Ireland enjoys successful macroeconomic management, highly competitive economy

In its annual report on Ireland, Moody’s Investors Service says the Irish government’s Aaa bond ratings reflect successful macroeconomic management and a highly competitive, wealthy economy.

“Deregulation and other structural reforms have played a key role in making the Irish economy more dynamic and resilient to shocks,” said Moody’s Vice President Alexander Kockerbeck, author of the report. “The high degree of political consensus over the economic policy framework suggests that prudent fiscal policies will continue.”

Kockerbeck said rapid growth in the past two decades was propelled by strong investment spending as well as a favourable demographic profile attributable to both a late-1970s baby boom and immigration.

Over the same period, strong economic growth and a booming property market led to buoyant tax receipts. Together with spending discipline, consistently higher government revenue reduced gross general government debt to the current equivalent of about 25% of GDP compared to 64% of  GDP as recently as 1997.

“However, increasing capital interest rates and recent tensions in credit markets have started to slow growth in what had been the most dynamic sectors of the economy,” said Kockerbeck. “The correction in the Irish housing market and, thus, the construction sector, is expected to continue in 2008. These trends pose risks for domestic demand generally.”

He said the possibility that the US slowdown could turn into recession and a further strengthening of the euro against the dollar would further weigh down Irish growth, given Ireland‘s close trade and investment links with the US, with obvious consequences for the fiscal balance.

“Ireland‘s fiscal position remains sound even though infrastructure and social services spending are being raised significantly,” said Kockerbeck. “Still, current spending needs to be monitored closely, especially in times of less favourable growth and revenue conditions.”