Moody’s: Top three challenges to the Irish Economy

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In its annual sovereign report, Moody’s – the credit rating agency, sees the dominant role played by multinationals, the risks of a hard Brexit, and the increasing cost of housing as among the main threats facing the Irish economy. And such threats require the Government to provide more financial buffers to offset potential shocks.

The agency also predicts that the economy will grow 5% this year and by 3.5% in 2019 – however, it sees little evidence of overheating because price consumer prices, wages, and the amount of bank credit are rising at a very moderate pace.

The report, although quite favourable, advises the Government to put aside more resources to meet potential adverse external shocks.

Given the potential impact of Brexit, exporters have survived the first wave of uncertainty triggered by the UK’s vote to leave the EU which led to a slump in sterling against the euro.

However, large amounts of trading with Britain means that Brexit is “the single-largest risk” to the prospects for continued growth, while any further shake-up in the global tax arrangements could in time dampen the inward flows of multinational investments which contribute a large slice of Government tax revenues, says the report.

On house prices, new home builds will fall short of the annual demand of up to 30,000 new units and this means that house prices need to be closely monitored and inflation will continue for some time.

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

Because foreign-owned firms contribute almost 80% of the revenues the Government collects from corporation tax, public finances are potentially vulnerable.

It says the EU and the Irish Fiscal Advisory Council have warned repeatedly about the Government increasing spending at a time of strong growth.

However, Moody’s believes measures such as the proposed “rainy day” fund will help prevent public finances once again repeating the “boom-bust fiscal policy”.