Our economy to expand twice as fast as Europe's
Ireland will enjoy a strong recovery but bad debts at banks will hold back growth, Moody's said in a new report on the economy.
Moody's expects growth to return to rates "of at least 3pc for the next few years" which it says will be more than twice the European average.
Domestic demand has stabilised and will continue to drive growth for the next two years along with exports. "Consumer confidence is gradually being restored thanks to robust employment trends and the stabilisation of the housing market," Moody's added.
While Moody's is generally optimistic about Ireland's prospects, the rating agency also sees dark clouds.
Bad loans, lack of credit and household saving will continue to hamper the recovery, it predicts.
"The recovery will go some way to reducing high levels of indebtedness but debt burdens will remain sufficiently high to constrain the pace of recovery," Moody's says.
The agency expects unemployment to continue falling.
Moody's expects austerity to ease significantly after 2015 when the deficit falls below 3pc of gross domestic product.
That will allow the Government to "eventually" cut taxes as "the economy hits its stride".
It warns that stress tests later this year may force local banks to increase provisioning for bad debts.
That contradicts the Government's position which is that Irish banks won't need further cash to shore up balance sheets.
Irish banks have more toxic loans as a percentage of lending than banks anywhere else in Europe, the report notes.
Moody's predicts the banks won't write off many bad mortgages among those unwilling to pay but will help genuine cases. The number of mortgages written off is likely to be "negligible", it said.