The Central Bank has issued its rosiest outlooks on the economy since the end of crisis, but warned that the cost of credit for small and medium businesses is rising, rather than falling as seen elsewhere in Europe.
Criticised for failing to prevent the build-up of pressures that led to the banking and economic crash, the Central Bank has published in recent times a regular assessment of the risk factors facing the economy.
In its latest macro-financial review, the Central Bank yesterday predicted strong growth for the economy, as well as a lessening of the risks that once haunted government finances at the height of the crisis.
Cheaper costs of fuel due to the tumbling price of crude oil, record low eurozone interest rates, the weakness of the euro and rising demand in Ireland’s main trading partners — the UK and US — are helping drive exports and the economic recovery, the Central Bank said.
The review found the country faces few serious risks over the Greek debt crisis because the improvement in Ireland’s own long-term debt was providing the country with some protection from possible market contagion. It believes the UK referendum does carry risks, however, for the economy.
“While efforts continue to resolve issues relating to Greece’s financial support programme, any deterioration in the situation may pose less risk for Ireland than it would have done previously,” the Central Bank said.
“This is a result of improvements in the sustainability of the Irish public finances and in the EU infrastructure for dealing with contagion. It is possible that a referendum will be held in the UK relating to its membership of the EU before the end of 2017. This could provide an additional source of uncertainty to the external economic environment over the medium term.”
However, risks to the rosy outlook may come from inside the country rather than outside. The Central Bank warns that even as the economy expands rapidly—it forecasts GDP will expand by 3.8% this year and by 3.7% in 2016 — SMEs continue to struggle to source relatively cheap finance.
The Government’s Strategic Banking Corporation of Ireland is helping to provide more funding, but the cost of SMEs’ loans is rising and not falling, as should be expected, it said.
“Bank financing conditions remain challenging, particularly for SMEs, with the cost of loans having been on an upward trend,” said the Central Bank. “The increased cost of credit makes it more expensive for firms to invest in potential growth opportunities.
“This is in contrast to developments in other European countries where interest rates have been declining of late.”
The main banks have returned to profitability, but the proportion of bad loans, at 20%, of their total loan books “remains high” compared with other countries.
The Central Bank said many insurers are struggling to make money.
“Although the insurance sector is benefiting from the economic recovery in terms of premium income growth, it faces challenges in both the life and non-life sectors, it said.
“Intense competition is resulting in a number of concerns. Firms in the non-life sector are experiencing underwriting losses and becoming dependent on investment income for overall profitability.”
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