The Central Bank of Ireland Q1 2015: Irish economy recovery broadened and gained momentum over the past year

Dublin, Ireland, 5-2-2015 — /EuropaWire/ — The recovery of the Irish economy has broadened and gained momentum over the past year. Recovery has been led by strong growth in exports and investment, and is also being supported by the resumption of growth in consumer spending. The latter has been helped by the continuing growth in employment, which even though slowing somewhat, has allowed the unemployment rate to continue to decline steadily. With consumer and investment spending both rising, domestic demand contributed positively to growth in 2014 for the first time since the downturn.

Notwithstanding the improved performance of the domestic side of the economy, however, the main driver of growth over the past year has been the exceptionally strong exportperformance. In part, this appears to have been due to some special factors. In 2014, exports grew much faster than import demand in trading partner countries, with the difference accounted for by a large contribution to export growth from contract manufacturing outside Ireland (arising when goods owned by an Irish entity are manufactured in and shipped from a foreign country). Viewing this surge in export growth as a temporary factor suggests that the underlying strength of the recovery over the past year is less than signalled by the currently projected increase in GDP growth for 2014 of just over 5 per cent.

Looking ahead, it is expected that, this year and next, exports will return to growing broadly in line with projected growth in external demand. Helped by Ireland’s trade links with the more strongly growing US and UK markets, this will continue to generate a strong growth rate for exports, although representing a slowdown as compared to 2014. On the domestic side, an improving labour market and rising real disposable incomes should lend greater support to consumer spending in 2015 and 2016, though high levels of indebtedness remain a headwind to any strong recovery in consumption. While moderating slightly from its current rate, investment is projected to grow solidly in coming years, continuing to rebound from the earlier extended period during which investment had fallen to relatively low levels.

Taking account of these developments suggests a stronger outturn for GDP growth last year, and also a slightly stronger outlook for this year, than previously forecast. As a result of the exceptional strength of export growth in 2014, GDP is now estimated to have grown by 5.1 per cent last year. Reflecting a favourable outlook for consumer and investment spending this year, GDP growth of 3.7 per cent is forecast for 2015, an upward revision of 0.3 per cent relative to the previous projection, while the forecast for GNP growth of 3.3 per cent is 0.2 per cent higher.

In 2016, on the basis of forecasts of growth in trading partner countries from the main international economic institutions and supported by some further strengthening of domestic demand, GDP is forecast to grow by 3.8 per cent, with GNP projected to rise by 3.5 per cent. Risks to these forecasts are judged to be balanced, with some possible upside potential from domestic factors, exchange rates and oil prices, offset by some potential downside risk on the external side, while future inflation could also be affected by oil price movements.

Turning to policy issues, progress in creating the conditions for a sustainable economic recovery has benefitted from fiscal and financial policies continuing along the path of consolidation and adjustment. Following such a policy path has also allowed Ireland to benefit significantly from current highly favourable international financial conditions. While much progress has been made, high public and private indebtedness persists and some key vulnerabilities remain. To reduce these vulnerabilities, and ensure a sustainable return to steady growth, policy needs to continue to build on the achievements of recent years and focus on strengthening resilience.

With respect to the public finances, benefitting from stronger than expected growth in 2014 and some windfall revenues, Exchequer developments have been favourable. Tax revenues have grown ahead of forecast and, despite some expenditure overrun, when combined with the projected higher level of nominal GDP, leaves the deficit on course to have fallen to about 4 per cent of GDP in 2014, well below target. While this improvement is welcome, deficit and debt levels still remain very high. To meet the medium-term budgetary objective and to build a buffer to guard against any future adverse shocks, further consolidation will be needed in coming years.

This would help to put the debt-to-GDP ratio firmly on a downward path and enhance sustainability. In the banking sector, progress in repairing the banking system and moving to improve the resilience of both banks and their customers has advanced. The outcome of the Comprehensive Assessment was broadly in line with expectations and the transition to the SSM has been made. While more remains to be done, progress is being made in dealing with the resolution of impaired loans and the Central Bank will continue to work to ensure that banks and mortgage borrowers in arrears move to conclude durable solutions.

Following a consultation and review process, in late January, the Central Bank announced the introduction of new regulations which will apply proportionate limits to residential mortgage lending. The measures introduce proportionate limits for loan to value and loan to income ratios for principal dwelling houses and for loan to value ratios for buy to let mortgages. With respect to the loan to value ratio for principal dwelling houses, a higher loan to value limit has been set for first time buyers on the first €220,000 of the value of a residential property.

The key objective of the new regulations is to increase the resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and house price spirals developing in the future. The Central Bank does not wish to regulate or directly control house prices. It is expected that the new regulations will be introduced under legislation shortly. The limits are supplementary to individual banks credit policies and are not designed as a substitute for lenders responsibilities to assess affordability and lend prudently on a case-by-case basis. Although they have been designed to be stable, the regulations are flexible enough to be adjusted in the future to economic, market or other developments, should the need arise.


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