Central Bank raises outlook but eyes big risks

The outlook for the economy remains remarkably rosy, as long as a number of big threats, including the potential for the UK to vote to leave the EU, are allayed, Central Bank officials have predicted.

In its latest quarterly outlook, the bank said such was the momentum driving the economy last year that it had raised its GDP growth forecast for this year to 5.1%.

That forecast suggests the Government will easily meet its tax revenue targets this year.

The bank clipped back its growth outlook slightly, to 4.2%, for 2017.

The forecasts, however, are based on the UK staying in the EU and on other threats to the world economy being avoided.

Bank officials yesterday were reluctant to further assess the effects on GDP here if the UK were to vote to leave the EU in its in-out referendum on June 23.

They noted, however, that uncertainty over the Brexit vote was already playing out here through the slide in sterling against the euro — which has led to a slump of 14.5% in the price advantages for Irish firms selling into Britain since last November.

Longer term, it would be difficult to predict the effects of a further large drop in sterling against the euro.

Chief economist Gabriel Fagan said that while the bank’s overall scenario was favourable, there were nonetheless “substantial” risks facing the economy at home and abroad, because of the legacy of the banking bust.

Sovereign, household and corporate debt had fallen significantly since the worst of the crisis years, but there was still “a strong case for prudence” because of a number of vulnerabilities, he said.

After falling across the economy by 5% from 2008 to 2013, wages are growing at over 2% a year across the private and public sectors —helping to spread the benefits of the recovery.

Costs are already elevated in Ireland and “even here caution is required”, Mr Fagan said.

On the current political stalemate, officials noted the modest effect on Irish bond yields since the uncertain election result.

Political uncertainty could in time harm growth if investment projects were delayed, he said.

Credit was contracting across the economy but in some areas — such as car finance — it was growing.

And officials stood by their own mortgage lending rules, which some analysts and many in the mortgage industry say need some sort of surgery.

Citing a speech in January by the new Central Bank governor Philip Lane, officials yesterday said a review of the rules would be based on hard evidence. The rules were designed to make households and banks “more resilient” and any changes would need careful consideration.

The Central Bank has said that the lending rules — which came into effect over a year ago — will be studied at the end of this year.

Separately, Central Bank research released earlier this week showed that SMEs in Ireland face the costliest loans in the eurozone. A lack of competition in the Irish banking industry was among the factors making small business credit here so costly, the researchers found.

Mr Fagan said yesterday the ECB had taken a number of steps to prevent such “fragmentation”, which he said was “not desirable” in terms of setting monetary policy.