OREANDA-NEWS. April 02, 2015.

The Central Bank of Ireland has today published Quaterly Bulletin Q2 2015.

Comment

The momentum of recovery in the Irish economy continues to build and broaden, with domestic demand now making a significant positive contribution to growth. While the strength of net export growth was an important driver of the preliminary estimate of 4.8 per cent GDP growth last year, the recovery in the economy has become more balanced over the past year. Domestically, the continued strong increase in investment spending has been supported by the beginning of a recovery in consumer spending, which is showing signs of gradually strengthening. The pick-up in consumption has benefitted from continuing favourable labour market developments, in particular growth in employment, which is helping to boost incomes. With consumer and investment spending both growing, domestic demand added to growth last year for the first time since 2007. Notwithstanding the improved performance of the domestic side of the economy, the contribution to growth from net exports has remained sizeable. Last year witnessed exceptionally strong growth in both exports and imports, to a large extent, reflecting the impact of contract manufacturing outside Ireland (arising when a company in Ireland contracts a company abroad to manufacture products on its behalf). Given the high import content of Irish exports, the growth in offshore manufacturing activity in 2014 significantly increased the National Accounts measures of both exports and imports on a gross basis last year.

While there is some uncertainty, it is assumed that the contract manufacturing effect in 2014 represented a step increase in the level of exports and imports and not a lasting upward shift in their growth rates. Looking ahead, therefore, it is assumed that exports will return to growing broadly in line with projected growth in external demand. Given Ireland’s trade links with the more strongly growing US and UK markets and the potential impact of ECB quantitative easing on euro area growth and the euro exchange rate, exports are projected to grow at a relatively strong rate over the forecast horizon. 

On the domestic side, the momentum of recovery is building and it is envisaged that growth will increasingly be driven by domestic sources in coming years. Higher frequency indicators suggest that the improvement in domestic demand seen in the second-half of 2014 has carried into the early part of 2015. This year and next, further increases in employment and rising real disposable incomes should support a pick-up in the growth of consumer spending, which is projected to rise by slightly more than 2 per cent in both years. The strong momentum in investment spending is also projected to be maintained, with both construction and machinery and equipment investment expected to grow strongly, helping investment to continue to rebound from a low base.

While there is little change to the overall outlook for GDP growth in 2015 and 2016, as compared to the forecasts published in the last Bulletin, the composition of growth is slightly changed, with domestic demand now seen as making a stronger contribution than previously envisaged. GDP growth of 3.8 per cent and 3.7 per cent is projected for 2015 and 2016 respectively, representing an upward revision of 0.1 per cent for this year and a downward revision of a similar amount for next year. Risks to these forecasts are tilted slightly to the upside, largely reflecting upside potential from domestic factors and the impact of exchange rate movements.

Turning to policy issues, Ireland’s evolving economic recovery has benefitted from fiscal and financial policies moving steadily along Strong policy implementation has allowed Ireland, both the sovereign and banks, to benefit significantly from increasingly favourable international financial conditions. While much progress has been made and many of the legacies of the crisis are being overcome, the challenge is to ensure that the emerging economic recovery transitions into a sustainable return to steady growth and increasing employment. To achieve this outcome, policy needs to focus on reducing remaining vulnerabilities and strengthening resilience in order to minimise future risks to economic, fiscal and financial stability.

With respect to the public finances, while figures have yet to be finalised, the outturn for the General Government Deficit in 2014 is on course to have fallen to around 4 per cent of GDP, well below target, while the General Government Debt ratio declined for the first time since 2007. More recent data signal that Exchequer developments in the early months of 2015 have continued to be favourable and Ireland remains on course to exit the Excessive Deficit Procedure, on schedule, in 2015. While planned budgetary adjustment has been the main driver of the improvement in the fiscal position over time, the improving economic performance and interest bill reductions have come to play a more prominent role, offsetting spending overruns in 2014. With relatively strong economic growth in prospect, it is important that the fiscal stance does not exacerbate cyclical pressures. Steady progress towards the medium-term objective of budget balance in structural terms (that is, adjusted for the economic cycle) would help ensure this. Moreover, it would also help ensure that the level and burden of public debt, which still remains very high, would be reduced to lower and safer levels.

In the banking sector, while significant challenges remain, progress is being made and the balance sheets of banks and their borrowers are gradually being repaired. While the overall level of arrears has fallen further, there continues to be some migration of loans into the very long-term arrears category. The Central Bank will continue to work to ensure that mortgage borrowers in arrears move to conclude durable solutions. In addition to the need to deal with important legacy issues, the Bank has moved proactively to enhance the resilience of banks and borrowers and, by extension, the wider economy, to potential financial vulnerabilities. To this end, the Bank has introduced new regulations which apply proportionate limits, in the form of loan to value and loan to income ratios, to residential mortgage lending. 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.

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.  Recognising that mortgage lending is only one aspect in a larger housing market, efforts have been made to limit unintended consequences, through the exclusion of borrowers in negative equity from the application of the measures and the establishment of differentiated limits for first-time buyers, reflecting evidence that the latter have lower default rates. The Bank will monitor and assess the impact and effectiveness of the new measures as data becomes available.