Irish Economy
Irish Economy 2015: Central Bank lauds strong recovery; Time to start paying down debt
By Michael Hennigan, editor of Finfacts
Jul 30, 2015 - 8:14 AM

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Irish Economy 2015: The Central Bank said Wednesday that following GDP (gross domestic product) growth of 4.8% last year, the strong recovery of the Irish economy has continued in the first half of 2015 and it said that the Government should start paying down public debt.

In its Quarterly Bulletin, the Bank said that "while the initial strengthening of activity in 2014 was driven by net export growth, the recovery over the past year has become more balanced, with domestic drivers increasingly playing
a more prominent role."

National Accounts data for the first quarter of 2015 will be published this morning after a month's delay, but the Bank says that the signs emerging from a broad range of other data and indicators point to an increase in the pace of domestic demand growth in the first-half of this year.

The Central Bank increased its forecast for GDP growth this year to 4.1% from the 3.8% it had predicted earlier this year, and projected strong growth of 4.2% through 2016, up from 3.7% previously forecast.

The Bank said that high rates of growth in exports and imports in the monthly trade data suggest that "some of the impact of contract manufacturing may have carried over into the early part of 2015 (reflecting tax avoidance - Finfacts). Our working assumption continues to be that this represents a step increase in the level of exports and imports and not a lasting upward shift in their growth rates. Looking ahead it is assumed that exports will return to growing broadly in line with projected growth in external demand. Helped by Ireland’s trade links with the US and UK markets and the improvement in the outlook for the Euro Area economy, this should continue to generate a strong rate of growth for exports this year and next."

The Central Bank forecasts the average unemployment rate in 2016 will fall to 8.5% from an average rate of 9.7% this year.

“While great progress has been made, debt ratios are still quite large and the fiscal position remains vulnerable to adverse shocks,” Gabriel Fagan, Central Bank chief economist, told reporters.

"The idea would be to maybe build fiscal space for a time when it might be needed. If we had a situation where there was an adverse shock, fiscal policy can respond. This can be brought about where we have a somewhat more ambitious pace of fiscal consolidation," he added.

Central Bank publishes signed articles in Quarterly Bulletin 3 2015

The Central Bank of Ireland includes three signed articles in the Central Bank Quarterly Bulletin 2015 Q3, entitled:

  • Labour Cost Adjustment during the Crisis: Firm-level Evidence
  • The Expanded Asset Purchase Programme – What, Why and How of Euro Area QE
  • Data Gaps and Shadow Banking: Profiling Special Purpose Vehicles’ Activities in Ireland

Labour Cost Adjustment during the Crisis: Firm-level Evidence

This article introduces a new firm-level dataset, based on the results from a survey on the wage-setting practices of Irish firms undertaken as part of the Eurosystem Wage Dynamics Network. These survey results represent a useful resource for policy makers, allowing for firm-level analysis of the approach to the adjustment of labour demand and wages in the face of a large negative shock.

A number of findings are worth highlighting in relation to the results of this survey:

  • In terms of the labour cost cutting approach, firms relied upon both reductions in the quantity of labour (employment and hours) and the price of labour (wages). Employee numbers were the most widely relied upon margin of adjustment, followed by wage cuts and hours.
  • While the majority of firms opted to freeze base wages, in the region of 60%, there is strong evidence of downward wage flexibility, with around one quarter of firms cutting wages.
  • A comparison with previous findings in relation to Ireland and other euro area countries points to a dramatic increase in the incidence of wage freezes and wage cuts amongst Irish firms during the 2008-2013 period.
  • A sizable share of firms, predominantly foreign-owned, did not implement pay freezes or cuts but increased wages - almost 14% during 2008-2009, rising further to 19% in 2010-2013.

The Expanded Asset Purchase Programme – What, Why and How of Euro Area QE

This article explains the what, why and how of the ECB’s expanded asset purchase programme, commonly referred to as ‘Quantitative Easing’. The announcement of the expanded APP by the Governing Council of the ECB in January 2015 marked the beginning of an unprecedented programme of asset purchases in the euro area, the effect of which is likely to be wide ranging.

This article discusses:

  • The reasons behind the decision to introduce the programme.
  • The details of how the programme will be carried out.
  • The channels through which the programme is expected to affect the real economy, namely:

- the portfolio rebalancing channel,

- the bank lending channel, and

- the signalling channel.

  • The article also outlines some of main financial and macroeconomic variables which might reasonably be affected by the programme. While the article does not attempt to draw firm conclusions about the effect of the programme at this early stage, Box 2 outlines some of the methods that can be used when more data are available.

Data Gaps and Shadow Banking: Profiling Special Purpose Vehicles’ Activities in Ireland

The role of shadow banking and securitisation has gained increasing national and international attention since the start of the global financial crisis in 2007. Ireland has a sizeable non-bank financial sector with a number of key components including money market funds, investment funds and other financial intermediaries. This article focuses on the activities of financial vehicle corporations (FVCs) and special purpose vehicles (SPVs).

The main findings of the article are:

  • Within the Section 110 framework, there are approximately 1,300 FVCs and SPVs registered in Ireland in 2012.
  • FVCs and SPVs have limited direct links to the domestic economy but are connected to the wider global financial system as the majority of their assets and liabilities are located outside of Ireland.
  • These vehicles are engaged in a diverse range of activities and have significant interconnectedness with the banking sector.
  • Although current and forthcoming regulations will improve oversight of the sector, some SPV activity will remain outside of the regulatory perimeter.
  • In order to better assess the financial stability impact of this sector, the Central Bank of Ireland will extend its reporting requirements to SPVs.

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