Staff from the European Commission, in liaison with staff from the European Central Bank, visited Dublin from 14 to 18 May to conduct the ninth post-programme surveillance (PPS) review for Ireland.
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.
Domestic economic activity is expected to stay robust in the short term, but risks remain. Underlying domestic demand continues to be supported by favourable labour market developments and strong construction investment. Unemployment is falling rapidly towards pre-crisis levels. The headline national accounts figures remain volatile and heavily influenced by the activities of multinational companies. External risks to the outlook relate primarily to the ongoing negotiations on the terms of the UK’s withdrawal from the European Union as well as changes to the international taxation and trade environment. The shortage of housing supply and continued significant increases in residential property prices and rents remain a major domestic challenge.
Standard public finance indicators have further improved underpinned by robust output growth. The general government deficit is expected to decline further in the near term. However, high external uncertainty puts an even greater premium on prudent fiscal policy. Risks of volatility in some forms of tax revenue, such as corporate income tax, remain. Prudent expenditure management remains crucial, while allowing for essential infrastructure investment. Irish public indebtedness has diminished, but remains elevated. The favourable cyclical situation combined with buoyant corporate tax receipts implies a strong case for accelerating deficit and debt reduction, or creating the envisaged Rainy Day Fund.
The current benign economic environment provides a window of opportunity to continue to reduce legacy non-performing loans (NPLs) in a decisive manner. The stock of NPLs, which remains a key area of focus for the banks and supervisory authorities, continues to decline, although the high share of long-term mortgage arrears remains a concern. Credit is picking up, initially driven by mortgages, and more recently also supported by lending to non-financial corporations. Although rising property prices have led to a reduction in bank loan loss reserves, the sustainability of such developments warrants continued attention. 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.
The marked increase in property prices and rents continues on the back of a still insufficient supply response. Certain indicators, such as price-to-rent or price-to-income (affordability) have exceeded their long-term average. Rents are above their previous peak recorded in 2008. Despite recent increases, housing supply remains below the level needed to address long-term housing demand adequately. Recent government measures to increase housing supply are going in the right direction, and will benefit from timely and efficient implementation.
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 autumn of 2018.
18 May 2018