Range of risks could threaten economic growth - Macro Financial Review

• Brexit remains a key risk on the horizon.
• Other risks include volatility in financial markets, residential real estate price growth and Irish economy operating above productive capacity.
• Central Bank focused on building resilience in banks and financial system.

The Central Bank of Ireland has today published its second Macro-Financial Review of 2018. It provides an overview of the current state of the macro-financial environment in Ireland and highlights risks to the economy and financial system.

Brexit-related risks to the economy highlighted in the Macro-Financial Review (MFR) include:

• A further weakening of sterling that would make Irish exports to the UK more expensive. In the event of a hard Brexit, a weaker pound could coincide with an increase in tariffs on those exports. The majority of Irish firms with a direct trading relationship to the UK are SMEs. Large and persistent currency movements could also cause competition from UK providers to arise, even for sectors previously sheltered from competition from UK firms.
• Ireland’s retail banks’ loans books are heavily concentrated in property lending to Ireland and the UK; UK-based borrowers account for 26% of exposures. Any economic shocks arising from Brexit could reduce bank profitability and have a material impact on the credit quality of banks’ loan portfolios.

Sharon Donnery, Deputy Governor, Central Banking, said: “Whatever form it takes, Brexit will be negative for Ireland. Even in the event of a deal, much uncertainty still surrounds the post-transition environment and this could continue to put pressure on investment that is vital for jobs and economic growth.”

A number of risks to the wider financial system and economy are also outlined and are deemed to have increased since the last MFR:

• A reversal of investor sentiment in financial markets and a correction in asset prices.
• Increased market volatility due to both European and global geopolitical developments, including protectionism in international trade and changes in corporate tax arrangements.
• A robust domestic macroeconomic environment has raised concerns about the potential for capacity constraints emerging and the economy operating above potential in the near term. An external macroeconomic shock would be intensified if the economy were operating above productive capacity.
• Residential real estate price growth bringing valuations close to or above what would be consistent with broader economic developments. Infrastructure shortages, particularly in the housing sector, are a risk. On supply issues, prices for apartments have increased the most and yet apartments comprise only 14% of new builds.

Deputy Governor Donnery concluded: “Beyond Brexit, the risks facing Ireland’s current economic growth are wide ranging. It is important that households, banks and the financial system are building resilience. For our part, this includes reinforcing our well-established mortgage measures and requiring banks to hold sufficient capital so they can better weather any difficult times ahead.”