflation in July 2018). The Bank of England introduced a further interest rate increase of 25 basis points in August 2018, given that inflation has been above target for the past six quarters. Although unemployment has fallen to 4 per cent in Q2 2018, persistently elevated rates of inflation and low productivity per worker has slowed the increase in real wages. As displayed in Figure 1, average real wages rose on an annual basis by 0.4 per cent in June 2018. Increased financial pressure in 2017 has caused UK households to overspend relative to their income for the first time since 1988, averaging £900 in excess of disposable income across the country.2 On a national basis, this implied £25 billion worth of overspending. FIGURE 1 GBP DEPRECIATION AND REAL WAGE GROWTH, THREE-MONTH AVERAGE (%) Source: ONS database, UK labour market: August 2018. Note: Total pay includes bonuses while regular pay excludes bonus payments. Average exchange rate of 0.8 between 2005 and 2018. The recently published White Paper by the UK government, outlining its preferences regarding a relationship with the EU, has been met with a mixed reception both in the UK and Europe. Generally, the proposal seeks to secure UK borders with respect to inward migration while placing a stronger focus on securing the free trade of goods relative to services. The National Institute of 2 ONS, 2018. ‘Making ends meet: are households living beyond their means?’, UK Sector Accounts Article. 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Total pay Regular pay EUR/GBP (RHS) Quarterly Economic Commentary – Autumn 2018 | 5 Economic and Social Research (NIESR) highlighted the similarities of the desired trade agreement with terms established between the EU and Switzerland, suggesting the UK government may need to make concessions in terms of labour mobility to get such a proposal accepted by the European Parliament. In the most recent edition of National Institute Economic Review, Kara et al., in their paper ‘Prospects for the UK economy’ include the simulated effects of a soft Brexit in contrast to the White Paper proposals and a no-deal scenario.3 The White Paper scenario results in lower output growth stemming from an immediate reduction in services exports to the EU. Compared to a hard Brexit, the implications of the White Paper proposals for GDP and inflation are less negative. Real GDP in Japan grew by 1 per cent for Q2 2018, fuelled by improvements in domestic consumption and exports. As of June 2018, annualised inflation stood at 0.2 per cent when excluding volatile food and energy prices. Japan’s trade outlook remains promising as the ‘Comprehensive and Progressive Agreement for Trans-Pacific Partnership’ (CPTPP)4 has secured half of its required six ratifications. However, potential US auto tariffs of between 20 and 25 per cent, if enacted, could place a significant burden on this positive trade outlook. US economic growth yielded an annualised real GDP growth rate of 4.2 per cent in Q2 2018. Personal consumption of goods and net exports recovered significantly (+3.8 combined percentage point contribution), following an underwhelming performance in Q1 2018. As of July 2018, the US unemployment rate declined to 3.9 per cent. The outlook for inflation is quite steady with the Federal Reserve raising the official interest rate to 2 per cent in June 2018. While US exports increased by 9.3 per cent on an annual basis for the second quarter, slow investment growth (-0.5 per cent) and previously weak export growth (+1.7 per cent averaged over the past four quarters) suggests the increase in exports may be partially due to firms attempting to sell inventories. The Chinese economy experienced annual growth of 6.7 per cent in Q2 2018. Annual Chinese inflation increased to 2.1 per cent in July, following an inflation rate of 1.9 per cent in June. Chinese exports grew in July by 12.2 per cent while imports rose by 27.3 per cent. The following section examines the recent increase in tensions in global trading relationships. 3 Kara, A., A., Hantzsche, J., Lennard, L., Cyrille, M., Lopresto, R., Piggott, and G., Young (2018). ‘Prospects for the UK Economy’, National Institute Economic Review, No. 245, F10-40. 4 The CPTPP was originally known as TPP, as Trans-Pacific Trade Agreement that had been signed in 2016 but never entered into force as a result of the US withdrawing. The remaining 11 nations held a formal signing ceremony for CPTPP, which no longer requires the participation of the US. To come into effect, the agreement requires ratifications from six nations, of which three have ratified the agreement thus far. 6 | Quarterly Economic Commentary – Autumn 2018 US trade tariffs The US has imposed a number of tariffs, with the administration arguing that this will repair the nation’s trade balance and lessen national security risk exposures. Having initially introduced a set of indirect tariffs in early 2018 against the rest of the world, the US administration quickly provided exemptions for 34 countries. This cohort represented the source of 55 per cent of aluminium imports into the US in 2017. For US steel imports, the exempted group represented 68 per cent of total steel imports in 2017. While Western economies to date have seen little impact as a result of these exemptions, even strong US allies including Israel have been the subject of significant tariffs. From a global perspective, the greatest implications of tariff increases centred on intensifying friction between the US and China. US imports of Chinese goods and services were worth over $500 billion in 2017, roughly one-fifth of total US imports. In the same year, the US exported $120 billion in trade to China, 8 per cent of total US exports. Table 1 lists an abridged chronology of the deteriorating trade relationship between China and the United States thus far. Currently, this increased use of tariffs between both countries shows no sign of abating with the possibility of tariffs being applied to greater shares of the $500 billion of US imports and $120 billion of Chinese imports. TABLE 1 THE CHINA-US TRADE WAR (2018) Effective Date From To Goods $bn (2017) Tariff Rate Indirect Tariffs Jan 23 US RoW Solar Panels 8 30% Jan 23 US RoW Washing Machines 2 20-50% Mar 23 US RoW Steel 9 25% Mar 23 US RoW Aluminium 10 10% Direct Tariffs Jul 6 US China 818 Products 34 25% Jul 6 China US 659 Products 34 25% Aug 23 US China 279 Products 16 25% Aug 23 China US 333 Products 16 25% Potential Tariffs Sept 23 US China 6,000 Products 200 10-25% Sept 23 China US 5,207 Products 60 5-10% Source: United States International Trade Commission Dataweb (Solar Panels, Washing Machines, Aluminium); Commerce Department’s Import Monitor (Steel Mill Products). Note: US imports of solar panels includes light-emitting diodes due to data being limited to 6-digit code (HS: 854140). US imports of washing machines includes interchangeable parts, maintained at 4-digit HS code (HS: 8450). From an Irish economic perspective in 2017, US imports of aluminium and steel from Ireland were worth $7.4 million and $5.9 million respectively. While Ireland, Quarterly Economic Commentary – Autumn 2018 | 7 to date, has benefited from tariff exemptions on these two items, the current trade war and any further escalations will adversely impact potential Irish growth in the short to medium term. Ireland’s status as a small open economy means any deterioration in global trade will directly impact the Irish economy. According to previous ESRI estimates, if world GDP were to fall by 1 per cent, Ireland would likely experience a similar decline. The IMF has recently estimated that in a worstcase scenario, the current trade war could lower global GDP by 0.4 per cent in 2018 and 0.5 per cent in 2019.5 Emerging market turmoil: Turkey As of August 2018, the US doubled steel and aluminium tariffs on Turkey, which exacerbated trading conditions for the already struggling Turkish economy. The combination of prolonged economic turmoil and recently increased US tariffs resulted in the Turkish Lira depreciating against the Euro by an average of 21 per cent between July and August, as seen in Figure 2A. The underlying problem with the Turkish economy is the sizeable increase in both household and corporate debt over a sustained period of time. For example, banking sector loans increased 32.6 per cent year-on-year in August 2018. In 2017, external debt represents 53.2 per cent of GDP, with much of the debt denominated in Dollars. The nation is also experiencing high, accelerating inflation with the Consumer Price Index measuring a 15.9 per cent year-on-year increase as of July 2018. Another unsustainable element of the Turkish economy is its sizeable current account deficit, which grew by 55 per cent, year-on-year, in June. As a result of a high current account deficit and extreme weakness in the Turkish Lira, foreign currency reserves have been dwindling over the past 18 months. As of June 2018, reserves have fallen year-on-year by 16.5 per cent. Should these reserves reach critically low levels, this could ignite a further flight of capital.6 Given Turkey’s particularly high reliance on external debt, any threat to the performance of the domestic economy could posit a large default risk to exposed lenders also. As seen in Figure 2B, roughly 70 per cent of Turkish debt is concentrated among five European nations, with Greece having reduced its share considerably since Q2 2015. Spain and Italy maintain significant shares of external 5 International Monetary Fund, 2018. ‘G20 Surveillance Note: G20 Finance Ministers and Central Bank Governors’ Meetings July 21-22, 2018, Buenos Aires, Argentina. 6 It should be noted that Turkey has been purchasing vast amounts of gold over the last year, likely anticipating the consequences of continued erosion of relations with Western Allies and the precarious nature of the domestic economy. This process expanded gold purchases from September 2017 onward, with annual growth rates in the stock of gold peaking at 67.5 per cent in December 2017. 8 | Quarterly Economic Commentary – Autumn 2018 Turkish debt, with claims representing 2.5 and 0.6 per cent of total assets belonging to each nation’s top five banks, respectively.7 FIGURE 2 TURKISH CURRENCY CRISIS 2018 A. EUR-TKY Exchange Rate B. Exposure (% of Total Foreign Claims) Sources: Eurostats (left) and Bank for International Settlements (right). Note: Measured from Consolidated banking statistics (CBS_PUB) using total claims on an immediate counterparty basis. Figure 2 summarises the forecasts for GDP growth produced by the major institutions of their respective economies. FIGURE 2 REAL GDP GROWTH (% CHANGE, YEAR-ON-YEAR) Euro Area United States United Kingdom Sources: FocusEconomics, IMF, OECD, HM Treasury and Federal Reserve. 7 Statista, Banks and Financial Services, total assets of leading banks. 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 M06D01 M06D30 M07D31 M08D29 M09D27 M10D26 M11D24 M12D25 M01D23 M02D21 M03D22 M04D20 M05D21 M06D19 M07D18 M08D16 2017 2018 0% 20% 40% 60% 80% 100% Spain Italy Greece Germany France UK Rest of World -2 -1 0 1 2 3 4 -2 -1 0 1 2 3 4 -2 -1 0 1 2 3 4 Quarterly Economic Commentary – Autumn 2018 | 9 IMPLICATIONS FOR IRISH EXPORTS, IMPORTS AND THE BALANCE OF PAYMENTS Goods The net export of Irish goods contributed €7.4 billion to the trade surplus for Q2 2018. In Figure 3, goods trade in Q2 2018 saw Irish exports grow at an annual rate of 17.8 per cent while imports increased by 3.9 per cent. Over the past four quarters, for every €1 worth of goods Ireland imported, the economy exported €2.48 worth of goods. FIGURE 3 ANNUAL GROWTH RATE (%) IN TOTAL IRISH EXPORTS AND IMPORTS OF GOODS Source: Central Statistics Office. While goods are owned by Irish resident firms, some goods may never physically cross the Irish border as a form of trade. When examining Irish goods, foreignowned Irish resident firm activities such as processing and merchanting must be taken into account.8 For example, cross-border trade values effectively exclude the trade of ownership goods (e.g. contract manufacturing, merchanting). However, such cross-border trade values arguably provide a better understanding of domestic exporter activity.9 8 ‘Goods for processing’ is dominated by ‘Contract Manufacturing’, a process in which multinational companies residing in Ireland issue contracts to foreign firms to produce goods. Although these goods never enter the Irish economy, due to ownership of these goods pertaining to Irish resident firms, sales are recorded as an Irish export. ‘Merchanting’ consists of the buying and selling of completed goods abroad which at no stage enter or leave Ireland. 9 For further details on ownership trade, see CSO’s ‘Explaining Goods Exports and Imports 2012-2016’. -6,000 -3,000 - 3,000 6,000 9,000 12,000 15,000 18,000 21,000 -20 -10 0 10 20 30 40 50 60 70 Exports Imports Change in Trade Balance (€M, Y-o-Y) 10 | Quarterly Economic Commentary – Autumn 2018 The recent growth of cross-border imports has exceeded that of exports, resulting in a persistently decreasing trade balance on a cross-border basis. However, in Q2 2018 a combined annual increase of 14 per cent in exports and a 2 per cent decrease of imports led to an unprecedented €4.8 billion contribution to the trade balance for goods. This marks the largest contribution since 2009. Figure 4 highlights how persistently higher growth rates in goods imports caused a consistent year-on-year decline in the trade surplus since Q2 2017. However, for the most recent quarter (Q2 2018), a significant surplus was experienced. FIGURE 4 ANNUAL GROWTH RATE (%) IN CROSS-BORDER IRISH EXPORTS AND IMPORTS Source: Central Statistics Office. In the most recent publication of the Balance of International Payments, the Central Statistics Office (CSO) released quarterly measurements of goods for processing and merchanting in Ireland between 2016 and early 2018. Prior to this release, the QEC normally estimated the sum of goods for processing and merchanting which we refer to as ownership trade. These new values reveal goods for processing (often referred to as ‘contract manufacturing’) have dominated goods exports since 2016, accounting for 90 per cent of total ownership exports and a third of total goods exports. Merging estimates between 2012 and 2015 with CSO values for 2016 onwards allows value of ownership trade to be identified. Figure 5 highlights how a sudden growth of this ownership trade inflated total goods exports. This increase led to total exports being 58 per cent greater than cross-border exports between 2015 and early 2018. Prior to 2015, total exports were, on average, only 14 per cent -2,000 - 2,000 4,000 6,000 8,000 10,000 12,000 -5.0 - 5.0 10.0 15.0 20.0 25.0 30.0 Exports Imports Change in Trade Balance (€M, Y-o-Y) Quarterly Economic Commentary – Autumn 2018 | 11 greater than cross-border exports. Goods for processing (mostly contract manufacturing) are one of the main reasons for the increase in export values in recent years. As a result, the goods balance of trade effectively doubles when ownership trade is taken into account. FIGURE 5 CROSS-BORDER AND OWNERSHIP TRADE OF GOODS (€ MILLION) Source: Central Statistics Office, QEC calculations. Note: Ownership trade includes, but is not limited to, forms of goods for processing such as contract manufacturing, and merchanting, the purchase and resale of goods which do not enter the merchant’s economy. The 14 per cent annual increase in cross-border exports stems largely from ‘Chemicals and related products’, which grew by 22 per cent between the second quarters of 2017 and 2018. Within this category, medicinal and pharmaceutical exports appear to be the main determinant of growth, having grown by 50 per cent between Q4 2017 and Q2 2018. Chemical products, including medicinal and pharmaceutical products, now represent 62 per cent of total cross-border exports. Cross-border imports declined by 2 per cent in Q2 2018 relative to the same period last year. ‘Machinery and transport equipment’ and ‘Chemicals and related products’ represented 39 and 25 per cent of total imports, respectively. Machinery imports fell by 6.6 per cent and Chemicals by 0.3 per cent for the same period. Table 2 compares exports and imports between regions for the first half of the year. The overall trade balance with the UK fell (-€0.7 billion) as exports of Chemicals and related products saw a 20 per cent fall compared to the same period last year. Excluding the UK, the EU trade surplus increased by 10 per cent (+€1.0 billion), due to a significant increase in chemical exports. Overall trade -30,000 -20,000 -10,000 - 10,000 20,000 30,000 40,000 50,000 60,000 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 CB Exports CB Imports Ownership Exports Ownership Imports Goods Balance Goods Balance (excl. Ownership) 12 | Quarterly Economic Commentary – Autumn 2018 with the US saw the greatest improvement compared to the first half of 2017, with the trade surplus between Ireland and the US increasing by 42.8 per cent (+3.8 billion). This was largely due to a 25 per cent reduction in US goods imports. TABLE 2 JANUARY-JUNE ANNUAL CHANGE (%) IN GOODS EXPORTS AND IMPORTS Exports Imports Total – UK -7 3 Food and live animals 4 6 Chemicals and related products -20 -20 Machinery and transport equipment -12 8 Miscellaneous manufactured articles 2 2 Total – Rest of EU 13 14 Food and live animals 5 5 Chemicals and related products 23 84 Machinery and transport equipment -14 -11 Miscellaneous manufactured articles 3 -1 Total – US 9 -25 Food and live animals -48 18 Chemicals and related products 29 -45 Machinery and transport equipment -47 -16 Miscellaneous manufactured articles 0 -1 Source: Central Statistics Office. Services Given that two-thirds of total Irish imports are based on the purchase of foreign services, even marginal declines in service growth can have a significantly positive effect on the trade surplus, as reflected in the trade balance for 2017. Following contractions in R&D-related activities throughout 2017, in Q1 2018 services appear to be returning to normal levels. Exports grew by 1.1 per cent while imports declined by 5.4 per cent, relative to the same period last year. Quarterly Economic Commentary – Autumn 2018 | 13 FIGURE 6 ANNUAL GROWTH RATE (%) IN IRISH SERVICE EXPORTS AND IMPORTS Source: Central Statistics Office. Exports of computer services maintain impressive growth in Q1 2018, rising by 16.6 per cent relative to the same period last year. Significant and consecutive declines in business services since Q2 2017 have moderated overall growth rates in service exports. Royalties & licenses and business services formed 75 per cent of services imports in Q1 2018. Successive year-on-year reductions in both items have contributed to five consecutive quarters of import declines, as reflected in Figure 6. Imports of research and development services experienced the largest annual decrease, falling by 42 per cent in Q1 2018. FIGURE 7 EXPORTS AND IMPORTS OF SERVICES (€ MILLION) Source: Central Statistics Office. -15,000 -12,000 -9,000 -6,000 -3,000 - 3,000 6,000 9,000 12,000 15,000 18,000 21,000 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 2018Q2 Exports Imports Change in Trade Balance (€M, Y-o-Y) - 10,000 20,000 30,000 40,000 50,000 60,000 Imports, Total Imports, Royalties/licences Imports, Business services Exports, Total Exports, Computer services 20 | Quarterly Economic Commentary – Autumn 2018 This accommodative monetary policy stance, coupled with the implementation of the public sector asset purchase programme from the ECB, has led to a stabilisation and fall in the cost of financing for Eurozone governments. Figure 15 presents the ten-year government bond yields for a selected group of economies. As of June 2018, Irish ten-year bond yields stood at 0.8 per cent below the Eurozone average. Importantly, despite a peak in the first months of this year, the cost of borrowing has begun to trend downwards in Quarter 2. This is in contrast to financing costs for other economies such as Italy where political tensions have led to uncertainty around debt sustainability. The decoupling of Ireland from other peripheral economies is a particular success and points towards increasing market confidence in Ireland’s economic and financial prospects. However, Ireland remains highly indebted both from a public and a private sector perspective. As noted in the previous Commentary, the expected unwinding of the ECB’s extraordinary measures as well as the gradual normalisation of the policy rate pose considerable risks to such a leveraged economy. Locking in longterm government funding at current low rates would be advisable and prudent as well as continued efforts to reduce the debt burden. FIGURE 15 TEN-YEAR GOVERNMENT BOND YIELD (%) Source: St. Louis Fed. database. Household credit and mortgage market For the Irish mortgage market, Q1 2018 represents an important turning point in a return to normalisation of lending practices. For the first time since 2009, the stock of outstanding mortgage lending has grown as new lending outstrips -2 0 2 4 6 8 10 12 01-2005 07-2005 01-2006 07-2006 01-2007 07-2007 01-2008 07-2008 01-2009 07-2009 01-2010 07-2010 01-2011 07-2011 01-2012 07-2012 01-2013 07-2013 01-2014 07-2014 01-2015 07-2015 01-2016 07-2016 01-2017 07-2017 01-2018 US Germany Eurozone UK Ireland Italy Quarterly Economic Commentary – Autumn 2018 | 21 repayments. Figure 16 presents the growth rates of credit to households from Irish resident credit institutions. The data are split by loans for house purchase and other personal loans (auto finance, credit cards, student loans etc.). On an annualised basis, outstanding mortgage lending grew by 0.2 per cent to Q1 2018. Non-mortgage credit also continued to expand in Q1 2018 at an annualised rate of 2.1 per cent. FIGURE 16 GROWTH RATES OF CREDIT TO HOUSEHOLDS (%) Source: Central Bank of Ireland, Credit, Money and Banking Statistics. Notes: Data are taken from Central Bank of Ireland data release A.18, Growth rates series codes 777 and 1,252. As the decline in the level of credit to households appears to have bottomed out, the share of mortgages in arrears also continues to fall. The improvement in the labour market as well as increasing house prices are both factors in determining a lower arrears rate. Policy actions in the banking sector in terms of achieving sustainable arrangements for borrowers are also contributing to the decline. As of Q1 2018, the share of loans in arrears stood at 6.7 per cent, down marginally on the previous quarter and down from 7.3 per cent year-on-year. This constitutes a total of 10.2 per cent of the balance of outstanding PDH mortgages. The default rate on buy-to-let (BTL) loans has also reduced but remains at 15.2 per cent of accounts. -20 -10 0 10 20 30 40 Lending for House Purchase Other Personal 22 | Quarterly Economic Commentary – Autumn 2018 FIGURE 17 IRISH HOUSEHOLD MORTGAGE ACCOUNTS IN ARREARS BY TYPE OF LOAN (%) Source: Central Bank of Ireland, Mortgage Arrears Statistics. Notes: PDH refers to principal dwelling houses loans while BTL are buy-to-let loans. Loans are defined in arrears if they are greater than 90 days past due on their payments. In terms of new mortgage lending, in Q2 2018 the volume of new mortgage drawdowns increased by 16.5 per cent year-on-year, and the value of mortgages increased by 22.2 per cent year-on-year. This represents an acceleration in the rate of growth of the volume of loans. Over the past 12 months, the relatively higher growth rate in the value relative to the volume of loans reflects the fact that borrowers are drawing down larger and larger loans in an increased house price environment (albeit the most recent data indicated a marginally lower mortgage size in Q2 2018 than Q1 2018). FIGURE 18 YEAR-ON-YEAR GROWTH RATE OF NEW MORTGAGE DRAWDOWNS (%) Source: Banking and Payments Federation Ireland. 0 5 10 15 20 25 PDH BTL -80 -60 -40 -20 0 20 40 60 80 100 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3 2018Q1 Volume of Total Drawdowns Value of Total Drawdowns Quarterly Economic Commentary – Autumn 2018 | 23 Trends in SME and corporate credit market Turning to the provision of credit to Non-Financial Corporations, in Q1 2018 the overall stock of credit continues to decline, down by 5.7 per cent year-on-year. However, much of the decline is concentrated in the financial intermediation and property sectors which continue to have a debt overhang from the crisis period. Credit to enterprises not in property or financial services grew in Q1 2018 by 0.3 per cent year-on-year. The growth for these sectors, coupled with the growth in the stock of mortgage credit, points towards the ongoing normalisation of the domestic credit market, ten years after the economic crisis began. FIGURE 19 GROWTH RATES OF CREDIT TO PRIVATE SECTOR ENTERPRISES (%) Source: Central Bank of Ireland, Credit, Money and Banking Statistics. Notes: Data are taken from Central Bank of Ireland data release A.14, Growth rates series codes 17, 17.1 and 17.2. While the overall stock of credit to enterprises in Ireland provides some insight into the financing conditions for companies, the presence of multinationals and some large Irish companies makes it difficult to evaluate the borrowing behaviour of Irish businesses. A focus on SME credit therefore is warranted to understand the financing environment for domestic enterprises. The previous Commentary noted that total annual gross new lending to SMEs has grown steadily since 2013 and, for 2017, total new lending amounted to just over €5 billion, up from €4.5 billion in 2016, representing a 10 per cent increase year-on-year. The data for Q1 2018 indicate a continuation in the trend of higher levels of credit for SMEs. Figure 20 outlines the four-quarter rolling average of new lending to SMEs with an increase in lending evident. Of particular note is the significant -20 -10 0 10 20 30 40 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 Total Total ex Financial Intermediation Total ex Financial Intermediation and Property Related Sectors 24 | Quarterly Economic Commentary – Autumn 2018 increase in credit to construction and real estate firms as well as to the hotels and restaurants sector. These sectors posted year-on-year growth to Q1 2018 of 77 and 48 per cent respectively. As these sectors are highly reliant on the domestic economy, their increased credit usage is reflective of the current strong performance of the domestically non-traded sectors. Given the non-traded nature of these enterprises, an overreliance on these sectors can lead to a loss of competitiveness emerging over the medium term. FIGURE 20 QUARTERLY NEW LENDING TO IRISH SMES BY SECTOR (FOUR-QUARTER ROLLING AVERAGE) Source: Central Bank of Ireland, SME Credit Series, Table A.14.1. While the level of new lending has grown year-on-year, survey data on rejection rates for bank finance across SMEs point to diverging trends across firms in the ease of credit access. Figure 21 presents the average rejection rate for SMEs seeking finance separately for micro, small and medium-sized firms. Overall credit supply appears relatively stable over the past number of quarters. However, in the most recent survey notable increases in the rejection rates for small firms appear to have offset declines in the rejection rate for micro firms. It must be noted that Ireland still has a higher rejection rate than the median rate in other Eurozone economies. The special article with this Commentary looks at the financing activity of Irish SMEs in more detail. Gargan et al. (2018) find a high share of internal funds on enterprise balance sheets which suggests that firms would have internal capacity to expand their operations regardless of credit market access. 0 200 400 600 800 1,000 1,200 1,400 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 Other Business Services including ICT and Finance Hotels and Restaurants Wholesale and Retail Construction and Real Estate Manufacturing, Transport and Utillities Primary Industries Quarterly Economic Commentary – Autumn 2018 | 25 FIGURE 21 AVERAGE REJECTION RATE FOR SMES SEEKING FINANCE A. Credit Demand Survey – Ireland by Firm Size B. European Comparison – Bank Loan Rejection Rates Source: Department of Finance Credit Demand Survey. Interest rates and the cost of finance A well-documented recent empirical fact is that the cost of finance in Ireland for both corporate and household credit is high by European standards. More recently, competitive pressures are increasing in the mortgage market and some reductions in lending rates are occurring. The standard variable rate on new mortgage loans in Ireland stood at 3.13 per cent as of Q2 2018; this is down slightly year-on-year from 3.34 in Q2 2017. However, comparing Irish new house purchase loans relative to other Eurozone economies, interest rates on mortgages in Ireland remain the highest of comparator countries (Figure 22). 0 10 20 30 40 50 60 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Micro Small Medium Overall 0 10 20 30 40 50 60 Interquartile Region (P25-P75) Min Max Median Ireland 26 | Quarterly Economic Commentary – Autumn 2018 FIGURE 22 INTEREST RATES ON NEW HOUSE PURCHASE LOANS TO HOUSEHOLDS (%) Source: Central Bank of Ireland, SME Credit Series, Table A.14.1. Notes: Countries included are: AT, BE, EE, ES, FI, FR, IE, IT, LT, NL, PT, SI. These countries are selected due to data availability. Data differ between this chart presented and the text, as the ECB comparison data include restructured mortgages whereas the new business standard variable rate (SVR) is only for new drawdowns. A similar picture emerges in relation to corporate interest rates. Figure 23 presents the interest rates on new business loans for Non-Financial Corporations in Ireland relative to the average for the Eurozone. Two series are presented: 1) covering all loans and 2) capturing loans of less than €250,000 which is used as a proxy for loans for SMEs. In June 2018, the average rate on new loans for all Irish corporates was 2.67 per cent whereas the Eurozone average was 1.68 per cent. For small Irish corporate loans, the interest rate in June 2018 was 4.83 per cent compared to the Eurozone average of 2.31 per cent. Interest rates are down yearon-year for small corporates but remain considerably higher than for their European peers. 0 2 4 6 8 10 12 Interquartile Range (P25-P75) Min Max Median Ireland Quarterly Economic Commentary – Autumn 2018 | 27 FIGURE 23 INTEREST RATES ON NEW CORPORATE LOANS – EUROPEAN COMPARISON (%) Source: ECB MFI data. Small loans refer to loans less than €250,000. Banking sector stability With increasing attention focussing on the possibility of overheating in the domestic economy, it is informative to examine the consolidated banking statistics collected by the Bank of International Settlements (BIS) to understand whether the domestic economy growth is increasingly financed by external exposures as occurred during the previous boom. These data detail the residence of counterparties, by nationality of the international consolidated banking sector. Therefore, the total exposure to the international banking sector for an individual country can be observed. Significant movements in this exposure can indicate large changes in bank lending in the domestic economy. In Figure 24 the country of residence for financial institutions with the largest outstanding stock of lending to the Irish economy is plotted over the period Q4 1999 to Q1 2018. The loans covered are for all types of financial instruments and maturities. 0 1 2 3 4 5 6 7 8 Ireland (All Loans) Euro Area (All Loans) Ireland (Small Loans) Euro Area (Small Loans) 28 | Quarterly Economic Commentary – Autumn 2018 FIGURE 24 COUNTRY OF RESIDENCE FOR FINANCIAL INSTITUTIONS WITH THE LARGEST OUTSTANDING STOCK OF LENDING TO THE IRISH ECONOMY (US$ MILLION) Source: Bank of International Settlements (BIS). From the chart it is clear that financial institutions in a number of countries significantly increased their lending to the Irish economy in the run up to the financial crisis of 2007/2008. UK and German credit institutions, in particular, had the largest exposure to the Irish economy at that point, while French and Belgian institutions also significantly increased their Irish lending. More recently, after 2008 all countries, with the exception of the United States, have had a declining exposure to the Irish economy. However, the US has seen its financial institutions continuously increase their lending to the Irish economy post-2008 such that by 2018, as a country, the US alongside the UK had the greatest exposure to the Irish economy. Recently, Avdjiev et al. (2018),12 amongst others, suggest using the ratio of total cross-border claims to GDP as an indicator of domestic financial stability. As much of this lending by foreign institutions would be to the domestic financial sector, large movements in cross-border flows could indicate the build-up of imbalances both in the domestic economy and domestic credit institutions. In Figure 25 the combined total exposures for each foreign country as a ratio of Irish GDP is presented. 12 Avdjiev S., Berger B. and H. Shin (2018). ‘Gauging procyclicality and financial vulnerability in Asia through the BIS banking and financial statistics’, BIS Working Papers, No. 735. 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3 2016Q2 2017Q1 2017Q4 Belgium Japan US UK Germany France Quarterly Economic Commentary – Autumn 2018 | 29 FIGURE 25 RATIO OF TOTAL CROSS-BORDER FLOWS TO THE IRISH ECONOMY TO IRISH GDP Source: QEC calculations. Similar to the total level of cross-border flows in Figure 25, the ratio illustrates the substantial increase in cross-border lending into the Irish economy in the run up to 2008. Thereafter, the ratio declines on a significant basis before stabilising around 2014. At present, the ratio is back to its pre-2002 level. This indicator provides an insight into where the vulnerabilities in the Irish banking sector originated from. The improvements in this ratio suggest the financial stability threat from foreign lending into the Irish economy has substantially reduced. Coupled with the current well capitalised nature of the Irish banking sector relative to other European peers (Figure 26), this points towards a more stable Irish banking sector at present. 0 50 100 150 200 250 300 350 400 36 | Quarterly Economic Commentary – Autumn 2018 In addition to understanding trends in consumer sentiment, further insight into Irish households appetite for spending and views on economic activity can be drawn from their savings behaviour. Figure 33 displays the ESRI/Bank of Ireland Savings Index, which measures Irish peoples’ sentiment towards savings. The overall index had been rising since August 2017. While it dropped slightly towards the end of Q1 2018, both July and August 2018 have seen a recovery in savings sentiment. The two sub-indices that compose the Savings Index are the Savings Attitudes and the Savings Environment. The recent performance of the overall Index has been driven by improvements in households’ attitudes towards savings. As this sub-index captures the view of consumers as to whether they are saving sufficiently, an increase in this element is likely to accord with the improving household financial positions as indicated by the consumer sentiment figures i.e. Irish households’ financial positions have improved so therefore they have additional financial resources to save. The more subdued element is the savings environment sub-index. This captures households’ views on whether it is a good time to save now or in 12 months’ time and the relative weakness in this indicator is likely picking up the uncertainties relating to the economic environment. FIGURE 33 SAVINGS INDEX AND SUB-INDEXES, ACTUAL Source: ESRI/Bank of Ireland. The overall position of Irish households’ net worth, which is the stock of financial and housing assets minus the stock of liabilities, is presented in Figure 34. Irish household net worth grew by 2.1 per cent in Quarter 4, 2017 relative to 80 85 90 95 100 105 110 115 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Overall Attitudes Environment Quarterly Economic Commentary – Autumn 2018 | 37 Quarter 3, as loan repayments reduce the stock of outstanding liabilities (-0.8 per cent), and rising asset prices (+1.7 per cent) raise the total value of domestic balance sheets. Net worth is now at the highest level (€726.8 billion) since the Q2 2007 peak of €719.6 billion. A large proportion of the increase in Q4 2017 was driven by a rise in the housing stock of €8.5 billion. Financial assets rose by €5.1 billion and liabilities declined by €1.2 billion in Q4 2017 relative to Q3 2017. Household net worth decreased considerably during the financial crisis as housing assets fell sharply in value. In Q2 2012, net worth was at €430 billion and housing assets were worth €295 billion. In Q4 2017, total net worth was up by 69 per cent and housing assets increased by 69.8 per cent. The value of financial assets in the Irish economy has increased by 17.2 per cent relative to Q2 2012 while liabilities are down by 19.0 per cent. The improvement in overall net worth is driven to a large extent by the recovery in the housing market. FIGURE 34 IRISH HOUSEHOLD NET WORTH (€ BILLION) Source: Central Bank of Ireland, Quarterly Financial Accounts. Looking forward, household consumption is set to continue benefitting from improving household earnings and more resilient household balance sheets. If the continued growth in the domestic economy withstands international shocks, household spending will continue to remain robust. We expect consumption expenditure to grow by 2.2 per cent this year and 2.3 per cent in 2019. -250 0 250 500 750 1,000 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 Financial Assets Liabilities Housing Assets Net Worth 38 | Quarterly Economic Commentary – Autumn 2018 Property market developments The latest trends in the domestic property market confirm that residential prices are continuing to rise. However from Figure 35 it would appear that, since the beginning of the year, the prices of apartments are increasing somewhat faster than those of houses. FIGURE 35 ANNUAL RESIDENTIAL PROPERTY PRICE INCREASES (%) Source: Central Statistics Office. In a recent update of earlier work on house price analysis, McQuinn (2018) examines the relationship between actual house prices and those levels warranted by fundamental variables in the economy. Examining prices up to Q1 2018, McQuinn (2018) concludes that, while prices have grown substantially over the past number of years, there is still no evidence of a significant divergence between actual and fundamental prices. As property prices now appear to be in equilibrium, McQuinn (2018), argues that future house price levels should now only increase in line with movements in economic fundamentals. In Figure 36 house price increases for Dublin and the rest of the country are plotted. The trends indicate that while the pace of house price growth continues to increase outside of Dublin, the rate of price increases in the capital have moderated somewhat in 2018. House price growth mid-year is half the rate at the outset of 2018. This moderation may be due to the presence of the macroprudential regulations which are placing an upper limit on the amount prospective homeowners can borrow from financial institutions. The regulations are likely to be more binding in the Dublin area where house prices and, consequently, the average loan size associated with the property are higher than in the rest of the country. 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 2014M01 2014M03 2014M05 2014M07 2014M09 2014M11 2015M01 2015M03 2015M05 2015M07 2015M09 2015M11 2016M01 2016M03 2016M05 2016M07 2016M09 2016M11 2017M01 2017M03 2017M05 2017M07 2017M09 2017M11 2018M01 2018M03 2018M05 Houses Apartments Quarterly Economic Commentary – Autumn 2018 | 39 FIGURE 36 ANNUAL HOUSE PRICE INCREASES FOR DUBLIN AND OUTSIDE OF DUBLIN Source: Central Statistics Office. Rental levels also continue to increase across the country. Despite growing strongly in 2017, standardised average rents continued to trend upwards in the first quarter of 2018. Nationally, rents grew at 7.1 per cent annually in the first quarter, up from 6.4 per cent in Q4 2017. Along with the sluggish response of housing supply, the continued improvement in the labour market and the moderate increase in disposable incomes are contributing factors to the continued inflationary pressures in the rental market. To better understand regional differences in the market and especially developments in the Dublin market, the ESRI/RTB rental index now produces additional regional indicators. In particular, rental indices are produced for Dublin (including the four local authority areas), the Greater Dublin area (GDA) (excluding Dublin) and the rest of the country (outside the GDA). While rental pressures are evident in Dublin, many of the surrounding counties are also facing increasing rents as supply pressures in the city lead to households choosing to commute. The results are presented in Figure 37. 0.0 5.0 10.0 15.0 20.0 25.0 30.0 2014M01 2014M03 2014M05 2014M07 2014M09 2014M11 2015M01 2015M03 2015M05 2015M07 2015M09 2015M11 2016M01 2016M03 2016M05 2016M07 2016M09 2016M11 2017M01 2017M03 2017M05 2017M07 2017M09 2017M11 2018M01 2018M03 2018M05 National excluding Dublin Dublin 40 | Quarterly Economic Commentary – Autumn 2018 FIGURE 37 RTB RENT INDEX – DUBLIN, GDA (EXCL. DUBLIN) AND OUTSIDE GDA Q3 2007=100 Source: Central Statistics Office Rent levels in both Dublin and the GDA (excluding Dublin) have clearly grown at a faster pace than the rest of the country since 2013. This could reflect the faster pace of economic growth in the capital. Year-on-year, rents increased by 7.8 per cent in Dublin and 6.4 per cent in the GDA (excluding Dublin) in Q1 2018. SUPPLY Investment Investment levels in Ireland have been increasing strongly over the past number of years, both in terms of overall investment (which is affected by the activities of multinational companies) as well as underlying investment activity (excluding aircraft leasing and intellectual property intangibles). Of particular note has been the marked pick-up in construction investment that has occurred in recent years as the industry begins to respond to rising prices and supply shortages. The latest quarterly data available, Q2 2018, indicate a slight decline in investment on a year-on-year basis, which is purely driven by a 62.8 per cent reduction in intangible investment. This change outweighed the 13.5 per cent increase in construction and the 6.8 per cent increase in machinery and equipment year-on- year. 60 70 80 90 100 110 120 130 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Dublin GDA (excl Dublin) Outside GDA Quarterly Economic Commentary – Autumn 2018 | 41 FIGURE 38 COMPONENTS OF INVESTMENT AS A PROPORTION OF TOTAL (€ MILLION) Source: Central Statistics Office, Quarterly National Accounts Data. Focusing on the CSO’s adjusted series for Gross Fixed Capital Formation, modified GFCF, (which adjusts for the effects of trade in aircraft by aircraft leasing companies and the importation of intellectual property), a different trend emerges. It can be seen the adjusted data display a much more consistent growth pattern. On an annualised basis overall modified investment increased by 13.2 per cent in the year to Q2 2018. This is composed of an increase of 14 per cent in buildings and construction, a 25 per cent increase in machinery and equipment and a 5 per cent decline in intangible assets. FIGURE 39 MODIFIED GROSS DOMESTIC CAPITAL FORMATION (€ MILLION) Source: Central Statistics Office, Quarterly National Accounts Data. - 5,000 10,000 15,000 20,000 25,000 30,000 1997Q1 1997Q4 1998Q3 1999Q2 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4 2016Q3 2017Q2 2018Q1 Intangible Assets Machinery and Equipment Building and Construction GFCF - 2,000 4,000 6,000 8,000 10,000 12,000 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 Buildings & Construction Machinery & Equipment Intangible Assets GFCF 42 | Quarterly Economic Commentary – Autumn 2018 As noted in a previous Commentary, the impact of multinationals on the investment data in the National Accounts poses a particular challenge in understanding the investment of domestic enterprises and in particular that of SMEs. A focus on SME activity is critical given their importance to job creation and regional development. Recent research also points towards a productivity gap for domestic enterprises (Papa et al., 2018)14 and an investment gap for SMEs (Lawless et al., 2018).15 Research by Gargan et al. (2018) published as a Special Article to this Commentary uses new survey evidence compiled as part of the Department of Finance Credit Demand Survey to provide an overview of investment activity by Irish SMEs. They profile the types of assets SMEs are investing in, how firms are financing these investments and what barriers firms face to investment. A number of findings emerge from their research which are important in understanding the divergences between the multinational and domestic sectors in Ireland. They find that two in every three SMEs invested in their staff, one-in-two invested in fixed assets and less than one-in-ten invested in intangible assets in 2016. SMEs were, in general, satisfied with their investment levels or their current capacity with only one-in-five facing a capital gap. This evidence suggests that SMEs have scope to increase investment in order to address capital shortfalls. One of the interesting findings of the survey is the low share of intangible investment amongst Irish SMEs. This contrasts quite starkly with the high share of intangibles that makes up the aggregate investment figure. These data can be corroborated by analysing the CSO capital stock at a sectoral level. Figure 40 presents the share of intangible assets as a percentage of total gross capital stock by sector over the period, 1985-2014. It can be seen that intangible asset growth has risen rapidly in particular sectors (such as ICT, professional, technical and scientific, and industry), in recent years. However, such assets are not used as capital inputs by many of the large SME sectors (construction, wholesale and retail, transport, and accommodation). 14 Papa, J., L. Rehill and B. O’Connor (2018). ‘Patterns of Firm Level Productivity in Ireland’, Department of Finance Technical Working Paper. 15 Lawless, M., C. O’Toole and R. Slaymaker (2018). ‘Estimating an SME investment gap and the contribution of financing frictions’, ESRI Working Paper series, No. 589. Quarterly Economic Commentary – Autumn 2018 | 43 FIGURE 40 INTANGIBLE ASSETS AS PERCENTAGE OF CAPITAL STOCK BY SECTOR (1985-2014) Source: Central Statistics Office, Annual Capital Stock and Assets Data. The absence of intangible assets as capital inputs for these sectors may limit the extent to which knowledge-based capital can improve their productivity performance over the medium term. Recent research by Di Ubaldo and Siedschlag (2017)16 highlights the benefit of investment in knowledge-based capital for Irish enterprises as a means of improving domestic productivity. However, the diverse nature of the SME base, and their low level of investment in intangible assets due to more traditional production structures, may pose challenges for firms in absorbing technology driven productivity gains. While these sectors are large employers and contribute considerably to job creation, boosting their labour productivity may be difficult and should be the focus of additional research. Current business sentiment To provide some insight into the current plans of enterprises, the Markit Purchasing Manager’s Index provides another indicator of activity in the manufacturing, services and construction sectors. In Figure 41, an Index reading above 50 indicates an expansion. In the first few months of 2018, the Index 16 Di Ubaldo, M. and I. Siedschlag (2017). ‘The impact of investment in knowledge-based capital on productivity: firmlevel evidence from Ireland’, No WP556, Papers, Economic and Social Research Institute (ESRI), https://EconPapers.repec.org/RePEc:esr:wpaper:wp556. 0% 10% 20% 30% 40% 50% 60% 70% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Agriculture Industry Construction & Real Estate Wholesale and Retail Transport and Storage Accomodation and Food ICT Financial and Insurance Profession, Scientific, Technical All 44 | Quarterly Economic Commentary – Autumn 2018 trends upwards for construction and remains well above 50 for manufacturing and services. FIGURE 41 BUSINESS AND CONSTRUCTION PMI FOR IRELAND Source: Markit. Figure 42 considers the business outlook for purchasing activity as monitored by the Markit index. Both indicators are trending upwards in 2018 pointing towards an improvement in business sentiment. FIGURE 42 FORWARD LOOKING INDICATORS FOR PURCHASING ACTIVITY Source: Markit. 0 10 20 30 40 50 60 70 80 Composite (M+S) Construction 0 10 20 30 40 50 60 70 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Manufacturing Outlook Services Outlook Quarterly Economic Commentary – Autumn 2018 | 45 Construction investment We expect that building investment will continue to increase particularly as the rate of housing construction expands. Based on trends in housing market activity, we forecast 18,655 units to be completed in 2018 increasing to 24,500 units in 2019 (Figure 43). Consequently, despite the international uncertainties, we expect annual average growth in investment of 9.8 per cent in 2018 and 8.9 per cent in 2019. FIGURE 43 BUSINESS AND CONSTRUCTION PMI FOR IRELAND Source: CSO and QEC Forecasts. LABOUR MARKET As the Irish domestic economy continues to grow strongly, employment levels for the first half of 2018 surpass previous record levels observed for the Irish economy in 2007. Seasonally-adjusted unemployment fell by 0.1 percentage points to 5.8 per cent in Q2 2018. Persistently low inflation and rising rates of growth in wages have resulted in moderate and yet well distributed improvements in real earnings for the same period. Unemployment While the Live Register is not a precise measure of unemployment,17 as it includes part-time and some seasonal and casual workers, it is one of the most up-to-date and detailed labour market measures. The recent August release of the Live Register highlights the downward trajectory of unemployment throughout 2018. Since January, the seasonally-adjusted Live Register recorded a decrease of 28,600 (-8.6 per cent) in August 2018, leaving a total of 209,900 17 The Live Register provides a monthly series of the numbers of people registered for Jobseekers Benefit, Jobseekers Allowance or other statutory entitlements at the Irish Department of Social Protection. 0 5000 10000 15000 20000 25000 30000 2011 2012 2013 2014 2015 2016 2017 2018 2019 52 | Quarterly Economic Commentary – Autumn 2018 FIGURE 47 TRENDS IN AVERAGE EARNINGS PER WEEK AND PER HOUR (€), SEASONALLYADJUSTED Source: Central Statistics Office. Note: The y-axis on the LHS scale has a very low range of values. Distinguishing between public and private pay, the public sector experienced an annual increase of 2.5 per cent to €956.48 per week while private sector employees experienced an annual increase of 3 per cent to €682.81 per week. For the public sector, average weekly earnings ranged from €838.39 among regional bodies to €1,363.13 per week for the Garda Síochána in Q2 2018. Average private sector earnings ranged from €356.29 per week in accommodation and food service activities to €1,164.51 per week in financial and insurance activities. Irregular earnings and bonuses, which are those that are not paid regularly at each pay period, appear to have converged for the public and private sectors in recent years. For high-earning industries such as ICT or finance, the gap has also narrowed considerably relative to last year. 660 670 680 690 700 710 720 730 740 750 21.2 21.4 21.6 21.8 22 22.2 22.4 22.6 22.8 23 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 Average Earnings per Hour (SA) Average Weekly Earnings (SA) Quarterly Economic Commentary – Autumn 2018 | 53 FIGURE 48 WEEKLY IRREGULAR EARNINGS, FOUR-QUARTER ROLLING AVERAGE (€) Source: Central Statistics Office Labour market forecasts As the Irish economy approaches full employment, earnings growth has increased. With economic activity forecast to be growing at a lower, more stable rate over the next two years, the unemployment rate is expected to average 5.7 per cent through 2018 and 5.0 per cent in 2019. Employment is set to exceed 2.28 million by the end of 2018, increasing to 2.35 million by the end of 2019. While inflows of migrant workers should help maintain competitiveness in the domestic market, the upward trend in the vacancy rate suggests labour supply has thus far been persistently outstripped by demand. As a result, nominal earnings are expected to continue to rise, increasing by 2.8 per cent in 2018, and 3.4 per cent in 2019. PUBLIC FINANCES For the year to August, annual taxation receipts increased by 5.1 per cent. Most taxation items registered strong growth with the exception of excise duty and customs. Figure 49 illustrates the annual changes in taxation returns for the last four years for the main tax categories as well as the overall total amount. 0 20 40 60 80 100 120 140 160 180 200 Private Sector ICT Financial/Insurance Public Sector Garda Siochana Education 54 | Quarterly Economic Commentary – Autumn 2018 FIGURE 49 ANNUAL CHANGES IN MAJOR TAX SUB-COMPONENTS (%) Source: QEC calculations. Taxation receipts closely related to consumption such as VAT continue to increase at a significant rate (3.9 per cent) as do pay related social insurance (PRSI) receipts. The latter witnessed an annual increase of 4.6 per cent in the year to August. With Budget 2019 due next month it is timely to look at trends in Government expenditure for the year to date. TABLE 7 ACTUAL AND PROFILE CURRENT AND CAPITAL EXPENDITURE FOR THE YEAR TO JULY Category Actual (€million) Profile (€million) Difference (%) Total Current 36,770 36,561 0.0 Social Protection 13,419 13,417 0.0 Health 10,271 9,958 2.0 Education 5,940 5,890 1.0 Other 7,140 7,296 -2.0 Total Capital 2,679 3,041 -8.0 Transport 580 631 -5.0 Education 431 465 -9.0 Housing 671 846 -8.0 Other 997 1,099 -9.0 Total 39,449 39,602 -8.0 Source: QEC calculations. -15 -10 -5 0 5 10 15 20 25 30 35 2015 2016 2017 2018 Excise Duty Stamps Income Tax Corporation Tax Valued Added Tax Total Quarterly Economic Commentary – Autumn 2018 | 55 Overall Government expenditure is running as envisaged at the outset of the year with total actual expenditure identical to the total profile or forecast level. However, within the different categories it is evident that much of the capital expenditure is less than the profile level. On the current side, actual expenditure on health and education is marginally greater than that forecast for the year to August. In Figure 50 we plot Gross current, capital and total voted expenditure over the period 2012 to 2018.24 From the chart, it is evident that the major increase in expenditure over the past six years has been in capital as opposed to current expenditure. FIGURE 50 CURRENT, CAPITAL AND TOTAL VOTED EXPENDITURE: 2012-2018 (€MILLION) Source: QEC calculations. Figure 51 presents the debt-to-output ratio for both GDP and the new GNI* measure. While both trends indicate that Ireland’s debt sustainability is clearly improving, a significant difference is evident between the GDP and GNI* output denominators. Using the GNI* measure, it is clear that the ratio is still above 100. This highlights the point made in the Monetary and Financial section that the Irish economy is still quite vulnerable to any significant changes in the financing costs of sovereign debt. 24 We assume that actual = profile in 2018 for both capital and current expenditure. 0 1,000 2,000 3,000 4,000 5,000 6,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 2012 2013 2014 2015 2016 2017 2018 Current Total Capital (RHS) 56 | Quarterly Economic Commentary – Autumn 2018 FIGURE 51 DEBT-TO-GDP AND GNI*RATIOS (%) Source: QEC calculations. 0 20 40 60 80 100 120 140 160 180 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 GDP GNI* Quarterly Economic Commentary – Autumn 2018 | 57 General Assessment Most key domestic economic indicators for 2018 suggest the Irish economy looks set to register another strong performance in the present year. While the pace of decline in unemployment has slowed to some degree, taxation receipts across all the major headings indicate that economic activity is still increasing significantly. The relatively strong performance of the global economy also ensures that external demand for goods and services produced in Ireland has increased somewhat in 2018. While the Irish economy continues to enjoy the largest growth rate in the Euro Area, differences persist between the headline rate of activity suggested by GDP and the underlying growth rate of the domestic economy. In this Commentary we have revised upwards our growth rate of GDP from 4.7 per cent to 8.9 per cent in 2018. GDP in 2019 is also now expected to grow marginally quicker than previously expected. However, it is important to understand the reasons for this revision which are twofold. First, a significant reduction in the rate of imports of highly valued research and technology related services amongst a select few multinational firms has caused overall import levels in the Irish economy to actually decline over the past year. This, in turn, causes GDP figures to increase more than expected. Given these data, we have revised down our import forecasts for 2018 which in turn raises our overall GDP forecast substantially. Second, the underlying rate of economic activity, as captured by consumption and modified investment, appears to be growing at a faster pace in 2018 than previously expected. In particular, the growth in domestic consumption for the year to date is particularly strong. This dichotomy between the headline growth rate and underlying trends highlights the difficulties in discerning what is actually going on in the real Irish economy. Recent data from the CSO do provide some more information in that regard. Gross valued added (GVA) is separated between the multinational and other sectors of the economy; the data reveal that the indigenous sector of the Irish economy grew by 4.3 per cent in 2017 and 5.4 per cent in 2016. This is at variance with the view that almost all of the growth in the Irish economy is coming from the multinational sector. The data also appear to indicate that the 58 | Quarterly Economic Commentary – Autumn 2018 recovery in the indigenous sector peaked in 2015 when a growth rate of 8.4 per cent was observed. The single biggest threat to the medium-term outlook of the domestic economy is the nature of the UK exit from the European Union. The forthcoming summit of European leaders next month in October may bring a greater degree of clarity on the nature of the British withdrawal, however it is prudent to assume that a nodeal exit is at this stage a real possibility. The possibility of a no-deal Brexit has important consequences for the present budgetary process. On the one hand as the economy is performing very strongly there are legitimate concerns that it may soon overheat, in which case a contractionary budgetary policy may well be in order as has been recently argued.25 For a small open economy like Ireland which is carrying a voluminous public (and private) debt load, policies to build up financial buffers and reduce indebtedness are warranted. In particular, at this point in the economic cycle, budgetary surpluses would be most desirable and allow a safety net to develop. Indeed, Ireland is one of the only small open economies not to be running a surplus in the EU at present. However, at present, there are several significant downside risks to the Irish economy to suggest a running a neutral budget may be preferable. First, there are key infrastructural bottlenecks in Ireland such as in the public housing area that require significant investment by the State. Undertaking such investment can add to the productive capacity of the economy, and reduce the increase in housing costs which are currently posing a threat to domestic competitiveness. Detailed research evidence on the structure and composition of households facing high housing costs has recently been released by Corrigan et al. (2018).26 They find the most persistent housing affordability difficulties are for low income urban households renting in the private market, who may find it difficult to access home ownership at current market prices. Furthermore, additional research by McQuinn (2018)27 on the housing market, updating earlier work, suggests that housing demand is set to increase over the coming years resulting in continued upward pressure on prices. This is likely to exacerbate the affordability challenge for the aforementioned households. To address this issue, 25 IFAC pre-budget statement and statement by Governor of Central Bank of Ireland at McGill Summer School. 26 Corrigan E., D. Foley, K. McQuinn, C. O’Toole and R. Slaymaker (2018). ‘Exploring Affordability in the Irish Housing Market’ ESRI Working Paper No. 593, June. This research is from the first year of a three-year research programme between the ESRI and the Department of Housing, Planning and Local Government. 27 McQuinn K. (2018). “Macroeconomic developments in the Irish housing market”, Economic and Social Research Institute (ESRI) ‘Exploring developments in the Irish housing and mortgage market’ conference, ESRI, June. Quarterly Economic Commentary – Autumn 2018 | 59 policies to increase housing supply and provide social and affordable housing are critical and provide a case for public capital investment. The recently announced Land Development Agency may help to deliver such supply by addressing issues such as the relatively high cost of development land. The second factor which suggests a non-contractionary budget may be preferable is the possibility next year of a no-deal Brexit. If such an outcome occurs then there is a possibility that in Q1 or Q2 2019, the Irish economy could face a significant, and immediate, adverse economic shock. In such a scenario, it is fair to say that the full downside risks for the economy are exceptionally difficult to envisage. Notwithstanding these points, as noted in the previous Commentary, given the commitments made concerning future Government investment in infrastructure, a neutral budget would leave very little scope for reducing the overall burden of taxation in the economy. As the sovereign debt is still very high, particularly when compared with GNI* as the output denominator, it is very difficult to justify reductions in taxation when the Government balance is still in deficit. The other major external risk to the Irish economy is the increased protectionism in trade policy observed between the United States and China. The scale of tariffs now being imposed, particularly on Chinese imports into the United States, is almost certain to have a negative impact on global trade. Given the small open nature of the domestic economy, this is likely to reduce the contribution to growth from the trade balance over the next 18 months. Allied to the Brexit issue, increased global trade tension highlights the uncertain external outlook for the Irish economy in 2019. A further concern for Irish firms exporting to the UK is the continued weakness of Sterling vis-à-vis the Euro; the exchange rate is currently at its highest (lowest) since the inception of the Euro in 1999. Previous Commentaries have highlighted the importance of considering both financial sector developments as well as fiscal issues in assessing the possibility of overheating in the Irish economy. To that end, in the monetary and financial section of the Commentary a new indicator is compiled which tracks the role of lending by foreign financial institutions into the Irish economy. The indicator is a ratio of total foreign bank lending in the Irish economy to GDP. At present, the indicator suggests that foreign lending to the domestic economy, as a proportion of underlying economic activity, is back at pre-2002 rates. Given the difficulties assessing the underlying rate of growth in the Irish economy, new information about Irish SMEs is particularly welcome. In a special 60 | Quarterly Economic Commentary – Autumn 2018 article to the Commentary, Gargan et al. (2018) use unique survey data compiled by the Department of Finance Credit Demand Survey to profile the investment decisions of Irish SMEs across the size of the firm, its age group and its sector. The authors find that two in every three Irish SMEs invested in their staff, one-in-two invested in fixed assets and less than one-in-ten invested in intangible assets in 2016. Furthermore, with high levels of liquid assets on their balance sheet, and one-in-five firms indicating a capital gap, the findings suggest that any perceived sluggishness in borrowing or investment appetite could potentially be demandside in orientation. From a macroeconomic perspective, this evidence indicates that Irish enterprises should have scope to increase investment if they so wished. If this materialises, a further boost to investment may be on the horizon. DETAILED FORECAST TABLES Quarterly Economic Commentary – Autumn 2018 | 69 EXPLORING INVESTMENT PATTERNS FOR IRISH SMES: NEW SURVEY EVIDENCE1 Eric Gargan, Martina Lawless, Maria Martinez-Cillero, Conor O’Toole* ABSTRACT An empirical profile of SME investment in Ireland is critical to understanding the growth possibilities and productive capacity of Irish indigenous enterprises. However little is known about SME investment activity outside the more aggregate information. This paper uses new survey evidence compiled as part of the Department of Finance SME Credit Demand Survey to profile the types of assets SMEs are investing in, how firms are financing these investments and what barriers firms face to investment. We provide a detailed exploration of the trends across firms looking at different size classes, age groups, exporting status and sectors. A number of findings emerge. We find that two in every three SMEs invested in their staff; one-in-two invested in fixed assets; and less than one-in- ten invested in intangible assets in 2016. SMEs were in general satisfied with their investment levels or their current capacity with only one-in-five facing a capital gap. For those with perceived insufficient investment, a lack of internal funds, rather than access to external finance, was identified as the main reason. Finally, SMEs reported having significant liquidity levels in 2016. These findings suggest that any perceived sluggishness in borrowing or investment appetite could potentially be demand-side in orientation. 1. INTRODUCTION Understanding the determinants of investment activity for domestic Irish SMEs is critical in terms of assessing their long-term productive capacity. To have adequate scope to grow and develop, firms need to continually invest in fixed and other assets to boost output. Indeed, a major determinant of productivity for firms is the growth in capital assets at their disposal. Following the onset of the financial crisis, aggregate investment activity in the Irish economy dropped dramatically. While much of the retrenchment in capital 1 This research was funded under the Department of Finance/ESRI research programme on the macoeconomy, taxation and banking. * Eric Gargan is an Assistant Principal in the Banking Policy Division, Department of Finance, Martina Lawless is an Associate Research Professor at the Economic and Social Research Institute and an Adjunct Professor at Trinity College, Dublin, Maria Martinez-Cillero is a Postdoctoral Research Fellow in the Economic and Social Research Institute, and Conor O’Toole is a Senior Research Officer in the Economic and Social Research Institute and an Adjunct Associate Professor in Trinity College Dublin. Corresponding author: [email protected]. 70 | Quarterly Economic Commentary – Autumn 2018 formation was accounted for by the adjustment in building and construction, investment in machinery and equipment and other non-construction assets also fell. At a domestic level, investment activity amongst SMEs also declined. Gerlach- Kristen et al. (2015) show that the share of SMEs investing in fixed assets declined from 55 per cent in 2005 to under 30 per cent in 2013. This fall was even more pronounced for micro-sized enterprises. While undoubtedly the deterioration in the business climate, through poorer fundamentals, would have led firms to pull back investment, a number of research papers have highlighted the negative impact of the banking crisis and credit boom on investment levels. Gerlach-Kristen et al. (2015) show that SMEs’ investment was negatively affected by credit constraints following the banking collapse. Lawless et al. (2015) show that debt overhang from the boom phase also negatively impacted investment activity amongst SMEs. Lawless et al. (2013) show that investment financing has shifted to the use of internal funds with a major reduction in the usage of bank credit. SME financing has been a popular topic of research in empirical literature. The different nature of financing of large and small companies has been well established in the literature (Rajan and Zingales, 1995; Berger and Udell, 1998), largely due to information opacity. In terms of external finance, small firms rely largely on private equity and debt markets. However due to information asymmetries between firm managers and lending institutions, access to external credit for small firms is highly reliant on the availability of collateral and liquidity. As the economy has recovered, some of the credit market drags on investment have abated. Carroll et al. (2016) document a marked pick-up in investment for SMEs following the improvements in the domestic economy in 2014 and 2015. However the rapid growth domestically in recent years, and the improvements in trading conditions for firms, have not seen a substantial increase in SME investment activity. Lawless et al. (2018) test the extent to which SME investment in Ireland is explained by economic fundamentals and find that, in 2016, firms were underinvesting by approximately 30 per cent. A portion of this gap, approximately 20 per cent is explained by factors relating to financial market issues (indebtedness, interest rates, credit rejections, etc.). However, given data limitations, a number of unanswered questions remain. Three specific issues are of particular pertinence. First, which type of assets are SMEs investing in, and is investment activity relatively larger when scaled against the level of existing total assets (data which have been missing to date)? Second, do firms themselves consider their investment activity to be optimal and what are the barriers to investment if not? Third, how much savings do firms hold on their balance sheets and how does this link to investment financing? Shedding light on Quarterly Economic Commentary – Autumn 2018 | 71 these issues can provide further insight into what is happening with SME investment in Ireland. To address these specific issues, a special ‘Investment activity and company assets’ module was appended to the regular Department of Finance SME Credit Demand Survey (CDS) to capture data on the aforementioned information gaps. The new module captures new information on the types of assets firms are investing in, the barriers they face to investment, and information on how they finance that investment. More detailed insights of this new information are provided in the Data Overview section. This article provides a first insight into the new data and attempts to address the questions raised. A number of important findings emerge. Half of SMEs in the sample invested in fixed assets in 2016, however only 7 per cent of firms invested in intangibles. Moreover, both the investment level and rate were between 4.5 and 4.8 times higher for fixed assets than for intangibles. Although a significant number of firms invested in staff (66 per cent), the mean and median level of investment made by these companies are the lowest relative to all types of investment. More than two-thirds of SMEs in the sample reported that they were satisfied with their investment levels or with their current capacity. In terms of barriers to investment, the lack of internal funds was identified as the main reason behind the lack of, or insufficient, investment. Finally, the data suggest that SMEs had remarkably high liquidity levels, which might be linked to the low demand for external funding sources for investment. 2. DATA OVERVIEW The Department of Finance SME CDS contains firm-level data on a random sample of Irish SMEs, and is carried out on a biannual basis. It was designed to include a good representation of micro, small and medium-sized firms and a proportional representation of selected key sectors of the economy. The 2016 CDS included a new module which contained a series of questions specifically asking about firms’ investment activity and assets. In addition, the new module in the CDS also contained important questions regarding investment financing sources and barriers.2 Past data did not provide any insights on key issues such as the types of fixed assets firms were investing in, or staff and intangibles investment patterns. Information regarding firms’ value of total assets was also absent, which prevented an exploration of the different investment rates across SMEs. As part of this module, firms were asked to provide a numeric 2 A full list of variables available in the new module is provided in Appendix I. 72 | Quarterly Economic Commentary – Autumn 2018 figure of the value of their total assets, as well as declaring the percentages of assets that were in fixed or liquid form.3 This allowed us to also explore the liquidity of Irish SMEs in 2016. Information was also requested on the value of turnover, profits, investment per asset or outstanding debt, and the number of employees and the value of investment in them. Some of the value variables obtained through this set of questions (i.e. debt, turnover or value of total assets) had a significant share of missing observations. For the case of total assets, about 50 per cent of firms did not report a value. However, as an alternative to providing the value of total assets, firms were given the option to state this information through pre-defined ranges of values. For firms which provided a range, the value of total assets was generated using multiple imputations.4 After this procedure, the percentage of firms with a missing total assets value was reduced to about 18 per cent. The figures below report the percentage of observations in selected firm categories, to provide an overview of the composition of the sample used. 3 Liquid assets include cash, stocks or other liquid assets such as accounts receivable. 4 An OLS regression was performed in each sub-sample of firms classified in each range, and range-specific predicted values were then calculated for each firm. If the predicted value was within the range, it was assigned as the value of total assets for that firm. If the value was not within range the value was left as missing. Quarterly Economic Commentary – Autumn 2018 | 73 FIGURE 1 DATA OVERVIEW Source: ESRI. Most SMEs included in the sample operated in the Wholesale and Retail sector, followed by the Professional and Scientific sector. The sample includes a large proportion of micro and small sized firms, as opposed to medium sized firms. According to 2015 CSO data, the majority of active enterprises in Ireland fall into the micro firm category, while small and medium firms represent 6.4 and 1.1 per cent respectively (CSO, 2017b). Therefore, although medium and small firms are overrepresented in the sample, which is a common occurrence in SMEs microdata, we also include a very high proportion of micro firms. The data include a small share of firms with less than ten years of operation, with almost half of the firms operating for over 25 years. Although the sample included a number of companies which had been in business for less than two years, these companies usually are not listed in Company Registration Office records and therefore are Construction 10% Manufacturing 13% Wholesale & Retail 32% Hotels & Restaurant 10% Professional & Scientific 18% Other sectors 17% (a) Sector Micro 42% Small 40% Medium 18% (b) Firm size Less than 10 years 17% 10 to 25 years 38% More than 25 years 45% (c) Firm age Export - UK 9% Export - Other 13% Export - No 78% (d) Exporting status 74 | Quarterly Economic Commentary – Autumn 2018 not in the database on which sampling is based. For this reason, this analysis excludes a certain cohort of very young rapidly growing firms for which credit constraints may be quite a significant issue. Finally, just over three-quarters of firms included did not export their products outside Ireland. As is standard in treating extreme observations in microdata studies, outliers have been removed from the sample, and were defined as observations situated above and below the 99 and 1 percentiles respectively. After cleaning the data, the total number of observations in the sample was 1,419. All statistics presented in the tables and figures that follow are weighted using probability weights provided in the dataset. 3. PROFILING INVESTMENT ACROSS FIRMS This section provides an overview of the extent to which Irish SMEs are investing in assets and, if investing, explores what type of assets are being purchased. It also provides information regarding the size of the investment made in each asset class, and the scale of the investment relative to the firm size. For this last purpose, investment rates, defined as the percentage of the value of investment relative to the value of total assets, are computed. Column 1 in Table 1 displays the percentage of firms which reported investing in 2016. Disaggregated information on investment activities by type of asset is also provided, which is a novelty of the 2016 data. Overall, just over 80 per cent of firms undertook some form of investment activity in either fixed assets, intangible assets or staff. Roughly 50 per cent of firms invested in fixed assets in 2016; however, disparities across different types of assets emerge. Most firms invested in machinery, followed by transport, while only 14.6 per cent of firms invested in larger types of assets such as buildings. The extent to which Irish SMEs are investing in intangible assets (such as new production processes, procedures, patents, research and development, branding, etc.) is of great interest. In contrast with the importance of intangibles suggested by the National Accounts (CSO, 2017a), merely 6.9 per cent of SMEs reported undertaking this type of investment. Finally, a large share of firms, 66.4 per cent, invested in staff in 2016. The average size of investment by asset type is also reported in Table 1.5 The mean and median investment levels are reported in Columns 2 and 3, respectively. Due to the skewed distribution of investment, which is displayed in Figure 2, the mean and median investments are quite different. The largest mean investment levels correspond unsurprisingly to buildings, followed by machinery 5 Note that the statistics of investment levels and rates only refer to investing firms, and not the total sample. Quarterly Economic Commentary – Autumn 2018 | 75 and transport. In comparison to fixed assets, the investment level was low for intangible assets and particularly for staff. TABLE 1 INVESTMENT BY TYPE OF ASSET All firms Investing firms % Mean inv. Median inv. Inv. rate a. Total investment 80.30 79,243 22,000 0.19 b. Fixed assets 50.21 103,813 45,000 0.24 Buildings 14.60 123,584 40,000 0.14 Transport 25.56 51,854 30,000 0.17 Machinery 35.75 58,365 20,000 0.10 c. Intangible assets 6.92 21,966 10,000 0.05 d. Staff 66.41 11,463 5,000 0.02 Source: ESRI. Mean investment rates are also displayed in the last column of Table 1. They were calculated as the ratio of the level of investment undertaken in 2016 by each firm to their level of total assets in 2015.6 This measure facilitates a comparison of investment across firms relative to their size, as conclusions taken from investment level statistics can be affected by larger firms making larger investments. In contrast with the average investment level, the average rate is the highest for transport assets, indicating that investment relative to firm size was higher for this type of asset. Again, the distribution of the investment rates is also quite skewed to the left, as shown in Figure 3. This suggests that most investing firms did not invest large amounts relative to their size, regardless of the type of asset. 6 The level of total assets in 2015 is obtained by subtracting the 2016 investment from the 2016 value of total assets. Recall, the value of total assets in 2016 for some observations is imputed (see Data Overview section). 76 | Quarterly Economic Commentary – Autumn 2018 FIGURE 2 HISTOGRAMS – INVESTMENT LEVEL BY ASSET Source: ESRI. Note: Upper values of each distribution have been capped at the level displayed in each histogram. Total investment includes investment in fixed assets, intangibles and staff. Quarterly Economic Commentary – Autumn 2018 | 77 FIGURE 3 HISTOGRAMS – INVESTMENT RATE BY ASSET Source: ESRI. Note: Ratios have been capped at 1, except for intangibles and staff investment. Total investment includes investment in fixed assets, intangibles and staff. Following the description of the general investment patterns of Irish SMEs, we briefly explore whether heterogeneity in terms of firm characteristics affects the incidence and level of investment. The graphs provided in Figures 4 to 7 display the percentage of investing firms, mean investment rates, and mean and median investment levels7 by selected firm categories. These are defined in terms of firm age,8 size,9 exporting status10 and sectors. 7 The percentages of investing firms and the investment level and rates by category on which graphs in Figures 4 to 7 are based are provided in Tables A.2a and A.2b in Appendix II. 8 According to the number of years a firm has been operating. 84 | Quarterly Economic Commentary – Autumn 2018 FIGURE 9 INVESTING FIRMS’ ATTITUDES BY ASSET AND CATEGORY Source: ESRI. Note: Young firms are defined as those with less than 20 years of operation; and old firms are those with over 20 years of operation. Figure 9 displays reported firms’ attitudes towards investment made by asset and also by selected firm categories.13 Again, the majority of firms reported adequate levels of investment across all firm categories and assets. Despite this general pattern, larger shares of firms operating in the industry sector reported unsatisfactory levels of investment 13 Intangible assets are not included in Figure 9 due to the low number of observations preventing further breakdown into categories. 0% 20% 40% 60% 80% 100% Young Old Micro Small-Medium Export - No Export - Yes Industry Services Other sectors Young Old Micro Small-Medium Export - No Export - Yes Industry Services Other sectors Young Old Micro Small-Medium Export - No Export - Yes Industry Services Other sectors (b) Transport Invested less Adequate investment (a) Buildings (c) Machinery Quarterly Economic Commentary – Autumn 2018 | 85 when compared to the other sectors, regardless of the type of asset considered. Dissatisfaction with the level of investment affected higher shares of micro firms, again for all three types of assets considered. A larger share of exporting and older firms reported unsatisfactory investment when compared to non-exporting and younger firms respectively, for machinery, but not for transport and buildings. FIGURE 10 NON-INVESTING AND UNSATISFIED INVESTING FIRMS’ ATTITUDES – TOTAL Reason % of non-adequate capacity firms Insufficient internal funds 40.64 No external finance 11.16 Uncertainty 26.69 Other 21.51 Source: ESRI. Figure 10 explores the motives of the sub-sample of Irish SMEs which did not invest and those SMEs which were unsatisfied with the level of investment performed. The majority of firms, 63 per cent, stated that their current capacity was adequate and therefore no investment was deemed necessary. Out of the remaining 37 per cent of firms, the main reason for the unsatisfactory investment (or lack of) was the unavailability of sufficient internal funds, followed by uncertain economic or sector prospects. Only a very small percentage of SMEs, 11.2 per cent, reported the unavailability of external finance as the reason behind their unsatisfactory investment activities. Adequate current capacity 63% Insufficient internal funds 15% No external finance (%) Uncertainty (%) Other 8% 86 | Quarterly Economic Commentary – Autumn 2018 FIGURE 11 NON-INVESTING AND UNSATISFIED INVESTING FIRMS’ ATTITUDES (a) Non-investing firms (b) Unsatisfied investing firms Reason % of non-adequate capacity firms Insufficient internal funds 34.72 No external finance 9.72 Uncertainty 30.56 Other 25.00 Reason % of non-adequate capacity firms Insufficient internal funds 46.59 No external finance 12.50 Uncertainty 25.00 Other 15.91 Source: ESRI. In Figure 11, the statistics previously discussed in Figure 10 are presented for non-investing (Chart (a)) and unsatisfied investing firms (Chart (b)) separately. The percentage of firms that despite having an unsatisfactory capacity did not invest was 26 per cent. Again, the unavailability of internal resources emerged as the main explanatory factor, as for non-investing firms this was main reason behind the lack of investment. In addition, most investing firms reported insufficient internal funds as the motive for their unsatisfactory investment level. An uncertain economic prospect was the next reason in importance for both subsamples of firms. Difficulties accessing eternal finance appear to be again the least important factor for either not investing or not reaching a satisfactory investment level. 5. EXPLORING INVESTMENT FINANCING AND INVESTMENT PLANNING After identifying the investment profiles and constraints of Irish SMEs in the previous sections, this section is concerned with the sources firms are using in order to fund investment. The main objective is to identify whether factors such as the costs or the accessibility of the different funding sources might be preventing investment. Adequate current capacity 74% Insufficient internal funds 9% No external finance (%) Uncertainty (%) Other 6% Adequate current capacity 14% Insufficient internal funds 40% No external finance (%) Uncertainty (%) Other 14% Quarterly Economic Commentary – Autumn 2018 | 87 The main novelty of the statistics reported in this section is that they provide separated information on the financing sources across different types of assets, from large (i.e. buildings) to smaller fixed assets. This section also examines the liquidity levels of Irish SMEs in 2016. FIGURE 12 FIXED ASSETS FUNDING SOURCES (a) Buildings (b) Other fixed assets Source: ESRI. Note: ‘Other’ category includes owners’ contribution, supplier credit or external equity, and leasing-hire purchases for building investment. Figure 12 displays the percentage of investing firms using different funding sources to cover the costs of investing in large and smaller fixed assets. The majority of firms used internal funds, regardless of the asset type. Larger differences emerge when looking at the use of external financing provided by banks, since 13 per cent of firms resorted to this source of finance to fund building investment as opposed to a much smaller 6 per cent of firms that used this source of finance to fund investment in other types of assets. Overall, Figure 12 suggests that SMEs do not seem to match funding sources and asset nature. Again, the percentages displayed in Figure 12 for all investing firms are further analysed by different categories in Figure 13. Despite the further breakdown, it is clear that internal funds are the main source of investment funding regardless of the firm category and type of asset. Internal funds 69% Bank 13% Other 18% Internal funds 69% Leasing/ hire purchase 12% Bank 6% Other 13% 88 | Quarterly Economic Commentary – Autumn 2018 FIGURE 13 FIXED ASSETS FUNDING SOURCES BY CATEGORY Source: ESRI. Note: ‘Other’ category includes owners’ contribution, supplier credit or external equity and leasing-hire purchases for building investment. Young firms are defined as those with less than 20 years of operation, and old firms are those with over 20 years of operation. The largest variation in funding sources for building investment emerges across sectors and age. Bank borrowing was used by larger shares of young and industry sector firms in order to fund investment in buildings. Fewer firms operating in the industry sector used internal funds than in any other category for this type of asset. Sector categories present again the most variation in funding sources for the case of other fixed assets. Bank borrowing and leasing and hire purchases were used by larger shares of firms operating in the industry sector in order to fund investment in smaller fixed assets. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Young Old Export - No Export – Yes Micro Small/Medium Industry Services Other sector (a) Buildings 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Young Old Export - No Export – Yes Micro Small/Medium Industry Services Other sector (b) Other fixed assets Internal funds Leasing/hire purchase Bank Other Quarterly Economic Commentary – Autumn 2018 | 89 Given the importance of internal funds as a source of investment financing identified in Figures 12 and 13, the liquidity of SMEs is explored in Figures 14 to 16 and Tables 3 and 4 below. FIGURE 14 % LIQUID ASSETS DISTRIBUTION Source: ESRI. Figure 14 displays the histogram of the distribution of the percentage of liquid assets on total firm assets for all firms. Most firms reported to have at least 50 per cent of assets in the form of liquid assets. A slightly higher concentration of observations below the 50 per cent value can be observed. According to Table 3, the vast majority of firms, nearly 95 per cent, reported availability of liquid assets in 2016. The average level of liquid assets was €765,493; however the median was €225,000, again much lower than the mean. The distribution of the value of liquid assets across all firms, displayed in Figure 15, is highly skewed to the left indicating a higher concentration of firms around the lower values of liquid assets. The percentage of firms with liquid assets, and mean and median value of liquid assets, are all higher when considering investing firms only. 90 | Quarterly Economic Commentary – Autumn 2018 FIGURE 15 LIQUID ASSETS LEVEL Source: ESRI. Note: Value capped at €3,000,000. The average values of two different ratios are also reported in the last two columns of Table 3. The first one is the investment-to-liquid assets ratio, which gives an indication of the availability of liquid assets relative to the investments made by investing firms. On average, the value of investments represented roughly 40 per cent of the liquid asset level of both the total sample and investing firms in 2016. TABLE 3 FIRM LIQUIDITY % firms with liquid assets Liquidity levels Ratios Mean Mean Median Investment/ Liquid assets Liquid assets/ Turnover Total 94.82 765,493 225,000 - 0.35 Investing firms 97.50 897,498 269,000 0.40 0.32 Source: ESRI. The second ratio is the level of liquid assets over the level of firm turnover in 2016. This can be interpreted as the ‘saving’ capacity of firms. The average value of this ratio for all firms was 0.35, indicating that liquid assets represented on average about one-third of total turnover in 2016. Unsurprisingly, the ratio is lower on average for investing firms. This ratio is reported by firm category in Table 4 and the distribution for all firms is displayed in Figure 16. Quarterly Economic Commentary – Autumn 2018 | 91 TABLE 4 LIQUID ASSETS/TURNOVER RATIO BY CATEGORY Liquid assets/Turnover Total Investing firms Age category 1 0.28 0.26 Age category 2 0.35 0.30 Age category 3 0.38 0.35 Export – UK 0.39 0.46 Export – Other 0.37 0.34 Export – No 0.34 0.28 Micro 0.38 0.34 Small 0.32 0.30 Medium 0.36 0.33 Industry 0.31 0.29 Services 0.37 0.33 Other sectors 0.34 0.28 Source: ESRI. The ratio is higher on average for older and more established firms, exporting firms, micro firms and firms operating in the services sector. When investing firms are considered separately, all ratios are on average lower, except for UK exporting firms. For this category of firms, the average ratio of investing firms is higher than for all firms. The distribution of the liquid assets-to-turnover ratio is again skewed to the left. FIGURE 16 LIQUID ASSETS/TURNOVER RATIO Source: ESRI. Note: Ratio capped at 1. 92 | Quarterly Economic Commentary – Autumn 2018 The ratio of total investment level to the level of liquid assets in 2016 is also explored in more detail in Table 5. The first two columns display the percentage of firms classified above or below 0.5 ratio value, respectively. The third column displays the percentage of observations for which the value of the ratio is 1 or above. TABLE 5 INVESTMENT/LIQUID ASSETS RATIO 0 < Ratio < 0.50 0.50 ≤ Ratio < 1 Ratio ≥ 1 Total 75.32 12.98 11.70 Age category 1 64.79 19.72 15.49 Age category 2 72.53 14.84 12.64 Age category 3 81.11 9.22 9.68 Export – UK 80 11.67 8.33 Export – Other 82.14 4.76 13.10 Export – No 72.7 15.34 11.96 Micro 64.85 18.18 16.97 Small 81 11.31 7.69 Medium 80.95 7.14 11.9 Industry 68.32 14.85 16.83 Services 76.45 12.63 10.92 Other sectors 80.26 11.84 7.89 Source: ESRI. Note: Age category 1, less than ten years; age category 2, ten to 25 years; age category 3, more than 25 years. Three-quarters of investing firms had an investment-to-liquid assets ratio lower than 0.50, which indicates that the value of investments made in 2016 represented less than half of their level of liquid assets in the same year. For some firm categories however even higher percentages of firms (above 80 per cent) had a ratio below 0.50, such as for firms operating for over 25 years, exporting firms or small and medium sized firms. This finding suggests a low need for external funds in order to invest. The third column provides a rough indication of the percentage of investing firms that would not be able to fund their 2016 investments solely resorting to internal resources, therefore requiring external finance sources to cover the level of investment. This is the case for about 12 per cent of all investing firms. Some variation exists however when this figure is disaggregated by firm category. Almost 18 per cent of firms in the micro and industry sector categories have a ratio above 1, suggesting that these types of firms may have higher need for external finance. Quarterly Economic Commentary – Autumn 2018 | 93 TABLE 6 LENGTH OF LONG-TERM DEBT Mean Median Min. Max. Total 8.59 7 3 60 Less 10 years 7.74 5 3 60 10-25 years 7.44 6 3 20 More 25 years 9.60 8 3 30 Micro 8.48 6 3 25 Small 8.49 6 3 60 Medium 8.92 7 3 30 Source: ESRI. Note: Age category 1, less than ten years; age category 2, ten to 25 years; age category 3, more than 25 years. The low use of external funds is reflected in the prevalence of long-term debt uptake for SMEs in the sample. Almost three-quarters of firms (73.6 per cent) did not have any long-term debt in 2016. Notably, the percentage of firms without long-term debt was slightly higher (76.2 per cent) for firms operating for less than ten years. These firms would have been established predominantly after the financial crisis, and therefore they would not have had debt overhang originating from before the crisis. Table 6 provides an overview of the average length of the long-term debt for the remaining one-quarter of SMEs which had incurred debt. The median debt term was seven years, although variation across selected firm categories can be noted. The median is the lowest for firms operating for less than ten years. It increases with firm age, as well as with firm size. 6. CONCLUSIONS AND POLICY IMPLICATIONS The new investment and assets module on the credit demand survey was developed to address clear data gaps in our understanding of Irish SME investment activity. A number of important conclusions emerge that provide insight for policy but also suggest additional avenues for future research. In terms of the patterns of investment across Irish SMEs, it is clear there are considerable differences by the type of asset. Overall 80 per cent of SMEs invested in either staff or other assets. However, this was mainly driven by staff investment which was undertaken by nearly 70 per cent of small and medium companies. The share of companies investing in fixed assets (building, machinery, equipment) was 50 per cent. Only 7 per cent of SMEs invested in intangible assets. The median investment level was €22,000 which represented 20 per cent of the size of total assets of the firm on average. Investment levels were higher for fixed assets (€45,000 median) than for staff or intangibles. Indeed, the median investment level was 4.5 times higher for fixed assets than intangible assets. 100 | Quarterly Economic Commentary – Autumn 2018 TABLE A.1 CONTD. Building investment satisfaction, 2016 Transport investment satisfaction, 2016 Machinery investment satisfaction, 2016 Intangibles investment satisfaction, 2016 No investment/Invested less than desired – Reasons, 2016 Building investment – Funding sources, 2016 Other fixed assets investment – Funding sources, 2016 Value of staff training, 2016 Value of staff training, 2015 Internal rate of return calculation dummy Hurdle rate calculation dummy Investment uncertainty level Source: ESRI. Quarterly Economic Commentary – Autumn 2018 | 101 APPENDIX II TABLE A.2A PERCENTAGES OF INVESTING FIRMS BY CATEGORY Total assets Buildings Transport Machinery Intangibles Staff Export – UK 63.39 17.24 39.66 41.74 11.30 74.55 Export – Other 70.00 16.67 32.48 50.96 10.69 74.15 Export – No 46.40 13.94 22.60 32.62 5.83 63.96 Age category 1 45.79 12.31 16.75 40.40 8.63 72.25 Age category 2 50.54 12.16 26.74 31.87 7.26 64.63 Age category 3 53.36 17.55 27.75 37.48 6.01 65.77 Micro 42.25 11.64 22.53 26.71 5.65 43.68 Small 59.40 15.80 30.67 41.60 8.73 80.32 Medium 53.30 18.61 21.59 44.00 5.98 92.34 Industry 54.58 13.89 37.05 39.44 9.06 75.11 Services 49.66 14.68 24.15 33.55 6.35 62.10 Other 51.83 15.23 16.33 39.59 6.44 73.14 Source: ESRI. 102 | Quarterly Economic Commentary – Autumn 2018 TABLE A.2B INVESTMENT LEVEL AND RATES BY CATEGORY Total assets Buildings Transport Machinery Intangibles Staff Export – UK Mean 105,268 109,250 52,065 64,052 17,385 10,845 Median 52,000 30,000 30,000 20,000 10,000 5,000 Rate 0.20 0.23 0.09 0.11 0.07 0.02 Export – Other Mean 160,718 242,308 62,351 100,318 33,767 22,243 Median 70,000 200,000 50,000 30,000 20,000 10,000 Rate 0.18 0.14 0.14 0.08 0.06 0.01 Export – No Mean 91,850 103,000 49,390 46,330 19,402 9,550 Median 37,000 35,000 30,000 15,000 10,000 4,270 Rate 0.23 0.13 0.19 0.11 0.05 0.02 Age category 1 Mean 87,223 89,083 65,546 39,610 23,153 7,693 Median 45,000 55,000 50,000 15,000 5,000 400 Rate 0.31 0.25 0.22 0.18 0.06 0.03 Age category 2 Mean 96,530 114,903 49,232 60,622 22,601 11,594 Median 35,000 25,000 30,000 19,000 10,000 4,270 Rate 0.25 0.13 0.17 0.11 0.07 0.02 Age category 3 Mean 118,528 137,455 51,057 64,095 20,682 12,876 Median 50,000 42,500 30,000 20,000 10,000 500 Rate 0.16 0.11 0.16 0.07 0.04 0.01 Micro Mean 54,671 66,659 39,022 22,324 9,383 3,441 Median 20,000 15,000 25,000 8,000 5,000 2,000 Rate 0.34 0.20 0.28 0.15 0.06 0.03 Small Mean 101,712 118,395 55,485 52,179 28,095 10,063 Median 50,000 42,500 40,000 20,000 20,000 5,000 Rate 0.17 0.12 0.12 0.09 0.06 0.02 Medium Mean 208,662 210,864 70,888 120,612 29,645 23,197 Median 120,000 112,000 50,000 50,000 15,000 12,600 Rate 0.09 0.09 0.03 0.06 0.01 Industry Mean 119,618 88,143 42,672 93,944 21,152 11,220 Median 63,000 40,000 30,000 25,000 10,000 5,000 Rate 0.37 0.23 0.25 0.13 0.05 0.02 Services Mean 99,962 126,107 57,573 45,428 19,592 10,131 Median 35,500 30,000 30,000 15,000 6,000 4,000 Rate 0.18 0.12 0.14 0.09 0.06 0.02 Other sector Mean 106,814 155,433 45,656 55,833 32,354 16,605 Median 45,000 55,000 40,000 19,500 20,000 6,000 Rate 0.17 0.12 0.14 0.10 0.04 0.02 Source: ESRI. Quarterly Economic Commentary – Autumn 2018 | 103 APPENDIX III The two tables in this Appendix provide information on the characteristics of the sample by sector. In the statistics reported, construction and manufacturing sectors have been grouped in the Industry category; and wholesale and retail (W&R), hotels and restaurants (H&R) and professional and scientific (P&S) have been grouped in the Services category. TABLE A.3A FREQUENCY (NUMBER OF OBSERVATIONS – UNWEIGHTED) Frequency (no. observations) – Unweighted Construction Manufacturing W&R H&R P&S Other Less than 10 years 22 21 65 44 52 44 10 to 25 years 53 69 167 54 87 103 More than 25 years 63 94 225 50 117 89 Micro 61 60 191 26 128 125 Small 56 81 216 71 83 63 Medium 21 43 50 51 45 48 Export – UK 6 31 52 0 25 14 Export – Other 9 61 38 1 48 28 Export – No 123 88 365 147 181 192 Total 138 184 457 148 256 236 Source: ESRI. TABLE A.3B PERCENTAGE OF OBSERVATIONS (UNWEIGHTED) % of observations – Unweighted Construction Manufacturing W&R H&R P&S Other Less than 10 years 1.55 1.48 4.58 3.1 3.66 3.1 10 to 25 years 3.74 4.86 11.77 3.81 6.13 7.26 More than 25 years 4.44 6.62 15.86 3.52 8.25 6.27 Micro 4.3 4.23 13.46 1.83 9.02 8.81 Small 3.95 5.71 15.22 5 5.85 4.44 Medium 1.48 3.03 3.52 3.59 3.17 3.38 Export – UK 0.43 2.2 3.69 0 1.77 0.99 Export – Other 0.64 4.33 2.7 0.07 3.41 1.99 Export – No 8.73 6.25 25.9 10.43 12.85 13.63 Total 9.73 12.97 32.21 10.43 18.04 16.63 Source: ESRI. Whitaker Square, Sir John Rogerson’s Quay, Dublin 2 Telephone +353 1 863 2000 Email [email protected] Web www.esri.ie Twitter @ESRIDublin ISSN 0376-7191 ISBN 978-0-7070-0467-9