ESRI Forecasts Stabilisation of Firm Credit Stocks

Research published today by the ESRI examines the likely future path of credit demand for Irish non-financial firms.  It finds that, following the recent deleveraging which has occurred in the economy, credit demand over the coming years will grow in line with GDP growth and that the share of credit accounted for by the property sector will decline relative to other business sectors. The research estimates future credit requirements of the Irish economy using both a whole economy and an individual sectoral level approach. Under different scenarios for potential economic growth, this analysis generates a range of estimates for future credit levels.  The overall projections suggest that credit stocks for non-financial corporations and SMEs will stabilise at a pre-boom level of approximately 40 per cent of GDP, with the subsequent growth in credit stocks evolving broadly in line with GDP.  At the peak in 2008, credit was 106 per cent of GDP and this has reduced to 60 per cent in 2013. The total volume of firm credit is not likely to grow significantly over the remainder of the decade and the analysis suggests that sector shares of credit are likely to change.  In particular, the current share of property lending is above the long-run fundamental level and we expect its share of total credit to decline between now and 2020. Dr Martina Lawless, one of the authors of the article, said  “The forecasts related to property credit should not be taken to  indicate that there will be no new lending in the property sector.  Credit is still required and it is extremely important that deleveraging pressure in this sector does not result in credit constraints for viable projects.  However, we do expect that the disproportionate share of credit allocated to property during the boom will continue to unwind over time.”

Notes for Editors: 1. The Special Article titled "Credit Requirements for Irish Firms in the Economic Recovery'', by Martina Lawless, Niall Mc Inerney, Kieran McQuinn and Conor O'Toole (ESRI) will be published on the 02 October 2014, at 00.01 on the ESRI website. 2. This research was undertaken as part of a research programme on “Funding SMEs in Recovery”,  funded by the Department of Finance.