Recovery of housing market not (yet) cause for concern – Moody’s

Moody's has raised its growth forecast for the Irish economy to 5 per cent for 2018, driven by recovering private consumption and residential investment. However, the ratings agency also warned that Ireland's debt vulnerabilities "remain significantly higher" than many of its peers, while there are other risks in the form of Brexit and US tax changes. But house prices, though rising steadily, are not yet a cause for concern, Moody's said.

In its annual sovereign review, Moody’s recognised Ireland’s “impressive recovery over the past few years” as well as the improvement in the public finances.

"Ireland's strong economic prospects are supported by its substantial competitiveness gains, as well as strong export and productivity growth," said Kathrin Muehlbronner, a Moody's senior vice-president and author of the report.

“The public finances have strengthened alongside the economic recovery, and the headline public debt ratio has nearly halved between 2012 and 2017,” added Ms Muehlbronner, noting that the ratings agency is not “overly concerned at this stage over a return to the boom-bust fiscal policy from before the crisis”.

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But it’s not all good news. Moody’s also noted Ireland’s “unusually high degree of economic volatility”, due in large part to the presence of multinationals which can “distort traditional economic metrics”.

Fiscal buffers

“This volatility in turn requires larger fiscal buffers to deal with negative shocks,” Moody’s said, as it warned that the UK’s exit from the EU remains “the single largest external risk for Ireland’s growth prospects given the close trading links between the two countries”.

Ireland is currently rated A2, having lost its AAA status and being reduced to junk in 2011 in the aftermath of the financial crisis. It has subsequently been upgraded several times, but still remains five levels below Moody’s top grade. In the report, the rating agency noted that, while Ireland has reduced its debt-to-GDP ratio, down from nearly 120 per cent of GDP in 2012 to 68 per cent last year, in large part on account of the high annual nominal GDP growth of nearly 35 per cent in 2015, Ireland’s debt vulnerabilities “remain significantly higher than most A-rated peers”.

“The fact that Ireland’s debt ratio is much higher than that of its peers in the ‘A’ rating category and will remain so in the coming years is an important constraint on the sovereign’s creditworthiness,” the review’s author said.

Other risks include the impact of last year’s US corporate tax reform, “which is not yet clear”, as well as potential other shifts in international taxation rules.

Overheating

Potential overheating in the domestic economy is also a fear. While the report notes that inflation, wage and credit growth are all increasing at only moderate rates, house prices and rents “warrant close monitoring”.

“In our view, the strong recovery in the housing market is not (yet) a cause for concern, although reduced affordability – as is also evident in the rental market – might eventually have an impact on the ability to attract skilled foreign workers or sustain growth in foreign investment.”

Moody’s is now forecasting GDP growth of 5 per cent this year, up from 3.7 per cent previously, mainly driven by the continuing recovery of private consumption and residential investment. For 2019, Moody’s is forecasting GDP growth of around 3.5 per cent, but said that growth will likely slow to 2-3 per cent over the longer term.

Looking ahead, Moody’s said that any potential upgrades and downgrades to the rating would likely be linked to developments in the Government’s fiscal and debt metrics.

“A faster than currently planned reduction in the public debt level could lead to an upgrade of the rating, while indications that the commitment to sound public finances and lower public debt is waning could put downward pressure on the rating.”