22 February 2013

Commission Winter Forecast 2013 - Ireland

Secondary market sovereign-bond yields have recently fallen down to their lowest level since April 2010, and especially so after the agreement on the promissory notes and the liquidation of the asset recovery bank IBRC in early February 2013.

Stronger data than expected for the third quarter of 2012 and upward revisions to GDP in the first and second quarter brought real GDP growth to above 0.8 per cent during the first three quarters of 2012 compared to the same period of the previous year. Growth was more broad-based than during the last few years, with not only net exports but also investment and private consumption showing positive growth rates in year-on-year terms. Following these positive data developments, real GDP growth for 2012 has been revised up to 0.7 per cent from 0.4 per cent at the time of the autumn forecast. 2013 growth projections are left unchanged, as upside risks to domestic demand are expected roughly to offset increasing downside risks to trading partners' demand and export performance.

Ireland also issued a five-year syndicated bond at a yield of 3.3 per cent in January 2013, while Treasury bill yields have fallen with each auction conducted, most recently to 0.2 per cent. Lead by developments in sovereign yields, guaranteed bank-bond yields have also declined, and banks have recently issued non-guaranteed covered bonds on favourable terms. The sale of the government's holding of contingent convertible (CoCo) bonds in a domestic bank also further underscore the quickly improving market sentiment. Lower sovereign and bank funding costs have, however, not yet markedly translated into lower lending rates to households and corporates.

While the positive investment data in the third quarter of 2012 was to a large extent driven by one-off events such as large purchases of transport equipment from aircraft leasing companies, there  are signs that the investment cycle has bottomed out more generally. Going forward, the multinational (MNE) sector is expected to account for the bulk of investment, as credit constraints are  still acute for domestic firms and fiscal consolidation continues apace. The pace of  household deleveraging is expected to moderate slightly, improving prospects for private consumption over the projection period, although resolution of non-performing loans remains crucial durably to revive domestic demand. Faster  progress in that area and positive confidence  effects from resolution of macroeconomic and  policy uncertainty are therefore important upside  risks.

The fiscal deficit is projected at 7.3 per cent of GDP in 2013 and 4.2 per cent in 2014 – below the 2013 budget target in each year. The better-than-expected  tax revenue outturn in 2012, excluding one-off revenue surprises, improves fiscal balance by 0.1 per cent of GDP over the forecast horizon. Liquidation of state-owned Irish Bank Resolution Corporation (IBRC) and related replacement of the promissory notes with long-term government bonds improves  fiscal balance by 0.1 per cent of GDP in 2013 and 0.7 per cent in 2014. This operation reduces government interest costs and financing needs, as well as  generates interest margin profit for the central  bank. This forecast includes one-off payments to  IBRC creditors of 0.6 per cent of GDP in 2013, but excludes compensation for possible shortfall in  IBRC asset sales by liquidator. This forecast includes fiscal adjustment measures  of 4.3 per cent of GDP in 2013-14, of which about two thirds is on the expenditure side and the rest on the revenue side. Among them 0.4 per cent of GDP addresses the 2012 health spending overruns and brings expenditure in line with the ministerial ceilings. Expenditure is projected to be in line with the budget allocations and within the government expenditure ceilings for 2013-14.

The government debt-to-GDP ratio increased from 25 per cent in 2007 to 106 per cent in 2011, and will peak at around 122 per cent in 2013 before declining. Moving from primary deficits into surplus in 2014 and the pick-up in economic growth will arrest debt dynamics. High precautionary cash balances stood at 11 per cent of GDP at end-2012, but and are projected to decline to 7 per cent by end-2014, thus contributing to gross debt reduction.

Full Irish forecasts

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