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Ireland’s Prospects Bright, But Uncertain – ECB

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Ireland’s Prospects Bright, But Uncertain – ECB

Ireland’s Prospects Bright, But Uncertain – ECB
December 05
12:52 2016

The European Commission and ECB finished the sixth post-programme surveillance review for Ireland on Friday, December 2, in which they said that Ireland’s economic prospects remained bright, but warned that “some clouds are on the horizon”.

The main objective of review was to assess the country’s capacity to repay loans granted under the former EU-IMF financial assistance programme and to recommend corrective actions.

The report said that rapid economic growth in recent years has assisted the state finances, but that although changes in the global operations of some multinationals boosted the level of GDP in 2015, this had only limited benefits for the domestic economy in terms of household income and employment.

The report warned that although GDP is expected to continue to grow at robust rates, the future activities of multinational enterprises is uncertain and the external environment has become increasingly unpredictable especially after the UK ‘leave’ vote.

The report also said that the Irish government’s budget used a large part of the over-performing, but partly volatile, tax proceeds to fund additional current spending in 2016. The report did welcome the government’s announcement to reach a debt-to-GDP target 0f 45% by the late 2020’s.  The report also recommended a strengthening of public spending reviews, including in the healthcare sector.

The report said that despite significant progress in recent years, there was “ample” scope for further vigilance for the banking sector and that factors continuing to drag on bank profitability include the elevated stock of non-performing loans (NPLs) and low-yielding tracker mortgages, weak credit demand, difficulties in accessing collateral, and a risk that net interest margins begin to decline. The report said that the efforts to ensure that NPL accounts are sustainably restructured should continue, in particular, mortgage loans that have long been non-performing.

The report said that despite the recent pickup in new lending volumes, both households and firms continue to repay more than they borrow, resulting in a still largely credit-less economic recovery, and that market uncertainty persists, including in relation to the longer-term impact of the UK ‘leave’ vote on the banks.

The report also reccomended that Irish real estate markets need to be closely monitored. While the review found little evidence of house price overvaluation so far, recent price and rent increases have drawn attention to persistent housing supply bottlenecks. The review noted that the  government has repeatedly intervened in the housing market to support the recovery in the residential construction industry, but that it will take time to restore an adequate supply of new homes.  The review also found that since the Central Bank’s macro-prudential measures were announced in late 2014, house price expectations have moderated.

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