The Department of Finance recently published a new economic research paper entitled Analysis of Private Sector Debt in Ireland. This complements the Department’s annual report on public debt.
Despite a near decade of deleveraging by households and firms, Ireland’s stock of private sector debt, as measured by the private sector debt-to-GDP ratio, remains high and is consistently flagged as a macroeconomic risk. However, in light of the large FDI footprint in Ireland, not all of this debt represents a genuine macroeconomic risk to the economy. The Department’s paper analyses the components and dynamics of Ireland’s private debt ratio to better understand the macroeconomic risks related to the current level of debt held by households and firms.
The paper’s key findings include:
After nearly a decade of deleveraging, household debt is on a much more sustainable path. Household debt now stands at 126% of disposable income, a level last seen in 2003, having peaked at 212% in 2009. However, Ireland’s household debt ratio is still the fourth highest in the EU;
The high headline (household plus corporate) private debt ratio is partially a result of the activities of multinational enterprises. MNE debt – a significant amount of which is cross-border intra-group lending for FDI purposes – inflates the debt ratio but does not represent a substantial risk to the domestic economy or financial system;
This paper addresses these distortions to produce a ‘core’ Irish private debt ratio, which excludes the FDI-related debt and which is expressed as a share of GNI, the CSO’s new underlying measure of national income;
Overall, the core private debt-to-GNI ratio is estimated at 172% in 2017, compared to a debt-to-GDP ratio of 244%. This is composed of household debt at 77% of GNI and ‘core’ corporate debt at 95%;
The paper estimates benchmarks against which to compare Ireland’s core private debt ratio based on fundamental economic factors;
Household debt is found to be below the benchmark, although Ireland’s households nonetheless remain among the most indebted in the EU, with pockets of high debt still existing. For the corporate sector, core Irish debt has been broadly in line with the benchmark in the last two years;
The analysis suggests that certain features of the Irish economy, including expected economic growth and population growth, have given rise to higher levels of both household and corporate debt than certain other European nations; and
While the levels of debt appear to be explained by these structural aspects of the Irish economy, the higher base of debt that now exists could pose a risk in the event of a downturn. For instance, a stable private debt ratio (i.e. with debt growing at the same pace as the economy (GNI)), but no faster, would result in household debt reaching a level close to its pre-crisis peak by 2023.
Commenting on the publication, Minister for Finance and Public Expenditure and Reform, Paschal Donohoe TD, said: “The high level of private debt in Ireland has continually been highlighted as an economic risk, including on the European Commission’s Scoreboard of Macroeconomic Imbalances. Understanding how much of this debt relates to the domestic economy and how much is attributable to the activities of multinationals is crucial to allow us to formulate appropriate economic policy.
“While the paper finds that household debt levels are not out of line with fundamental economic drivers, the fact that Ireland’s households remain among the most indebted in the EU highlights the continued need for the Government to closely monitor trends in household debt, including regarding mortgage arrears. We are actively engaging with our colleagues in the EU as part of the European Semester process to ensure we continue to unwind any harmful macroeconomic imbalances that developed during the crisis and avoid the build-up of any new imbalances.”