Strong economic momentum, mainly thanks to foreign
The successful implementation of policy reforms by the Irish
authorities has borne fruit. Ireland has positioned itself as the
fastest-growing European economy since 2014. In 2015, GDP growth
exceeded expectations and reached a staggering +26.3%. In fact,
this rate is three times higher than that of the previous year
(+8.4% in 2014). The stunning figure reflects a massive assets
reallocation. Its source is the influx of big foreign companies’
headquarters which moved to Ireland in search of a low taxation
environment. Company restructuring activities undertaken by these
multinationals resulted in a jump in exports (see Figure 2). It
also drove up external sector’s contribution to growth to +18.4pp
in 2015, up from +1.7pp in the previous year. Thanks to this strong
performance the current account balance improved markedly in 2015,
reaching +10.2% of GDP (+1.7% in 2014).
Domestic demand is also dynamic. Companies are expanding their
investments in the real economy: +32.6% in 2015 and +18.1% in 2014.
Consumption is expanding further and was up +4.5% in 2015 after
+1.7% in 2014. This is due to a rise in household real incomes and
growing employment. The record high consumer confidence,
buoyed by the improving economic environment and low energy prices,
supports the increase in retail sales (see Figure 3).
The Irish economy might cool down a bit over the next period. GDP
growth is forecast to reach +4.5% in 2016 and +3.4% in 2017.
Corporate turnover and profits on the rise
Economic momentum and regained competitiveness entail an expansion
in firms’ output and a rise in corporate profits. These should
reach 70.3% of value added in Q1 2016 (see Figure 4). Irish firms’
turnovers record the highest growth in the Eurozone and have been
on an upward trend since 2014. Insolvencies should decrease at a
slower pace compared to the past three years: -7% in 2016 and -4%
in 2017. They will remain 2.6 times above 2007 levels.
The strong macroeconomic recovery helps private and public
The Irish economy’s rebound supports the deleveraging of
non-financial corporations due to the increase in corporate
margins. Mainly driven by multinationals which account for 2/3 of
total corporate debt, corporate indebtedness remains high at 257.3%
of GDP (Q1 2016). Yet compared to Q1 2015 level of 327.5%, this is
a major decline. It represents a low financial stability risk for
the economy as these companies finance their operations on the
global capital markets. Moreover, it reflects exchange rate
movements which impact valuation. Despite remaining deleveraging
needs for some Irish SMEs, overall the corporate sector has stayed
at a recovery phase since 2015. Debt reduction has been faster for
households. In Q1 2016 household debt declined for the 30th
consecutive quarter falling to 149.4% of GDP, the lowest level
The increase in household disposable income and employment means it
is easier to repay debt – and faster, too.
Overall, the private sector - corporates and households - is
showing clear signs of recovery. Total debt has significantly
declined. Private sector debt accounts for 315.2% of GDP (Q1 2016),
85.5pps less than its 2015 peak of 400.7% of GDP.
Non-performing loans remain a downside risk for the Irish banking
sector. NPL’s stood at 15.8% of total bank loans in March 2016.
Although this figure has moderated since the crisis, it is still
twice higher than The Eurozone average which stands at 7%. SMEs are
most impacted as they experience the highest NPL ratio: 40% of
total vs. 25% for large corporates and 15% for households.
Overall, the Irish banking sector’s vital signs have picked up
since the 2011 crisis. Higher solvency ratios and positive return
on assets and return on equity ratios are all signs of improvement.
Risks will arise from the Brexit vote in the
Ireland is highly exposed to the British economy: the UK is the
second biggest market for Irish exporters and it is also positioned
as the first import market for Irish companies. Ireland is one of
the few EU countries to have goods’ trade balance deficit with the
A UK recession and further strong GBP depreciation would negatively
impact Irish goods traded with UK, which account for 14% of Ireland
total goods export and 20% of total services exports. However, at
least in the short-term, the UK is proving resilient so the
currency depreciation remains the main concern for exporters. On
the opposite, the currency depreciation should benefit to Irish
importers. In total, around EUR18bn are of goods are imported (27%
of total Irish imports) and around EUR12bn of services (9% of total
Irish imports). Sectors like agri-food, energy, chemicals,
machinery and equipment, wood/paper, and textile (see Figure 5) are
expected to benefit in the short-term from lower import costs.
However, in the medium-term, given the domestic demand slowdown and
the deteriorating purchasing power in the UK, Irish
exports-oriented sectors such as agri-food, chemicals, and
electronics might be severely affected (see Figure 5 & 6). The
total cumulative impact by 2019 is estimated at -0.9pp for GDP
growth and will trigger an additional increase in business
insolvencies. We estimate +1.5pp in the soft leave scenario, in
which the UK signs a Free Trade Agreement with the EU. In a hard
leave scenario, with no FTA, the fall in GDP growth will be bigger
(-1.4pp) and weigh more on business insolvencies (+2.0pp).