The Department continues to use the EU harmonised methodology to estimate the level of potential output as it is the legally binding reference method used by the Commission for assessment of Member State’s compliance with the Stability and Growth Pact. However, to the extent that the harmonised methodology can be characterised as a “one size fits all” approach for estimating potential output, it is can produce estimates that are problematic when applied to Ireland.
In this regard, when issues with the methodology manifest themselves, the Department proactively engages with the European Commission to devise solutions that ensure potential output estimates remain plausible. For example, potential output estimates have been insulated from the 2015 GDP and capital stock distortions reported in the 2015 National Income and Expenditure accounts. Similarly, in the context of the Stability Programme Update (SPU) 2018, model adjustments were agreed with the Commission to account for distortions in the 2017 GDP estimate associated with contract manufacturing.
Furthermore, the Department actively contributes at a technical level in Europe through the Output Gap Working Group, which is chaired by a senior Department official, to improve the performance of the harmonised methodology.
Notwithstanding improvements to the methodology, the Department has developed a number of alternative statistical models to assist in its assessment of the medium term growth potential of the Ireland’s economy and its cyclical position over the short term, results of which have been summarised in Chapter 9 of the SPU 2018. This work is in conjunction with the application of the European Commission’s harmonised production function approach. These results, along with other economic indicators, are considered by the Department when assessing the cyclical position of the economy.