Macro Financial Review highlights global and domestic risks

• Uncertainty continues to dominate the global economic outlook
• Impact of Brexit on the Irish economy both in the short and long term is likely to be negative and material
• Household indebtedness remains high, with a vulnerability to interest rate rises
• Although new lending is increasing, overall credit developments remain subdued

The Central Bank of Ireland has published the first edition of the 2017 Macro-Financial Review. It provides an overview of the current state of the macro-financial environment in Ireland. Monitoring macro-financial developments and risks is an important task for the Central Bank. This report aims to assist our key stakeholders - the public, financial market participants, and national and international authorities – to evaluate financial risks better.

The report notes that the global economy is expected to growth modestly in 2017 and 2018. Brexit and the possibility of changes in international tax and trade policy are among the factors generating uncertainty at this time. Market sentiment towards European financials has improved but cyclical and structural challenges in the European banking sector remain, including a high level of non-performing loans on bank balance sheets and the need to diversify profit sources and reduce overcapacity.

Risks to the projected output growth in the Irish economy remain to the downside. The impact of Brexit on the Irish economy both in the short and long term is likely to be negative and material. To date, Brexit’s effects have been predominantly through the depreciation of sterling against the euro. Exchange rate effects, changes in UK demand, and any new barriers to trade arising from Brexit, as well as any changes to broader international taxation and trade arrangements, could have an adverse effect on the Irish economy. 

Overall credit growth remains subdued, with annual growth in bank credit to both the household and NFC sectors remaining negative. Some categories of household credit are showing positive growth, including non-mortgage credit and mortgage lending at fixed rates. While household debt has been declining, some households remain highly indebted, leaving them vulnerable to a rise in interest rates. Those in the 30-44 age category have high debt-to-income ratios relative to other age cohorts and by international comparison. The Central Bank’s analysis also shows that mortgage arrears cases are declining. It shows the overall number of mortgage arrears cases has declined by 44 per cent over a three-year period (from 2013 Q2 to 2016 Q4) with over 100,000 mortgage accounts in arrears at end-2016.

The report also notes that house price growth has been rising steadily since late-2016, while survey data show further price increases being expected over the medium term. High rental growth is also being observed. A scarcity of housing in certain locations is contributing to these price and rental developments.