Central Bank of Ireland : Quarterly Bulletin 1 2014

29 January 2013

The Central Bank of Ireland today published Quarterly Bulletin 1 2014.

Comment

Ireland has emerged from the EU/IMF Programme against a background of increased market confidence in the outlook for the country's economic performance and policy prospects. This has been reflected in an improvement in the market's assessment of Ireland's creditworthiness, helping the Sovereign and domestic banks to regain access to market funding at, increasingly, more favourable rates. The key to the return of market confidence, to the extent that now exists, has been the combination of strong policy implementation over the period of the Programme and growing signs of gradually improving economic conditions. Particularly important has been adherence to the fiscal targets, which has brought about a reduction in the General Government Deficit, leaving it on track to fall below 3 per cent of GDP by 2015. With the ending of the EU/IMF Programme, continuing to build on the achievements of recent years will be crucial to ensuring continued access to market financing at relatively favourable rates into the future.

More significantly, further progress in terms of policy implementation across a range of areas is required before Ireland can be considered to have recovered from the crisis. The main challenges remain the need for further fiscal consolidation, restoring banking soundness and sustaining the rebound in employment growth through improvements in competitiveness. While much has been achieved, creating the conditions for a sustainable economic recovery will require further reductions in the level of debt in the economy, both public and private, returning the banking system to a position where it can support the economy with adequate lending, and getting the rate of employment well up from the low level to which it had fallen in the crisis. To ensure that these challenges are overcome, continued adherence to the policies that were in place during the Programme remains essential.

With respect to the public finances, the latest estimates suggest that the General Government Deficit for 2013 should come in below the 7.5 per cent of GDP target under the Excessive Deficit Procedure. Projections indicate that the debt-to-GDP ratio has peaked and at a slightly lower level than previously expected. While these are welcome developments, deficit and debt levels remain very high and further consolidation is needed in coming years to put debt firmly on a downward path and secure sustainability. Through reducing uncertainty, this should contribute to a faster and more lasting recovery and also reinforce the confidence of international lenders and further improve access to market funding.

In the banking sector, while liquidity and funding conditions have improved, the key issues revolve around the need for further progress in dealing with the resolution of impaired loans in order to put the system back on a sustained sound footing to be in a position to support recovery. In accordance with the mortgage arrears resolution strategy and targets, the Central Bank has continued to require the banks to accelerate their work to ensure the conclusion of sustainable long-term arrangements. While progress has been slow, momentum is building and the Bank continues to work to ensure that banks and mortgage borrowers in arrears move to conclude durable solutions. The Bank is also monitoring ongoing steps to cure and resolve legacy debt problems of small firms.

The importance of maintaining progress in the restoration of competitiveness must not be neglected. While moderate wage growth and reductions to the cost base of the economy have helped restore some of the competitiveness lost during the boom, further improvements in productivity and competitiveness would help to boost Ireland's growth potential and support further employment growth.

Continuing to make progress on fiscal and banking issues and enhancing productivity and the competitiveness of the economy is the best way to ensure that the emerging improvement in economic conditions can be sustained. While GDP growth in the first half of 2013 was held back by the negative impact on exports of the expiry of some pharmaceutical patents and weakness in trading partner countries, a range of indicators signal that economic activity picked up in the second half of 2013.
Encouragingly, the most recent data indicate that employment has grown strongly over the past year. Initially, the recovery in employment was confined to part-time jobs, however, recent quarters have seen steady growth in full-time employment, which appears to be broadly based. Looking ahead, this is likely to support household incomes and consumer confidence and, on this basis, modest positive growth in consumer spending is projected for 2014. Investment spending has also gathered an underlying momentum (abstracting from one-off factors) and is expected to continue to do so over the forecast horizon. Taken together, this points to some increase in domestic demand in 2014, though this is likely to be modest given that many headwinds to recovery still remain. On the external side, while patent expirations in the pharmaceutical sector are likely to continue to have some impact, improving external demand is projected to support stronger export growth this year and next.

Taking account of these developments suggests a marginally weaker outturn for GDP growth last year, but a slightly stronger outlook for this year, than previously forecast. As a result of the weak first half of 2013, GDP is now estimated to have grown by a modest 0.4 per cent last year. However, taking account of the recent signs of recovery and factoring in an improvement in external demand, GDP growth of 2.1 per cent is forecast for 2014. In terms of GNP, however, the pattern of growth over 2013 and 2014 is more even. With the impact of patent expirations in 2013 being offset in measured GNP by a reduction in associated profit outflows, the out-turn for GNP growth in 2013 is likely to be around 2.0 per cent, with GNP growth of 2.2 per cent forecast for this year. In 2015, on the basis of consensus forecasts from the main international economic institutions projecting a recovery in external demand back to its long run trend and also supported by stronger growth in final domestic demand, GDP is forecast to grow by 3.2 per cent, with GNP expected to rise by 2.5 per cent. Ireland needs to continue along the path of consolidation and reform that it has pursued for some years now to help ensure that the emerging economic recovery is sustainable.