Macro-Financial Review H1 2016 14 June 2016

A Brexit would have short term and long-term effects for Ireland Key Messages External Risks remain elevated and have increased since the last Macro-Financial Review A Brexit would have short term and long-term effects for Ireland Domestic output continues to grow strongly High indebtedness across private and public sectors leave the economy vulnerable to higher interest rates and/or economic shocks In the banking sector, the workout of impaired loans and the disposal of NPLs is ongoing. Domestic banks have returned to profitability but it remains weak and varies at individual bank level Domestic non-life insurance sector face difficult operating conditions with high-impact firms reporting underwriting losses in 2015

External economic and financial outlook has deteriorated External economic and financial outlook has deteriorated. Domestic growth remains strong. Real GDP growth (global) forecasts, 2016-2017 Composition of Irish GDP growth per cent per cent per cent per cent Source: CSO and Central Bank of Ireland. Notes: 2016 and 2017 are forecasts from the Central Bank’s Quarterly Bulletin No. 2 2016. Source: IMF World Economic Outlook (WEO) Database.

Private sector debt, consolidated, % of GDP Corporate and household indebtedness remain high. Leaving economy vulnerable to economic shocks. Private sector debt, consolidated, % of GDP Household debt to gross household disposable income – European comparison per cent per cent per cent per cent Source: ECB, CSO and CBI. Notes: Debt is defined as loans. Data as at 2015Q4 except for disposable income for Denmark for which 2014Q4 is the latest available. Source: CSO & Central Bank of Ireland.

House price increases and expectations have moderated House price increases and expectations have moderated. Housing supply remains too low. Residential property price growth: National, Dublin & non-Dublin Stock listed for sale or rent on Daft.ie year-on-year change per cent year-on-year change per cent number of units number of units Source: CSO. Source: Daft.ie.

Sources of Irish commercial property investment expenditure Commercial real estate prices increasing at a high rate. Demand driven by foreign investment. Breakdown of commercial property capital and rental value growth by sector Sources of Irish commercial property investment expenditure year-on-year change per cent year-on-year change per cent € billions number of deals Source: CBRE Research. Notes: Investment spending relates to individual transactions worth at least €1 million. Breakdown by the original source of funding is only available from 2011. Source: MSCI/IPD.

Non-performing loans continue to decline, but remain high Non-performing loans continue to decline, but remain high. Higher net interest margins driven by funding costs ,rather than interest income. Domestic banks’ non-performing loans as a share of loans to sector Domestic banks’ net-interest margins per cent per cent per cent per cent Source: Central Bank of Ireland. Notes: Data are consolidated and represent impairment rates for each sector. Source: SNL Financial and Central Bank of Ireland calculations.

The Review Banking sector resilience Conjunctural assessment Conjuctural assessment Credit/housing market developments Household resilience Changes in borrower characteristics & resilience to shocks Banking Sector resilience Changes in lending practices & resilience Side effects Housing supply, unsecured lending & rents Impact on pro-cyclicality Bank credit & house prices Conjunctural assessment Credit/housing market developments Banking sector resilience Changes in lending practises & resilience Impact on pro-cyclicality Bank credit & house prices Side effects Housing supply, unsecured lending & rents Open public submissions via website 15 June Close public submissions 10 August Publication of Review Outcome End November Central Bank accepting evidence-based submissions: 15 June 2016 – 10 August 2016