EU Commission publishes findings of 9th post-programme surveillance mission to Ireland
This report by the European Commission presents the findings of the ninth post-programme surveillance mission to Ireland and identifies remaining challenges for the Irish economy.
Read the Executive Summary below.
Download the full report here.
Staff from the European Commission visited Dublin in liaison with staff from the European Central Bank from 14 to 18 May to conduct the ninth post-programme surveillance (PPS) review for Ireland. The main objective of PPS is to assess the country’s capacity to repay the loans granted under the former EU-IMF financial assistance programme and, if necessary, to recommend corrective actions. Staff from the European Stability Mechanism participated in the meetings on aspects related to its own Early Warning System.
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 to 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 risk.
Public finances have further improved, underpinned by robust output growth. The general government deficit is expected to decline further in the near term. 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 income 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, supported by restructuring efforts, strong economic growth and investor appetite for Irish assets. Although long-term mortgage arrears are declining, their high level 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 contributed to a reduction in bank loan loss reserves, the sustainability of such developments warrants continued attention. Concerns remain that some legislative proposals could have unintended consequences, including 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 seems to remain 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.
Risks for Ireland's capacity to service the European Financial Stability Mechanism (EFSM) and European Financial Stability Facility (EFSF) debt remain low. The sovereign's financing situation is comfortable and the National Treasury Management Agency (NTMA) plans to maintain strong cash buffers in advance of large redemptions over the medium term, notably in 2019 and 2020. Market access conditions for the Irish sovereign remain favourable. The debt sustainability analysis shows that the public debt-to-GDP ratio is expected to decrease further in the medium-term but remains vulnerable to economic shocks.
The next PPS mission is planned to take place in autumn 2018.
Download the full report here.