In a speech at the Dublin Economics Workshop in Wexford last week, Deputy Governor of the Central Bank of Ireland, Sharon Donnery said that while the Irish economy greatly benefits from being one of the most open in the world for trade and finance, this comes with vulnerabilities beyond Government control.
Donnery noted that the Irish economy is especially sensitive to developments in the global financial cycle as well as being more prone to structural macroeconomic shocks.
The Deputy Governor warned that these vulnerabilities can be cyclical, such as a global growth slowdown with knock on effects for Irish exports, or structural in the form of substantial changes to the status quo such as Brexit, trade wars, or the evolving global taxation landscape.
Central Bank research has found that compared to the UK, US and euro area, Ireland is the most affected by, or the most elastic to, a negative global shock. Comparing with other small open economies, the research suggests Ireland would be less negatively affected than Singapore or Sweden, but more affected than Switzerland and New Zealand for example.
Taken together, the Deputy Governor warned that the fundamental structural characteristics of the Irish economy imply many vulnerabilities. She referenced features such as the economy’s openness, heightened volatility, role of multinationals, pharma and computer services driven export growth, and simply being small.
Donnery says these factors point to the economy, the public finances, businesses and households being more exposed to macroeconomic risk than larger economies. The Central Bank is working on areas within its remit, namely the macro prudential framework to build the resilience of banks and households to better withstand shocks.