Ireland's gradual economic recovery has continued, but largely due to weaker net exports, real GDP growth has slowed to a projected rate of ½ per cent in 2012. Domestic demand and employment continue to decline owing to ongoing household balance sheet repair, the weak labour market and low lending to households and SMEs. Prospects for growth in 2013 are for modest pick up to just over 1 per cent as domestic demand declines moderately, although weak trading partner growth may continue to dampen net exports despite Irish competitiveness gains.
It is expected that fiscal targets for 2012 will be met. Revenues remain ahead of profile in the first three quarters of 2012, which, together with expenditure restraint in several areas, has offset expenditure overruns in the health sector, and also on social welfare owing to higher unemployment. The authorities are alert to the health sector overruns and are determined to meet the programme target for a budget deficit below 7.5 per cent of GDP in 2013. The measures adopted in Budget 2013 should be durable, as growth-friendly as possible and minimise the burden of adjustment on the most vulnerable.
The authorities are ramping up reforms to restore the health of the Irish financial sector so that it can help support economic recovery. Intensified efforts are required to deal decisively with mortgage arrears and further reduce bank operating costs. Parliament is currently considering an ambitious reform of the personal insolvency framework. For this essential reform to succeed, a careful balance should be struck that addresses borrower’s financial distress and protects the family home, while also reinforcing debt service discipline. An orderly phasing out of the costly Eligible Liability Guarantee Scheme would improve bank profitability and thereby support lending capacity.
Market conditions for Irish bonds are much improved, bringing benchmark eight-year yields below 5 per cent, underpinned by Ireland's robust policy implementation under its EU-IMF supported programme. Significant yield declines also reflect the euro area leaders' statement on June 29 and the ECB's announcement of Outright Monetary Transactions in early September. Ireland has started to regain market access, including through government bond issues. This achievement, despite Ireland's still rising public debt, underlines investor confidence in Ireland’s capacity to implement adjustment policies as well as market expectations of European support for Ireland. Nonetheless, significant risks remain along the path back to full reliance on market funding, requiring continued determined policy efforts by the Irish authorities.
Full press release
© International Monetary Fund
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