IMF cuts Irish growth forecasts due to post-Brexit risks

The International Monetary Fund cut its Irish economic forecasts following the UK's decision to quit the European Union and warned banks would be hit as Brexit weighs on their UK operations and prospects for companies, employment and investment.

The Washington-based fund now sees Irish gross domestic product expanding 3.2 per cent next year, having previously estimated 3.6 per cent growth, according to its main annual review of the country, published on Thursday. It trimmed its forecast for this year marginally, to 4.9 per cent from 5 per cent.

“The rebound of the Irish economy has been exceptional,” the IMF said. “The positive economic performance is expected to continue, but the UK vote to leave the EU amplifies downside risks.”

The IMF has chosen to ignore the Central Statistics Office’s recent upward revision of Irish GDP for last year to 26 per cent in its analysis and policy recommendations, as the data “would distort the true representation of the underlying economic developments”.

Staff at the fund recommended that Irish officials develop additional gauges that better reflect the country’s underlying activity.

Manageable impact

In a separate report on the country’s financial system, the IMF said the impact of Brexit “could be large, but should still be manageable”, adding the longer-term consequences will depend on the nature of the future relationship between the UK and the EU, especially regarding trade, financial flows and labour movement.

The report gave strong backing to the Central Bank’s introduction of mortgage lending limits last year, which the Irish regulator has insisted will remain a permanent feature of Irish banking even as it reviews the rules this year.

The caps are “well-justified, even though credit conditions have normalised and real estate prices are estimated to be close to equilibrium”, the IMF said.

House prices

The latest CSO data shows Irish house prices rose almost 7 per cent in the year to May. However, values are still one-third off their 2007 peak. The country’s unemployment rate has fallen to 7.8 per cent from a peak above 15.1 per cent at the height of the financial crisis, in early 2012.

The IMF noted the Government has placed a “high priority” on boosting housing supply, having recently unveiled a plan aimed at delivering 25,000 new houses per year by the end of the decade.

The IMF said that households and companies have lowered their borrowings in recent years – they remain highly leveraged, with 100,000 home loans estimated to be in negative equity at the end of last year. While banks have lowered their non-performing assets as they restructure soured loans and the economy improves, the overall level of troubled loans remains a challenge, it said.

Minister for Finance Michael Noonan welcomed the publication of the reports on Ireland's economy and financial services landscape.

“The IMF also recognises that the Government is fully committed to sound budgetary policy in the years ahead and that Ireland’s financial regulatory and supervisory frameworks have been significantly upgraded and the financial soundness of the banking sector has improved,” he said.

However, the fund noted that “increased fragmentation” in the new Dáil, “reform fatigue” and Brexit may complicate the Government’s job.

The IMF also urged the Government to proceed with further bank share sales, even though Mr Noonan has effectively ruled out an initial public offering of Allied Irish Banks, which received a €20.8 billion bailout during the crisis, until the first half of next year at least.