Staff from the European Commission, in liaison with staff from the European Central Bank, visited Dublin from 28 November to 1 December to conduct the eighth post-programme surveillance (PPS) review for Ireland.
This was coordinated with an International Monetary Fund’s Staff visit. Staff from the European Stability Mechanism also participated in the meetings on aspects related to its Early Warning System. The main objective of PPS is to assess the country’s capacity to repay loans granted under the former EU-IMF financial assistance programme and, if necessary, to recommend corrective actions.
The strong momentum in the Irish economy is expected to continue in the short term, but risks remain tilted to the downside. While the headline figures remain volatile and heavily influenced by the activities of multinational enterprises, underlying domestic activity is growing at a solid pace, buoyed by robust employment growth, private consumption and strong investment in construction. Risks to the economic outlook relate primarily to the outcome of the negotiations regarding the UK’s exit from the European Union and potential changes to the international taxation environment. Risks could also arise in the event of continued strong increases in property prices over the medium term.
Public finances have further improved on the back of robust output growth, yet risks of volatility in some forms of tax revenue, such as corporate income tax, remain. Overall government expenditure in 2017 has so far been within budget allocations notwithstanding slippages in some departments. The general government deficit is expected to decline further in the near term, although progress in making the public finances more resilient has slowed in recent years. Irish public indebtedness has diminished, but remains elevated. The strong cyclical situation coupled with heightened economic uncertainty over the medium-term implies a strong case for building significant countercyclical fiscal buffers, also by broadening the tax base.
Banks continue to improve their resilience. They have further strengthened their regulatory capital positions, which should help them prepare for upcoming regulatory requirements, while continuing to deal with legacy issues. Strong economic growth and continued investor appetite for Irish assets are helping to improve the banks' overall asset quality. Although a recovery in credit demand can be observed for certain categories of loans, repayments are still larger, which weighs on some banks’ profitability. Concerns remain that the draft bill enabling the Central Bank of Ireland (CBI) to cap interest rates on variable rate mortgages, if enacted, could have negative implications for the transmission of monetary policy, financial stability and bank competition.
While there has been a notable reduction in non-performing loans, efforts to deal with legacy issues should be sustained. The stock of non-performing loans, which remains a key area of focus for the banks and regulatory authorities, continues to decline, although the pace of decline has slowed and the high share of long-term mortgage arrears remains a concern. Although rising property prices are supporting the repair of banks' and households' balance sheets, the sustainability of such developments warrants continued attention. The handling of tracker mortgages is the subject of a continuing examination by the CBI.
Persistent supply shortages coupled with increased demand continue to drive strong increases in residential property prices and rents. Annual house price growth reached a two-year high in September 2017 and rents are above their peak 2008 level. Residential property transactions remain subdued overall on the back of the limited housing stock. The government is taking a number of measures to support the recovery of supply. New mortgage credit is starting to increase, albeit from a low base. The macro-prudential framework is crucial for ensuring households’ and banks’ resilience going forward.
The mission would like to thank the Irish authorities for the helpful and open discussions.
The next PPS mission is planned to take place in the spring of 2018.
1 December 2017