Household debt and pay rises above rest of EU greatest risks to economic recovery
Pay increases which are out of sync with European norms and high levels of household debt are among the greatest risks to Ireland’s economic recovery, it has been claimed.
The Coalition’s Spring Economic Statement and Stability Programme Update, both released today, said that the high indebtedness of the Irish household sector may act as a drag on growth over the medium term.
“The household debt-to-income ratio fell to 177pc at the end of the third quarter in 2014, continuing the decline of recent years.
Nevertheless, household indebtedness in Ireland is high in comparative terms compared to our euro area peers and households may choose to prioritise debt reduction over raising consumption as household incomes rise,” the document states.
Because the country is a small open economy, Ireland is vulnerable to losses of competitiveness through wage and/or productivity developments that are out of line with those in the euro area and beyond, the document states.
We also remain vulnerable to poor levels of growth in the Euro area.
“The euro area economy has shown encouraging signs in recent months.
Nevertheless, growth has disappointed in the euro area in the past and any slowdown in growth could impact on activity in Ireland via the trade channel,” the Government is warning.
“While there has been no significant contagion to date, financial stress has the potential to re-emerge with the uncertainty surrounding developments in Greece. The risks of a return to global financial market turbulence could also possibly increase, due to asset market mispricing or low market liquidity,” the statement adds.
Inflationary pressures remain weak in advanced economies and in Ireland, the document states.
The Irish banking system in 2015 is also now in a much stronger position with the banks continuing to make significant progress in restoring their financial health and benefitting from the recent improvement in the macroeconomic environment.
The Government says the results of the ECB Comprehensive Assessment reinforces confidence in the strength of the Irish banking system.
However, vulnerabilities in the asset books of Irish banks may continue to weigh on bank credit ratings.
It also warns that Geopolitical tensions may also continue to pose a downside risk given current tensions in Russia and the Ukraine as well as in the Middle East.