IMF Executive Board Concludes 2018 Article IV Consultation with Ireland
On June 22, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ireland.
The Irish economy continues to grow at a rapid pace, well above the EU average. Although headline data are distorted by the volatility of multinationals’ activity, the broad recovery of (modified) domestic demand (4 percent in 2017) underpins the expansion. Strong labor market performance brought the unemployment rate down to below 6 percent by April 2018. While wage pressures emerged in some sectors, inflation remained subdued, mainly reflecting the pass-through of pound sterling depreciation. Public finances continued to improve on the back of strong output growth, while the public debt burden declined slightly to 68 percent of GDP. Ireland’s current account surplus widened to 12½, mainly reflecting activities of multinationals.
Banks have continued to strengthen their financial soundness and remain profitable. While still high, nonperforming loans have declined. Although loan repayments from the nonfinancial corporate sector continued to outstrip new lending, credit recovery endured, as consumer and mortgage loans picked up. Reflecting improved labor market conditions, rising incomes, and low interest rates, housing demand has recovered strongly whereas the supply response has been modest so far, thus leading to growing pressure on house prices and rents.
The outlook remains broadly positive but with externally-driven downside risks. Abstracting from the volatility of activities of multinationals, growth is projected at about 5 percent in 2018 mainly driven by domestic demand, and to gradually converge to its potential rate (around 3 percent) over the medium term. Solid employment growth would bring unemployment below 5 percent by the end of the forecasting period and underpin a rise in earnings. Hence, headline inflation is expected to gradually reach 2 percent. Public finances are projected to improve further, while the external current account surplus is estimated to taper off to around 6½ percent of GDP over the medium term.
Executive Board Assessment
Executive Directors welcomed Ireland’s continued strong economic growth, leading to a rapid reduction in unemployment and strengthened public and private balance sheets. While the outlook remains positive, lingering crisis legacies, rising housing prices, and external downside risks—mainly from resurgent global protectionism, adverse effects from Brexit, and ongoing changes in the international tax landscape—pose challenges. Against this background, Directors encouraged policies focused on rebuilding fiscal buffers, guarding against re‑emergence of boom‑bust dynamics, and addressing structural bottlenecks to enhance resilience and foster sustainable growth.
In light of the strong cyclical momentum and the risks to the outlook, Directors encouraged the authorities to step up fiscal consolidation to alleviate demand pressures and build buffers. They stressed that growth‑friendly consolidation should center around broadening the tax base; saving temporary revenue windfalls, especially from volatile corporate taxes; and maintaining moderate spending growth, while improving its efficiency and addressing social and infrastructure needs. Directors welcomed the authorities’ plans to establish a Rainy‑Day Fund to increase the resilience of public finances. Ireland’s continuous active engagement in implementing the international tax reform agenda was also commended.
Directors encouraged the authorities to boost efforts to expand the housing supply and improve affordability. They considered that taxation could be used more actively to reduce land and property hoarding, and that measures to improve housing affordability should be well targeted. Directors also agreed that macroprudential policy should continue to be deployed as needed to ensure that bank and household balance sheets remain resilient to shocks.
Directors welcomed the improvements in domestic banks’ financial soundness, but underlined the need to accelerate balance sheet repair and prepare for the challenges posed by Brexit. To foster arrears resolution, they supported measures to accelerate legal processes, encourage creditor‑borrower engagement, increase provisioning requirements, and provide binding supervisory guidelines on write‑offs of non‑performing loans. Directors also encouraged downsizing the government’s stakes in the banking system as market conditions allow.
Directors underlined the importance of addressing structural bottlenecks as key to promote high, sustainable growth. They welcomed the government’s plans to reduce the sizeable infrastructure gap, and encouraged prioritizing investment to best achieve value‑for‑money. Directors called for further efforts to boost productivity of domestic firms, including through greater support for innovation; better align educational paths with business needs; and increase female labor force participation by providing affordable child care, and supporting removal of gender pay gaps.
Directors welcomed the publication of additional statistics that aim, inter alia, to filter out the impact of multinationals’ activity, and to allow a more accurate assessment than GDP of domestic economic developments and better inform policy‑making. They encouraged continued efforts to provide more granular and frequent information in this area.
Source: International Monetary Fund
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