The Central Bank has warned that Irish firms and the wider economy could be affected by a weakening of growth in China, and other emerging markets.
Although the Irish economy has little direct exposure to these markets, a Chinese slowdown or disruption in emerging economies – particularly due to a rise in US interest rates – could lead to a slowdown in the country’s key trading partners.
This in turn would lead to slowing growth here, it cautions.
In its latest twice-yearly Macro Financial Review, the Central Bank says the outlook for the global economy has weakened since the last review in June.
However, it says the economic outlook for Ireland has improved over the same period thanks to stronger domestic demand, supported by rises in employment, real wages, exports and investment.
The Central Bank says Budget 2016 will provide a stimulus to economic activity, but says the level of government debt remains high.
It says the current growth outlook and supportive policy environment “provides an opportunity to make greater progress in terms of debt reduction”.
While households and businesses have been paying down debt, the level of debt in both sectors remains high by international standards, exposing both – and the wider economy – to risk from rising interest rates or negative economic shocks.
Mortgage rates here are also much higher than the euro area average, with the Central Bank stating that mortgage rates here “are relatively high and have not declined in line with the Euro area median”.
It says the big difference is because Irish banks face higher credit risk, weak competition and constrained bank profitability.
It says 90% of Irish mortgages are “floating rate”, making them vulnerable to rising interest rates.
Meanwhile, household debt in Ireland is in the region of €155 billion, equivalent to 170% of household disposable income.
Although the stock of debt has been falling consistently since the recession, Irish household debt is still among the highest in Europe with only Denmark and the Netherlands having higher levels.
The bank notes that high levels of debt make households vulnerable to a drop in income or a rise in interest rates – or both. However, it says household net worth has continued to rise.
Today’s review says the number of mortgage drawdowns in the first nine months of the year was 17,200, compared with 13,200 in the same period in 2014.
Residential rents have been rising steadily since August 2011, and are now above their previous peak in early 2008.
Activity in the residential property market has grown steadily this year, with figures from the PSRA showing some 33,000 transactions, worth €7.2 billion, between January and September.
This compares with 26,500 transactions worth €5.5 billion in the same period last year.
In the UK in the same period there were 1.2 million transactions representing 4.4% of the housing stock.
To reach a similar percentage here, there would need to be 90,000 transactions, rather than the 48,000 in the year to October. The Central Bank says current mortgage approvals are running at about half of the UK rate.
It also notes there has been a steady rise in the number of repossessions over the past year. In the 12 months to June 2015 there were 2200 residential repossessions, of which 1,500 were owner occupied homes.
The Central Bank says investment in commercial property remains high, with most of the money originating overseas.
It notes that while a greater level of “predominantly foreign non-bank finance in the market can assist the dispersal of risk through the wider financial system”, such a high level of foreign investment leaves the Irish market vulnerable to changes in investor sentiment, and to external financial conditions.
Adverse conditions in the commercial real estate market could also impact on domestic banks by weakening the collateral underpinning loans to the commercial real estate sector, it adds.
The Central Bank notes further losses in the non-life insurance sector. It says downward pressure on insurance premiums and weak underwriting discipline in previous years has left firms exposed to “a deteriorating claims environment”.
It says investment income is “no longer sufficient to cover underwriting losses, and there has been an erosion of the solvency position of the sector”.
The non-financial corporate sector – businesses other than those in financial services – are highly indebted according to the standard benchmark of debt to GDP.
Irish business debt – consolidated – was 164% of GDP at the end of June. The bank notes that where debt levels are high, even modest changes in interest rates can cause repayment difficulties.
When measured relative to financial assets, NFC debt has been declining, going from 60% to 33% since 2012.
The decline has been driven by strong growth in the value of financial assets, especially equities, rather than a decline in the stock of debt. This coincides with the quantitative easing programmes of the ECB.
Credit growth to Irish private sector enterprises remains negative as the sector continues to reduce debt.
The Central Banks also notes a big difference in interest rates charged in different sectors of the economy, with construction, transport and communications firms paying three percentage points more on weighted average rates than firms in the electricity and gas and real estate activities sectors.
It cautions that “higher interest rates, by making borrowing more expensive, may act as an impediment to investment”.
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