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Ireland: Staff Report for the 2005 Article IV Consultation

Author(s):
International Monetary Fund
Published Date:
October 2005
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1. This supplement reports on recent developments since the staff report was issued.1 These developments support the thrust of the staff appraisal. In particular, with the economy now in the neighborhood of full employment, continued rapid growth of domestic demand could give rise to wage pressures and further erode competitiveness. Against this background, the key policy priorities remain fiscal restraint, to help relieve potential overheating and to build a cushion in the event that downside risks materialize; wage moderation, to keep wage growth in line with productivity growth; and continued efforts to maintain financial stability.

2. Revisions to national accounts data for 1995–2004 do not alter the general pattern of economic growth in recent years. The new data incorporate two methodological improvements: chain-linked deflators and a better measure of financial intermediation services. Average annual real GDP and real GNP growth rates over the period as a whole are virtually unchanged, though growth was slightly weaker during the late 1990s boom and slightly stronger during the downturn of 2001-03. Real GDP growth in 2004 was revised down to 4½ percent, reflecting a lower contribution from net exports, and a reduction in net factor income cut real GNP growth to 4 percent.

3. Domestic demand growth was very strong in the first half of 2005, as anticipated in the staff report. Private consumption grew by about 5 percent year-on-year, supported by rapid employment and income growth, and machinery and equipment investment increased by over 25 percent, reflecting in part purchases of aircraft. However, net exports subtracted about 2 percentage points from GDP growth, reflecting in part a slowdown in partner-country growth. House price increases continued to slow, consistent with a soft landing for the housing market, though private sector credit growth remained very high. Employment and the labor force grew by about 5 percent year-on-year in the second quarter, reflecting increases in the working age population—due in part to large net immigration—and in labor force participation, and the unemployment rate fell slightly over the year to 4¼ percent. Despite higher oil prices, HICP inflation was steady at about 2 percent, in line with the euro area average.

4. While the short-term growth forecast has been revised down, the economic outlook remains strong. The real GNP growth projection for 2005 has been marked down by 0.6 percentage points to 4½ percent, reflecting mainly the soft patch in exports in the first half. Going forward, higher oil prices are expected to dampen household disposable incomes and corporate profitability, though the strength of consumption and business investment in the first half of the year have resulted in an upward revision to domestic demand for the year as a whole. The staff’s new forecast is somewhat below the Department of Finance’s projection of 5 percent. In 2006, domestic demand is expected to ease slightly, reflecting in part higher oil prices, and the contribution from net exports to rise slightly, as export growth returns to trend.

5. Recent fiscal developments are consistent with a projected general government deficit of about 1 percent of GDP in 2005. As expected, revenue has continued to exceed the budget profile, reflecting in particular VAT and excise receipts, stamp duties, and collections from revenue investigations. Though expenditure has been slightly lower than projected, staff assume that it will be in line with the budget for the year as a whole. Staff’s projection is similar to the Department of Finance’s revised forecast, published in September.

Table 1.Ireland: Selected Economic Indicators

(Annual change unless otherwise stated)

Proj.
200120022003200420052006
National accounts (constant prices) 1/
GNP3.92.75.14.04.54.9
GDP6.26.14.44.54.54.9
Domestic demand3.94.34.64.35.74.7
Private consumption5.63.53.43.84.85.6
Public consumption10.67.43.52.44.12.9
Gross fixed investment-0.23.75.68.08.43.7
Net exports (contribution to GDP growth)2.62.21.70.8-0.30.8
Exports of goods and services9.34.00.87.02.55.1
Imports of goods and services7.31.8-1.47.63.55.0
Prices, wages and employment
Harmonized Index of Consumer Prices (annual average)4.04.74.02.32.32.5
Average hourly earnings, manufacturing10.38.64.74.5
Output, manufacturing 2/10.07.64.60.4
Unit wage costs (manufacturing) 2/-2.6-8.2-4.10.2
GNP/employment0.80.93.21.01.83.2
Employment3.11.81.93.02.61.7
Unemployment rate (in percent)3.94.44.74.54.24.0
Money and credit (end-period)
M3 3/4/17.29.322.517.7
Private sector credit 4/5/15.115.017.926.626.7
Financial and asset markets (end-period)
Three-month treasury bill 4/3.32.92.12.22.1
10-year government bond 4/5.14.34.33.73.2
ISEQ index 4/-0.3-30.023.226.026.3
House prices (permanent tsb index/ESRI) 4/4.413.313.78.66.2
Public finance (In percent of GDP)
General government balance 6/0.8-0.40.21.4-1.1-0.7
Primary balance 6/2.30.91.42.60.10.6
General government debt35.432.131.129.029.429.3
External trade and balance of payments
Balance of goods and services (Percent of GDP)14.716.615.514.913.513.2
Current account (Percent of GDP)-0.6-1.00.0-0.8-1.9-2.2
Official reserves (In billions of SDRs, end-period.) 4/4.54.02.81.91.8
Effective exchange rates (1995=100, annual average)
Nominal 7/89.290.796.799.796.8
Real (CPI based) 7/94.498.9106.8110.2106.8
Memorandum items for 2004:
Area70.3 thousand square kilometers
Population (in million)4.0
GDP per capita (in SDRs)31,728
Sources: Department of Finance; Central Bank of Ireland; IMF, International Financial Statistics; and Fund staff calculations.

Based on National Income and Expenditure, compiled in accordance with the new European System of National Accounts (ESA 95).

Underlying productivity growth data may be overstated because of problems related to the measurement of output produced by multinational companies operating in Ireland.

The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.

As of July 2005.

Adjusted change, which includes the effects of transactions between credit institutions and non-bank international financial companies and valuation effects arising from exchange rate movements.

Excludes allocations for financing of future pensions liabilities and one-off expenditures.

As of June 2005.

Sources: Department of Finance; Central Bank of Ireland; IMF, International Financial Statistics; and Fund staff calculations.

Based on National Income and Expenditure, compiled in accordance with the new European System of National Accounts (ESA 95).

Underlying productivity growth data may be overstated because of problems related to the measurement of output produced by multinational companies operating in Ireland.

The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.

As of July 2005.

Adjusted change, which includes the effects of transactions between credit institutions and non-bank international financial companies and valuation effects arising from exchange rate movements.

Excludes allocations for financing of future pensions liabilities and one-off expenditures.

As of June 2005.

Table 2.Ireland: Contributions to GDP Growth, 2001-06

(In percent) 1/

Proj.
200120022003200420052006
Domestic demand3.43.73.93.64.84.0
Private consumption2.71.71.61.82.22.6
Public consumption1.41.00.50.30.50.4
Fixed investment-0.10.91.31.82.00.9
Structures0.80.91.31.50.90.2
Residential investment0.60.51.31.30.3-0.2
Equipment-0.60.10.10.31.10.7
Change in stocks-0.60.10.5-0.30.00.1
Net exports2.62.21.70.8-0.30.8
Exports8.03.60.75.92.24.3
Imports-5.4-1.41.0-5.1-2.4-3.4
Statistical discrepancy0.20.2-1.10.10.00.0
GDP (annual percent change)6.26.14.44.54.54.9
GNP (annual percent change)3.92.75.14.04.54.9
Memorandum item
Current account (as a percent of GDP)-0.6-1.00.0-0.8-1.9-2.2
Source: Fund staff estimates.

Rounding may effect totals.

Source: Fund staff estimates.

Rounding may effect totals.

Table 3.Ireland: Summary of Balance of Payments 2001-06
Proj.
200120022003200420052006
(In billions of euro)
Current account balance-0.8-1.30.0-1.2-3.1-3.7
Balance of goods and services17.221.721.522.121.622.8
Goods balance30.535.432.631.832.234.6
Exports of goods86.789.578.380.285.792.1
Imports of goods-56.2-54.1-45.7-48.4-53.5-57.4
Services balance-13.3-13.8-11.1-9.7-10.6-11.8
Credit28.631.637.142.245.148.0
Debit-41.8-45.4-48.2-51.9-55.7-59.8
Of which: Royalties
Credit0.20.30.20.2
Debit-10.6-11.7-14.3-14.3
Income balance-18.3-23.7-21.9-23.6-25.2-27.1
Credit32.228.830.133.8
Debit-50.5-52.4-52.1-57.4
Current transfers (net)0.30.70.40.30.60.6
Capital and financial account balance0.41.6-1.34.7
Capital account balance0.70.50.10.4
Financial account-0.31.1-1.44.3
Direct investment6.219.415.3-3.6
Portfolio investment-25.2-38.0-40.0-7.0
Other investment19.019.321.613.7
Reserve assets-0.40.31.81.2
Net errors and omissions-0.40.3-1.33.5
(In percent of GDP)
Memorandum items
Current account balance-0.6-1.00.0-0.8-1.9-2.2
Balance on goods and services14.716.615.514.913.513.2
Goods balance26.027.223.421.420.220.1
Services balance-11.3-10.6-8.0-6.5-6.7-6.9
Income balance-15.6-18.1-15.8-15.9-15.8-15.8
Current transfers0.30.50.30.20.40.4
Capital and financial account balance0.31.2-0.93.2
Of which:
Direct Investment5.314.911.0-2.4
Portfolio Investment-21.5-29.1-28.7-4.7
Other Investment16.314.815.59.2
Sources: The Central Statistics Office; and Fund staff estimates.
Sources: The Central Statistics Office; and Fund staff estimates.
Table 4.Ireland: General Government Finances

(In percent of GDP)

200020012002200320042005
Proj.
Current balance7.95.13.43.74.72.8
Current revenue, of which:34.232.331.131.733.132.9
Tax revenue (including taxes on capital)26.624.623.624.225.425.2
Social security receipts4.24.34.24.24.44.4
Miscellaneous3.43.43.33.33.33.3
Current expenditure, of which:26.327.227.728.028.530.1
Interest payments2.01.51.31.21.21.3
Goods and services5.15.25.45.35.95.9
Compensation of employees7.98.48.69.08.79.1
Current transfers10.611.311.611.812.012.9
Depreciation0.70.70.80.80.80.9
Current expenditure, excluding interest24.325.726.426.827.328.8
Capital balance-3.6-4.4-3.8-3.6-3.2-3.9
Capital receipts (excluding taxes on capital)1.11.01.11.11.11.1
Gross capital formation3.64.24.23.83.63.9
Capital transfers1.11.20.80.90.81.1
General government balance4.30.8-0.40.21.4-1.1
Primary balance6.32.30.91.42.60.1
Memorandum items
Structural (as a percent of potential GDP)
Government balance (including one-off factors)2.6-0.5-1.20.41.7-1.1
Revenue 1/35.233.232.232.934.334.0
Expenditure32.633.733.432.532.635.1
Government balance (excluding one-off factors)2.6-0.5-1.20.00.8-0.6
Primary balance4.61.00.21.62.90.2
General government gross debt (as percent of GDP)37.835.432.131.129.029.4
Growth in nominal GDP15.212.211.46.66.87.5
Sources: Department of Finance and staff estimates.

Revenues in 2002 exclude UMTS receipts of 0.2 percent of GDP.

Sources: Department of Finance and staff estimates.

Revenues in 2002 exclude UMTS receipts of 0.2 percent of GDP.

Table 5.Ireland: Medium-Term General Government Finances 1/

(As a percent of GDP)

20032004200520062007200820092010
(Staff Projections)
Total revenue32.934.334.033.633.433.433.433.4
Taxes and social security contributions28.529.829.629.429.329.329.329.4
Other revenue4.44.54.34.24.04.04.04.0
Contingency provision0.00.00.00.00.00.0
Total expenditure32.732.935.134.334.234.234.234.2
Primary expenditure, of which:31.531.733.833.033.033.033.033.0
Gross fixed investment3.83.63.93.83.83.83.83.8
Government consumption15.015.315.915.815.815.815.815.8
Current transfers11.812.012.912.312.212.212.212.2
Capital transfers0.90.81.11.11.11.11.11.1
Interest payments1.21.21.31.31.21.21.21.2
Budget balance0.21.4-1.1-0.7-0.8-0.8-0.8-0.8
Memorandum items
Nominal GDP growth in percent6.66.87.57.77.47.27.06.9
Gross debt31.129.029.429.329.429.629.729.9
Structural budget balance, including one-offs 2/0.41.7-1.1-0.8-0.9-0.8-0.8-0.8
Structural budget balance, excluding one-offs 2/0.00.8-0.6-0.9-1.0-0.8-0.8-0.8
Output gap-0.3-0.50.00.40.20.00.00.0
(Stability Program December 2004 Update)
Total revenue34.435.234.233.833.2
Total expenditure34.334.335.034.533.8
of which:
Collective consumption5.65.65.75.65.6
Individual consumption10.310.410.510.410.2
Social transfers other than in kind9.09.59.49.39.2
Gross fixed investment3.93.53.93.93.7
Interest payments1.31.21.31.21.3
Subsidies0.60.60.60.60.6
Other3.73.63.63.43.2
General government balance0.10.9-0.8-0.6-0.6
of which due to contingency0.40.8
Memorandum:
Nominal GDP growth in percent5.38.38.58.18.1
Gross debt32.130.530.130.130.0
Structural budget balance 2/0.11.40.00.40.3
Output gap-0.1-1.1-1.9-2.4-2.1
Sources: Staff estimates and Department of Finance

Based on current policies. The staff estimates assume that tax revenues will perform according to the latest SP projections in 2006-07, but are adjusted for the difference between the government’s and staff’s growth assumptions. From 2008 onwards, tax revenues (excluding indirect taxes) are projected using the OECD’s estimates of tax elasticities. Expenditure estimates for 2005 are based on the latest available official information, whereas projections for 2006-07 assume expenditure to increase at the pace envisaged in the SP (except for interest rate expenditure). Due to different accounting conventions, the staff’s estimates of total revenue and expenditure ratios differ from the Stability Programme.

As a percent of potential GDP.

Sources: Staff estimates and Department of Finance

Based on current policies. The staff estimates assume that tax revenues will perform according to the latest SP projections in 2006-07, but are adjusted for the difference between the government’s and staff’s growth assumptions. From 2008 onwards, tax revenues (excluding indirect taxes) are projected using the OECD’s estimates of tax elasticities. Expenditure estimates for 2005 are based on the latest available official information, whereas projections for 2006-07 assume expenditure to increase at the pace envisaged in the SP (except for interest rate expenditure). Due to different accounting conventions, the staff’s estimates of total revenue and expenditure ratios differ from the Stability Programme.

As a percent of potential GDP.

Table 6.Ireland: Indicators of External and Financial Vulnerability

(In percent of GDP, unless otherwise indicated)

199920002001200220032004
External indicators
Exports (annual percent change, value in U.S. dollars)12.510.510.110.514.316.7
Imports (annual percent change, value in U.S. dollars)9.713.07.96.713.317.5
Terms of trade (goods, annual percent change)-2.5-3.12.02.0-0.5-1.4
Current account balance0.2-0.4-0.6-1.00.0-0.8
Capital and financial account balance,-1.89.20.31.2-0.93.2
Of which:
Inward portfolio investment70.380.484.857.675.385.6
Inward foreign direct investment18.926.89.223.914.56.2
Other investment liabilities (net)-1.1-8.716.314.815.59.2
Total external debt 1/2.82.01.80.60.00.0
Of which:
External debt to exports ratio4.02.62.40.80.00.0
External interest payments to exports (in percent)0.30.20.10.20.00.0
U.S. dollar per euro (period average)1.070.920.890.941.131.24
U.K. £ per euro (period average)0.660.610.620.630.690.68
Financial markets indicators
General government debt48.137.835.432.131.129.0
Government bond yield (10-year, end-period)5.65.15.14.34.33.7
Spread of government bond yield with Germany (end of period)0.60.20.60.20.30.3
Real government bond yield (10-year, period average, based on national CPI)3.1-0.10.10.30.61.9
Annual change in ISEQ index (in percent, end of period)0.414.1-0.3-30.023.226.0
Personal lending interest rate10.511.810.610.49.99.9
Variable mortgage interest rate4.26.04.64.23.53.5
Financial sector risk indicators
Annual credit growth rates (to private sector)21.321.315.115.017.926.6
Annual deposit growth rates8.115.615.69.611.914.1
Personal lending as a share of total loans53.752.152.255.355.655.8
(excluding financial intermediation and government)
Of which:
House mortgage finance39.739.038.842.444.444.9
Other housing finance0.91.00.90.80.40.3
Other personal lending13.012.212.512.010.810.6
Annual mortgage credit growth rates22.424.317.823.125.526.5
Commercial property lending as a percent of total loans
(excluding financial intermediation) 2/12.415.016.417.019.721.2
Foreign-currency denominated assets (in percent of total assets)41.041.544.640.132.529.4
Foreign-currency denominated liabilities (in percent of total liabilities)42.844.447.442.934.232.2
Contingent and off-balance sheet accounts (in percent of total assets) 3/400.5465.1591.8505.2537.7662
Non-performing loans (in percent of total loans) 4/0.981.031.030.970.930.82
Total provisions for loan losses (in percent of total loans)1.11.11.11.10.90.7
Risk-weighted capital/asset ratios of domestic banks (in percent)10.810.710.612.313.912.6
Bank return on assets1.31.20.91.00.91.0
Bank return on equity23.022.016.018.017.820.7
Liquid assets of all banks to total assets (liquid asset ratio)32.032.030.030.033.633.0
Liquid assets of all banks to short-term liabilities (in percent)39.044.037.034.041.240.0
Deposits to M3 ratio 5/6/1.031.031.021.021.461.36
Loan-to-deposit ratio vis-à-vis Irish residents 2/7/1.291.361.441.431.461.61
vis-à-vis total 2/7/1.471.541.591.511.561.70
Concentration ratios in the banking sector
No. of banks accounting for 25 percent of total assets333322
No. of banks accounting for 75 percent of total assets232321191817
Share of state-owned banks in total assets321000
Share of foreign-owned banks in total assets373942293134
Sources: Data provided by the authorities; Central Bank of Ireland; International Financial Statistics; Bloomberg; and Fund staff estimates.

Represents non-euro debt of the government sector.

Includes lending for construction and real estate activities.

Credit equivalent values.

Owing to differences in classification, international comparisons of nonperforming loans are indicative only.

Non-government deposits vis-à-vis Irish and nonresidents to M3 ratio.

The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.

Nongovernment loans/nongovernment deposits ratio.

Sources: Data provided by the authorities; Central Bank of Ireland; International Financial Statistics; Bloomberg; and Fund staff estimates.

Represents non-euro debt of the government sector.

Includes lending for construction and real estate activities.

Credit equivalent values.

Owing to differences in classification, international comparisons of nonperforming loans are indicative only.

Non-government deposits vis-à-vis Irish and nonresidents to M3 ratio.

The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.

Nongovernment loans/nongovernment deposits ratio.

1The attachment contains updated staff report tables and background section of the PIN.

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