The dominant role played by multinationals, the risks of a hard Brexit, as well as house prices are among the main threats facing the Irish economy and require the Government to provide more financial buffers to offset potential shocks, according to the Moody’s Investors Service.
In its annual sovereign report, the credit rating agency predicts the economy will grow 5% this year and by 3.5% in 2019, but it sees little evidence of overheating because price consumer prices, wages, and the amount of bank credit are rising at a very moderate pace.
In a largely favourable report, it advises nonetheless the Government to put aside more resources to meet potential adverse external shocks.
Exporters have survived the first wave of uncertainty triggered by the UK’s vote to leave the EU which led to a slump in sterling against the euro.
However, large amounts of trading with Britain mean Brexit is “the single-largest risk” to the prospects for continued growth, while any further shake-up in the global tax arrangements could in time dampen the inward flows of multinational investments which contribute a large slice of Government tax revenues, says the report.
On house prices, new home builds will fall short of the annual demand of up to 30,000 new units which means house prices need to be closely monitored and inflation will continue for some time.
“Hence, in our view the strong recovery in the housing market is not (yet) a cause for concern, although reduced affordability — as is evident in the rental market — might eventually have an impact on the ability to attract skilled foreign workers or sustain growth in foreign investment,” says the Moody’s analysts.
Because foreign-owned firms contribute 80% of the revenues the Government collects from corporation tax, public finances are potentially vulnerable.
It says the EU and the Irish Fiscal Advisory Council have warned repeatedly about the Government increasing spending at a time of strong growth.
However, Moody’s believes measures such as the proposed “rainy day” fund will help prevent public finances once again repeating the “boom-bust fiscal policy”.