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Latest Central Bank review reveals Irish economy improving

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Even though the country would appear to be in better financial health this year the good news came with a warning because the Central Bank also say Irish firms need to be careful as they could be affected by a weakening of the economy in China.

Although the Irish economy doesn’t have direct exposure to the market, a Chinese slowdown or disruption in emerging economies, could lead to a slowdown in the country’s key trading partners which in turn could lead to slow growth in Ireland.

In its latest twice-yearly Macro Financial Review, the Central Bank says the outlook for the global economy has weakened since the last review in June.

However, it says the economic outlook for Ireland has improved over the same period thanks to stronger domestic demand, supported by rises in employment, real wages, exports and investment.

“Stronger domestic demand is evident, supported by an improving labour market and rising real wages which benefit the household sector directly,” the bank said. “The non-financial corporate sector is seeing strong growth in exports while investment is forecast to rise sharply in 2015 and 2016.”

The Central Bank says that while Budget 2016 will provide a stimulus to economic activity the level of government debt still remains high.

While households and businesses have been paying down debt, the level of debt in both sectors remains high by international standards, exposing both to risk from rising interest rates or negative economic shocks.

Mortgage rates here are also much higher than the euro area average, with the Central Bank stating that mortgage rates here “are relatively high and have not declined in line with the Euro area median”.

It says the big difference is because Irish banks face higher credit risk, weak competition and constrained bank profitability.

It says 90% of Irish mortgages are “floating rate” making them vulnerable to rising interest rates.

Meanwhile, household debt in Ireland is in the region of €155 billion, equivalent to 170% of household disposable income.

Although the stock of debt has been falling consistently since the recession, Irish household debt is still among the highest in Europe with only Denmark and the Netherlands having higher levels.