IMF Executive Board Concludes the 2016 Article IV Consultation and the Fifth Post- Program Monitoring Discussion with Ireland

July 28, 2016

On July 27, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 and the Fifth Post-Program Monitoring Discussion with Ireland.

The rebound of the Irish economy has been exceptional. According to the previous data release in March 2016, Ireland’s real GDP was reported to have grown by 7.8 percent in 2015 on the back of strong domestic demand and solid export growth. Subsequent revisions to the national accounts in July 2016 have led to an upgrade of the 2015 GDP growth to 26.3 percent, mainly due to much larger net exports contributions, while private consumption growth was modified much more moderately from 3.5 to 4.5 percent. The GDP revisions, which represent a level shift, are largely related to relocation of multinational companies to Ireland, which had a limited impact on the underlying Irish economy, as explained in the Supplementary Information to the Staff Report.

High frequency indicators suggest that growth momentum has continued in 2016. Solid job creation has reduced the unemployment rate below 8 percent. Inflation has hovered around zero as low commodity and food prices more than offset rising cost of services, particularly housing rents. Owing to buoyant revenues, the general government deficit narrowed to 2.3 percent of GDP (pre-revision national accounts) in 2015, thus allowing Ireland to exit the Excessive Deficit Procedure. The deficit is projected to fall below one percent this year, despite some spending overruns, mainly in the health sector.

The positive economic performance is expected to continue, but the UK vote to leave the EU amplifies downward risks. Over the medium term, Ireland’s economy is likely to be affected by the spillovers. The severity of the impact is, however, difficult to gauge at this stage, and will crucially depend on the future relationship between the UK and the EU, especially regarding trade, financial flows, and movement of labor.

Taking into account negative spillovers, real GDP growth is projected to decline to just below 5 percent in 2016 and converge to its estimated potential (about 3 percent a year) over the medium-term on the back of more moderate export growth and investment activity. As a result, the output gap is expected to virtually close and the current account surplus to moderate by the end of the forecasting period. Against this backdrop, staff estimate that the government’s objective of reaching the medium-term objective of a structural deficit of ½ percent of GDP remains broadly within reach.

Since the crisis, Ireland’s financial regulatory and supervisory frameworks have been significantly upgraded and the financial soundness of the banking sector has improved, yet challenges from crisis legacies persist. This progress was evaluated by the IMF’s Financial Sector Assessment Program, the findings of which are summarized in the accompanying Financial System Stability Assessment.

Executive Board Assessment 2

Executive Directors welcomed Ireland’s remarkable economic rebound, improving public finances, and positive outlook. At the same time, they noted that the recovery is incomplete and crisis legacies persist in an environment of increased uncertainty, including following the U.K. vote to leave the EU. They urged the authorities to continue to strengthen the foundations for sustainable and inclusive long-term growth. They recommended locking in recent gains, tackling lingering crisis legacies, rebuilding policy buffers, and bolstering the economy’s resilience through structural reform.

Directors commended the authorities’ solid track record of fiscal prudence, which has allowed Ireland to exit the EU’s Excessive Deficit Procedure. They supported continued public debt reduction to lessen the Irish economy’s vulnerability to shocks and rebuild room for countercyclical fiscal policy. They noted that the authorities’ plan to create a “rainy day” fund over the medium term could be an important buffer in case of need. Directors agreed that fiscal policy could better support job-rich growth by rebalancing the tax mix away from direct taxes; widening the tax base and reducing the burden on middle-income households; increasing spending efficiency, particularly in health; and better targeting social transfers to improve intergenerational fairness. Directors noted that higher and prioritized capital expenditure would help buttress Ireland’s competitiveness.

Directors welcomed the improvement in banks’ financial soundness. They stressed, however, that persistent banking vulnerabilities, together with potential adverse spillovers from the U.K. vote, point to the importance of continued supervisory vigilance and careful risk management. While there has been significant progress in reducing nonperforming loans, Directors underscored the need for continued efforts, and supported the authorities’ plans in this area, including providing access to financial and legal advice to distressed mortgage borrowers.

Directors supported the authorities’ intention to maintain macroprudential measures on mortgage lending, and the central bank’s plan to periodically assess the effectiveness of these measures. They underscored the importance of policies to alleviate housing supply shortage, and encouraged monitoring of the commercial real estate market and the asset management sector.

Directors highlighted the importance of policies to support a robust and inclusive medium-term growth and job creation. Priorities could include broadening financing options for small and medium enterprises, supporting innovation, enhancing labor activation policies and technical and vocational programs to reduce skills mismatches, and strengthening female labor force participation.

Noting the recent revision of Ireland’s national accounts, Directors supported the authorities’ work underway to develop additional metrics that better reflect Ireland’s underlying economic activity.

Table 1. Ireland: Selected Economic Indicators, 2011–17 1/

(Annual percentage change unless indicated otherwise)

Projections

2011

2012

2013

2014

2015

2016

2017

National accounts (constant prices)

Real GDP

2.6

0.2

1.4

5.2

7.8

4.9

3.2

Final domestic demand

-0.1

1.0

-1.5

5.2

8.6

5.3

3.8

Private consumption

-0.7

-0.8

-0.3

2.0

3.5

3.1

2.2

Public consumption

-2.0

-2.2

1.4

4.6

-0.8

4.4

2.7

Gross fixed investment

3.2

8.6

-6.6

14.3

28.2

10.2

7.3

Net exports 2/

3.6

-0.3

2.6

0.1

0.1

0.9

0.2

Exports of goods and services

2.1

2.1

2.5

12.1

13.8

6.8

5.2

Imports of goods and services

-1.5

2.9

0.0

14.7

16.4

7.0

5.8

Real GNP

-0.8

1.6

4.6

6.9

5.7

4.5

2.8

Gross national saving (in percent of GDP)

16.0

17.6

20.7

22.9

26.5

26.8

27.6

Private

22.3

23.6

24.6

24.6

26.9

25.9

26.4

Public 3/

-6.2

-6.0

-3.8

-1.7

-0.5

0.9

1.1

Gross investment (in percent of GDP)

17.2

19.1

17.7

19.3

22.0

23.0

24.0

Private

14.8

17.1

15.8

17.2

20.2

21.2

22.3

Public

2.4

2.0

1.8

2.1

1.8

1.8

1.7

Prices, wages and employment (annual average)

Harmonized index of consumer prices

1.2

1.9

0.5

0.3

0.0

0.3

1.2

Average wage, whole economy

-0.6

0.5

-0.7

-0.2

1.8

3.2

2.6

Employment

-1.8

-0.6

2.4

1.7

2.6

2.0

1.7

Unemployment rate (in percent)

14.7

14.7

13.1

11.3

9.5

8.3

7.7

Money and credit (end-period)

Irish resident private sector credit

-2.9

-4.0

-4.9

-4.4

-4.4

…

...

Financial and asset markets (end-period)

Three-month interbank rate

1.4

0.2

0.3

0.1

-0.1

…

...

Government bond yield (in percent, 10-year)

8.5

4.5

3.5

1.2

1.2

…

…

Annual change in ISEQ index (in percent)

5.2

16.3

30.3

15.1

33.5

…

…

House prices

-16.7

-4.5

6.4

16.3

6.6

…

...

Public finance (in percent of GDP)

Net lending/borrowing

-12.6

-8.0

-5.7

-3.8

-2.3

-0.9

-0.6

Net lending/borrowing (excl. one-off items)

-8.7

-8.0

-6.1

-3.9

-1.3

-0.9

-0.6

Primary balance (excl. bank support)

-5.2

-3.9

-1.4

0.2

0.8

1.8

2.0

General government gross debt 4/

109.1

120.2

120.0

107.5

93.8

89.0

86.6

General government net debt 4/

77.3

86.7

89.6

88.1

75.5

72.1

70.5

External trade and balance of payments (percent of GDP)

Balance of goods and services

18.0

17.2

19.3

18.3

20.9

21.9

21.7

Balance of income and current transfers

-19.2

-18.7

-16.2

-14.7

-16.4

-18.1

-18.2

Current account

-1.2

-1.5

3.1

3.6

4.4

3.8

3.5

Effective exchange rates (1999:Q1=100, average)

Nominal

108.5

104.1

107.3

107.7

100.1

...

...

Real (CPI based)

110.1

105.1

106.8

106.0

97.9

...

...

Memorandum items:

Population (in millions)

4.6

4.6

4.6

4.6

4.6

4.7

4.7

GDP per capita (in euros)

38,021

38,131

39,069

41,011

46,301

49,505

51,436

GDP (in billions of euros)

173.9

174.8

179.4

189.0

214.6

231.4

242.5

National accounts released in July 2016:

Nominal GDP (in billions of euros)

173.1

175.8

180.2

193.2

255.8

…

…

GDP per capita ( in euros)

37,830

38,329

39,235

41,904

55,187

…

…

Real GDP growth (in percent)

0.0

-1.1

1.1

8.5

26.3

…

…

Sources: Bloomberg; Central Bank of Ireland; Department of Finance; International Financial Statistics; and IMF staff projections.

1/ The data reported in this table refer to those available at the time of the mission.

2/ Contribution to growth.

3/ Excludes bank restructuring costs.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Deputy Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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