- The economy needs to be resilient to the risks associated with strong domestic growth as well as external threats.
- A disorderly Brexit is one of the main risks to the Irish economy.
- Strong domestic economic performance points to an increased risk of an overheating economy – prudent management of the economy is needed.
Addressing the MacGill Summer School in Glenties, Co Donegal, Acting Governor of the Central Bank of Ireland, Sharon Donnery, discussed the current economic outlook. She said that the global environment is uncertain, and with Brexit looming, we should be ready to respond if risks materialise.
Acting Governor Donnery said, “We are a small open economy, greatly exposed to the global environment. Crucially, we can’t influence many of these outside factors. So we need to make sure we are resilient to them. That we are prepared. When global times are good, we do better. Similarly when the global economy slows down, we are affected. While we benefit from the global opportunities we need to also ensure we build defences to the risks.”
Discussing the preparation for the risks associated with Brexit she said, “A no-deal Brexit would likely bring considerable volatility to financial markets, with heightened stress and a potentially large depreciation of Sterling. Following the financial crisis we have been building resilience in the financial system for the last decade. Through our preparations over the last three years we have more specifically strengthened resilience to Brexit. Today the main outstanding source of risk to financial stability stems from a worse than expected macroeconomic shock.”
Discussing the wider international risks to the economy she said Ireland is heavily exposed to the global environment, and the current outlook is somewhat unfavourable. Changes in world demand have a considerable impact on Irish exports, unemployment and wages.
She noted the actions taken by the Central Bank to improve resilience and highlighted the importance of having coordinated response. Referring to the Central Bank’s macro prudential tools, “the variety of these macro prudential tools provide flexibility that may be required in response to many shocks, domestic or global”. She added, “The domestic economy is doing well, and we have the opportunity to boost our resilience to future shocks and risks. Prudent management of the public finances are needed. Interest payments on national debt are lower than expected and corporate tax receipts are high, but neither situation should be regarded as permanent. These funds should be put to work to buffer against the next downturn or crisis and not to finance current expenditure or to boost an economy which is close to capacity.”