Rising risk of financial shocks

By Geoff Percival

The potential for further negative economic shocks to the Irish economy has increased over recent months, the Central Bank has warned.

In its latest macro-financial review, the financial regulator said the higher degree of turbulence in Europe’s financial markets over recent months “implies greater potential” for negative shocks.

Changes in international corporate tax arrangements in the EU and the US; a move towards protectionism in international trade; and Brexit remain the key international “risk triggers”.

However, the Central Bank also warned of domestic risks — above normal property price rises, bank exposures to property-related lending, high levels of household and public debt (Ireland currently being the fourth most indebted member of the EU), and the small number of payers accounting for a large share of corporation tax receipts.

“While the domestic economy is performing well, this — in itself — gives rise to potential risks,” said Central Bank deputy governor Sharon Donnery.

“Stronger growth could add to overheating pressures if not managed prudently. The array of risks facing Ireland, coupled with the fact that we are a small and open economy naturally prone to volatility, make it hard to predict what the future holds,” she said.

The potential for consumers and businesses to postpone investments until the future trading relationship with the UK is clearer, a slowdown potentially increasing non-performing loan levels, and UK insurance firms losing the right to do business here and affecting competition and product availability are Brexit risks.

“The risks arising from Brexit, especially a hard or disruptive Brexit, are far reaching for Ireland. The window of opportunity for resolving a range of issues for firms is closing fast and contingency plans need to be fully prepared,” Ms Donnery said.

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