The Republic is rapidly moving up the international household debt league table, according to a report published yesterday., writes Marc Coleman, Economics Editor
Goodbody Stockbrokers says the ratio of personal debt to average income will rise from 120 per cent to 160 per cent over the next three years, driven by mortgage lending and abundant consumer credit.
However, the firm, which is owned by AIB Bank, argues that the Republic's economy is less vulnerable to high personal-debt levels than other developed economies, although it is more exposed to interest rate increases than ever before.
The Republic's level of personal debt has risen rapidly from 50 per cent of disposable income in 1995 and is currently the third highest in the euro zone and the 12th highest among the members of the Organisation for Economic Co-operation and Development, just behind Canada and the US.
Assuming that the other countries' debt-to-income ratios remain unchanged, Ireland will rise to third place in the OECD by 2006, claims Goodbody. The only countries with higher household debt burdens will be Denmark and The Netherlands.
The stockbroker argues that a number of features of the Irish economy will offset the dangers posed by the predicted high level of debt. It says Ireland's population is relatively young and that people tend to take on debt in the early stage of their lives. As the population ages, the relative debt levels will fall.
It also points to the high levels of savings here, which have risen from 56 per cent of disposable income to 70 per cent in the last five years.
Goodbody economist Dermot O'Leary acknowledged that this figure could be flattered by people withdrawing equity from their homes.
The relatively benign outlook for interest rates is also a factor that must be taken into account when assessing how sustainable household debt levels are, Goodbody says.
"The notion that Irish consumer spending is being maintained by an ever-rising debt spiral fuelled by sustained low interest rates is a myth," Mr O'Leary said, "but households are now more sensitive to interest rate changes than any time in Irish economic history.
"Going into a period where consumption is expected to take over the lead role from exports in terms of growth, this means the possi- bility of more volatile economic cycles increases."
He expects interest rates to rise by a half of one percentage point next year but says that interest rate levels will thereafter remain "accommodative" of further lending growth. In addition, it is possible that increased competition in the financial sector will act to cushion the effect on consumers as mortgage spreads fall.
"Consumers in Ireland may find any upward move in interest rates diluted by further competition in the mortgage space," said Mr O'Leary.
Bank of Ireland chief economist Dan McLaughlin yesterday said interest rates were likely to start rising early next year due to European Central Bank concerns about higher inflation and lending growth.
The report echoes recent warnings by the Central Bank that the economy is increasingly exposed to the housing market. The bank is expected to issue a report on the financial stability of the economy next week.