The Central Bank of Ireland has today published its second edition of the 2017 Macro-Financial Review (MFR), which provides an overview of the current state of the macro-financial environment in Ireland. Despite a global economic recovery that continues to strengthen, the Review highlights a range of risks to the Irish economy and financial system. The continued highlighting of such risks is a core part of the Central Bank’s mission of safeguarding stability and protecting consumers.

The risks identified in the latest MFR include Brexit, disruptions to global trade arrangements, overheating and high levels of indebtedness in both households and firms.

Sharon Donnery, Deputy Governor, Central Banking, said: “Whilst the recovery of the Irish economy continues to strengthen, the risks are both real and varied. The agreement reached between UK and EU negotiators last week is to be welcomed, but Brexit continues to pose a major risk to the Irish economy given that any final deal is still subject to continued negotiations which will be both significant and complex.”

“Without the detail of any final deal, it is prudent that we continue to call out the risks. Sectors such as agri-food and manufactured goods, which are highly dependent on the UK for trade, remain vulnerable. In the absence of a final trade deal, disruption to supply chains is also a possibility, with many firms currently using the UK as a land bridge for transporting goods here. Any change to transport routes or increased border waiting times might mean a knock-on increase in prices for Irish shoppers. Meanwhile, high levels of indebtedness in many Irish firms may deter investment and leave them vulnerable to any economic downturn or unable to raise the finance required to alter business models post-Brexit.”

The MFR also notes that a Brexit related slowdown in the UK economy could negatively affect Irish retail banks’ profitability in the long term, as they continue to have significant exposures in the UK market. Firms relocating to Ireland are likely to place additional pressure on an already tight Dublin property market, both residential and commercial. This is coupled with the existing lack of infrastructure in transport and communications identified. The counter-cyclical capital buffer on Irish banks’ exposures, set by the Central Bank, remains at 0 per cent.  This rate reflects the prevailing subdued, if strengthening credit environment.

The assessment continues to highlight the threat of overheating in the economy, as Ireland approaches full employment. Infrastructural deficits in transport, communications, and residential property pose a risk to growth by, on one hand, the constraint they impose on growth and, on the other, as the additional expenditure required to address them may add to overheating pressures.

Deputy Governor Donnery said: “Ireland faces a significant challenge in financing these infrastructural gaps while avoiding overheating in the wider economy. We continue to urge prudence in public expenditure and a sensible allocation of surplus revenues between a rainy day fund and the ongoing reduction of the nation’s public debt.”

A large share of debt, including mortgage debt, is highlighted as being vulnerable to a rise in increase rates, including policy rates from the European Central Bank. Furthermore, banks’ loan books remain concentrated in property-related lending, leaving banks vulnerable to adverse developments in residential and commercial real estate markets. In the first nine months of 2017, €7.6 billion in new mortgage lending was drawn down, an increase of 16 per cent on the same period in 2016.

Donnery concluded: “Our recent review of the mortgage measures saw them largely unchanged as we continue to guard against homeowners borrowing beyond their means. Of course, an increase in housing supply will ease price pressures, but as we can see from the many risks outlined today, house prices can go both up and down.”

“Almost 10 years on from the financial crisis, it is therefore important that households remain conscious of the risks associated with taking on new debt. The Central Bank stands ready to adjust the mortgage measures and other tools such as the countercyclical capital buffer that require banks to hold additional reserves, in order to safeguard financial stability.”