Irish Economy 2015: The Central Bank and Moody's, the credit ratings agency, in separate reports today forecast similar levels of growth this year.
In its Quarterly Bulletin [pdf], the Central Bank says today that notwithstanding the improved performance of the domestic side of the economy the main driver of growth over the past year has been the exceptionally strong export performance. "In part, this appears to have been due to some special factors. In 2014, exports grew much faster than import demand in trading partner countries, with the difference accounted for by a large contribution to export growth from contract manufacturing outside Ireland (arising when goods owned by an Irish entity are manufactured in and shipped from a foreign country). Viewing this surge in export growth as a temporary factor suggests that the underlying strength of the recovery over the past year is less than signalled by the currently projected increase in GDP growth for 2014 of just over 5%."
"Contract manufacturing" is tax avoidance and involves accounting transactions that artificially shift activity to Ireland such as the 'Double Irish' dodge to cheat the tax services in other countries.
Looking ahead, the Central Bank says that it is expected that, this year and next, exports will return to growing broadly in line with projected growth in external demand. Helped by Ireland's trade links with the more strongly growing US and UK markets, this will continue to generate a strong growth rate for exports, although representing a slowdown as compared to 2014. On the domestic side, an improving labour market and rising real disposable incomes should lend greater support to consumer spending in 2015 and 2016, though high levels of indebtedness remain a headwind to any strong recovery in consumption. While moderating slightly from its current rate, investment is projected to grow solidly in coming years, continuing to rebound from the earlier extended period during which investment had fallen to relatively low levels.
"Taking account of these developments suggests a stronger outturn for GDP growth last year, and also a slightly stronger outlook for this year, than previously forecast. As a result of the exceptional strength of export growth in 2014, GDP is now estimated to have grown by 5.1% last year. Reflecting a favourable outlook for consumer and investment spending this year, GDP growth of 3.7% is forecast for 2015, an upward revision of 0.3% relative to the previous projection, while the forecast for GNP growth of 3.3% is 0.2% higher."
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Ireland's economy is recovering at a reasonably strong pace now, and its fiscal performance has also been improving over the past several years, Moody's the rating agency says in an annual report. "Key rating constraints are the high public debt level as well as remaining weaknesses in the Irish banking sector," the reports says. Moody's also notes that fiscal policy is being loosened in 2015 and the strong 2014 growth performance is unlikely to be repeated this year.
"Ireland's 2014 economic performance was strong with real GDP growth estimated at around 5%, and the country's growth prospects remain solid. However, we believe that the strong growth in exports is unlikely to be repeated as it was partly due to special factors related to offshore production activity. We expect economic growth rates of 3.8% and 3.0% in 2015 and 2016, respectively, which is still a very solid performance," said Kathrin Muehlbronner, a senior credit officer at Moody's.
Moody's cautions that the strong investment recovery now under way will at some point in the future require a pick-up in bank lending. "But as the banking sector remains weak, with non-performing loans at 25% of total loans, as well as low current and prospective profitability, it remains one of Ireland's key constraints."
At the same time, Moody's considers that the risks arising from the banking sector for the government's balance sheet have been materially reduced as a result of strengthened capital, liquidity and funding profiles. Also, contingent liability risks related to the National Asset Management Agency (NAMA) have further declined, given the strong cash flow and faster-than-expected repayment of government-guaranteed debt.
Moody's also expects that Ireland will continue to bring down its budget deficit, with the 2015 budget targeting a deficit reduction to 2.7% of GDP (from an estimated 3.9% in 2014). Aside from the economic recovery, government finances will benefit from the savings on interest expenditure following the replacement of IMF loans with cheaper market funding, says Moody's.
However, the rating agency notes that fiscal policy in 2015 is being loosened significantly compared with earlier commitments of the government. As such, the 2015 budget means that Ireland's elevated debt levels will likely reduce at a slower pace than initially expected.
While 2014 represented the first year in which the public-debt-to-GDP ratio declined, the ratio remains among the highest in Moody's sovereign rating universe, although Moody's expects the debt ratio to decline gradually below the 100% mark by 2018.