Ireland remains vulnerable to a negative global shock– Deputy Governor Sharon Donnery

• Irish economy is especially sensitive to developments in the global financial cycle
• Its structure points to the economy, the public finances, businesses and households being more exposed to macroeconomic risk than larger economies
• Central Bank continuing to put in place measures to build the resilience of households and banks to shocks

In a speech at the Dublin Economics Workshop in Wexford today, Sharon Donnery, Deputy Governor of the Central Bank of Ireland, said that while the Irish economy greatly benefits from being one of the most open in the world for trade and finance, this comes with vulnerabilities beyond our control.

She noted that the “Irish economy is especially sensitive to developments in the global financial cycle as well as being more prone to structural macroeconomic shocks.”

“Ireland offers an example of a small economy that benefitted greatly from openness. However, economic openness exposes the country to many vulnerabilities beyond our control. These vulnerabilities can be cyclical, such as a global growth slowdown with knock on effects for Irish exports, or structural in the form of substantial changes to the status quo such as Brexit, trade wars, or the evolving global taxation landscape.”

Referring to Central Bank research, the Deputy Governor noted that compared to the UK, US and euro area, Ireland is the most affected by, or the most elastic to, a negative global shock. Comparing with other small open economies, the research suggests “Ireland would be less negatively affected than Singapore or Sweden, but more affected than Switzerland and New Zealand for example.”

Taken together, the fundamental structural characteristics of the Irish economy imply many vulnerabilities. She referenced features such as the economy’s “openness, heightened volatility, role of multinationals, pharma and computer services driven export growth, and simply being small.”  

These factors point to the economy, the public finances, businesses and households being more exposed to macroeconomic risk than larger economies.

The Central Bank is working on areas within its remit, namely the macro prudential framework to build the resilience of banks and households to better withstand shocks.

“It is important that banks hold sufficient buffers to guard against the high levels of macroeconomic risks that Ireland faces. Referring to the recently implemented counter cyclical buffer (CCyB), Ms Donnery noted “It is designed promote the sustainable provision of credit to the economy”. It means that banks have more capital when times are good, so they can use that to absorb losses in tougher times.

Referring to a Systemic Risk Buffer (SyRB), Ms Donnery noted it aims to build resilience against the higher probability and larger effect of structural shocks, for example of being small and highly-globalised.

Ms Donnery noted that following its request, over the summer, the Central Bank received confirmation from the Minister of Finance and Public Expenditure and Reform that a legislative provision will be introduced to complete the macro-prudential toolkit for bank capital. This gives the Bank the power to introduce a systemic risk buffer, which would help to counter structural shocks to the economy.”