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The Irish economy grew strongly in 2018, backed by buoyant domestic economic activity. Year-end data point to a small Exchequer cash surplus for 2018, driven by over-performing corporate tax receipts. Irish banks showed capital and liquidity buffers well above regulatory requirements, but long-term arrears, sectoral changes, and operational efficiency represent key challenges. The main risks to the economic outlook stem from Brexit, volatility related to the activity of multinational companies, and an overheating of the economy in the medium-run. These risks warrant the prudent accumulation throughout the upcoming years of a fiscal capacity.
Real GDP grew at an annual rate of 6.7% in 2018. ­Domestic demand indicators support the evidence of strong growth despite distortions from multinational corporations. Domestic demand adjusted for the activities of multinationals grew at an annual rate of 4.5% during the year, driven by private consumption and domestic components of investment.[1] The latest release for unemployment was 5.6% in February. The strong labour market and the still tight housing ­market ­represent supply-­­side constraints that could hamper future growth.
Consumer price inflation (CPI) remained subdued in 2018 despite robust internal demand and sustained employment growth. Goods prices are the main drag on inflation due to weak sterling and an improvement in the calculations of some CPI components, although their combined negative effect on prices is less than offset by increases in housing rents and higher service and energy prices.
Ireland’s general government balance was close to balance in 2018, as the Exchequer recorded a small surplus by end-2018. This is mainly due to better-than-expected corporation tax receipts. The high reliance of Ireland on this potentially unstable source of revenues makes the Irish fiscal position relatively vulnerable. Persistent slippages in health sector expenditures could further increase the fiscal vulnerability in Ireland. The general government debt remains above €200 billion and the debt-to-GDP ratio for 2018 was at 64%. However, such a ratio may be an imprecise measure of the debt ­burden for the economy given that the activities of multi­­national enterprises distort the GDP figures.
Ireland enjoys favourable market access. In 2018, it issued over €17 billion in benchmark bonds with a weighted average maturity at issuance of 11.8 years, and a weighted average yield at issuance of 1.1%. The National Treasury Management Agency has taken advantage of the favourable market conditions brought by the ECB’s asset purchases to lengthen the maturity profile of the debt and to reduce its average interest rate. Buy and sell orders of Irish government bonds were quite balanced during the second half of 2018, according to high-frequency indicators, following a spike in volatility in European sovereign bond markets in May. Strong economic growth, sizeable cash buffers, and an ‘A’ credit rating support Ireland’s favourable market access.
Irish banks showed signs of recovery in an improving operating environment. Banks’ active engagement in portfolio sales and restructuring helped to reduce non-performing loans (NPLs). However, the share of mortgages in long-term arrears is still sizeable. NPL resolution activities contributed to further reducing the coverage ratio, which compares unfavourably to the euro area average. Nevertheless, Irish banks’ capital and liquidity ratios sit well above the regulatory minimum requirement and provide additional buffers. In the long term, increasing competition and sectoral changes require banks to increase their digital capacity and improve their operational efficiency to stay profitable.
Under its Early Warning System, the ESM’s monitoring shows very limited risks for Ireland in meeting its loan service payments. However, Ireland faces a number of external downside risks and, potentially, an overheating domestic economy approaching full employment. These risks warrant the prudent accumulation throughout the upcoming years of a fiscal capacity and close monitoring of Ireland’s macroeconomic and financial market dynamics.
[1] Final modified domestic demand is composed of private and public consumption, and modified gross fixed capital formation (excluding aircraft related to leasing and R&D related intellectual property). Change in inventories is excluded given its high volatility.
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