Central Bank of Ireland Quarterly Bulletin Q4 2014   

3 October 2014

The Central Bank of Ireland today published Quarterly Bulletin Q4 2014.


The recovery in the Irish economy has gained momentum and is broadening, though the underlying strength of the economy is less than that suggested by the recent exceptionally buoyant Quarterly National Accounts data.  However, while the latest year-on-year headline growth rate overstates the scale of the improvement in economic performance, the evidence from a range of other data indicates that the recovery has strengthened and is becoming more balanced. Encouragingly, the domestic economic recovery has become more broad-based, supported by gradually improving employment and incomes. Against this background, consumer spending is growing and, allied to strong growth in investment spending, domestic demand is set to contribute positively to growth in 2014, for the first time since the downturn.

The first half of 2014 has also seen a very strong acceleration in recorded export growth. This reflects the positive effect of stronger growth in trading partner countries, some recovery in the output and exports of the pharmaceutical sector, as the impact of patent expirations eases, but also, significantly, the impact of methodological changes recently introduced in the National Accounts. As a result of these changes, goods owned by an Irish entity that are manufactured in and shipped from a foreign country are now recorded as Irish exports.

Looking ahead, reflecting the strong performance of exports in the first half of the year, favourable external demand conditions and a further easing in the impact of the patent cliff on pharmaceutical exports, the outlook for export growth in 2014 has been revised up significantly as compared to the forecasts contained in the last Bulletin. For next year it is assumed that exports will largely grow in line with demand in trading partner countries which, while still generating a strong growth rate, would represent a slowdown in export growth as compared to 2014. On the domestic side, reflecting the stronger first-half performance and a gradually improving outlook, the forecasts for consumer and investment spending for 2014 and 2015 have also been revised higher. While further growth in employment should stimulate some increase in household incomes, high unemployment and debt levels remain headwinds to any strong recovery in consumer spending.

Largely as a result of the strong upward revision to the export projections, the outlook for GDP growth in 2014 has been raised significantly as compared to the forecasts published in the previous Bulletin. GDP growth of 4.5 per cent is now projected for this year, an upward revision of 2.0 per cent relative to the previous projection, while the forecast for GNP growth of 4.9 per cent is also correspondingly higher. A much smaller revision is being made to our forecasts for 2015, for which GDP growth of 3.4 per cent and GNP growth of 3.1 per cent are forecast, just 0.1 per cent and 0.4 per cent higher than the projections contained in the previous Bulletin.

Turning to policy issues, since exiting the EU/IMF Programme, Ireland has benefitted from signalling that it will continue along the path of consolidation and adjustment. In the absence of external oversight, markets will look more closely to ensure that Ireland continues to build on the achievements of recent years. Further progress in policy implementation across a range of areas will be crucial in order to reduce vulnerabilities and ensure a sustainable return to steady growth.

With respect to the public finances, reflecting the improvement in the economy, Exchequer data have been favourable. Tax revenues have grown ahead of target and expenditure has remained broadly on track which, when combined with the projected higher level of nominal GDP, leaves the 2014 General Government Deficit on course to come in well below target. While this provides a favourable background to Budget 2015, it is important to stress that a 3 per cent deficit-to-GDP ratio is not an end-point. Budget 2015 will be the first in a series of post-Troika budgets that will need to ensure that Ireland moves progressively towards meeting the medium-term budgetary objectives. In the short-term, it would be advisable to take advantage of temporary revenue surges to reduce debt more quickly, thereby easing the vulnerability that continues to result from the overhang of indebtedness. Thus, doing more than the minimum necessary and bringing the budget deficit comfortably below 3 per cent of GDP in 2015 would provide an important buffer to guard against adverse shocks. This first post-programme Budget offers the opportunity to further solidify Ireland’s reputation for creditworthiness. It is important that this opportunity is taken. Beyond 2015, it is imperative to facilitate the return of the economy to lower and safer levels of public debt. Securing debt sustainability through a sequence of primary surpluses is necessary to underpin a more durable recovery. Just as unexpectedly unfavourable developments resulted in unwanted increases in public debt in recent years, windfall revenue gains should be employed to reduce that debt.

In the banking sector, liquidity and funding positions are continuing to improve and are returning to a more sustainable profile. Bank profitability is also continuing to show signs of recovering. The key issues, however, revolve around making further progress in dealing with the resolution of impaired loans, which continues to cloud the sector as it deleverages. Using the mortgage arrears resolution targets, the Central Bank has required the banks to accelerate the conclusion of sustainable long-term arrangements with customers in arrears. The most recent data indicate that long-term arrears have fallen for the third successive quarter, although 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 banks and mortgage borrowers in arrears move to conclude durable solutions. The Bank also continues to monitor and audit the progress of banks in resolving arrears in relation to commercial and SME portfolios. While challenging, progress is being made and the balance sheets of banks and their borrowers are gradually being repaired.

Although, with overall lending volumes still low, bank credit has not been the main driver of the recent surge in Dublin property prices, lenders will need to exercise prudence in mortgage lending standards.

Turning to competitiveness, it is important to ensure not only that the gains made in recent years are maintained but that there continues to be further improvement in Ireland’s competitiveness. To the extent that price and wage developments over the past five years have been a cyclical response to economic weakness rather than to structural changes in the economy, there is the risk that a stronger than expected recovery exerts pressure for a rebound in wages and prices. This must be resisted. Despite low levels of inflation in recent years, Ireland remains a relatively high cost location in terms of the broad cost environment. While gaining momentum, Ireland’s economic recovery is still at an early stage. A strong external performance will remain central to ensuring a sustainable return to steady growth and rising living standards in the future. Further improvements in productivity and competitiveness would boost Ireland’s growth potential and support continued employment growth.