Private-sector debt in Ireland has surpassed the Netherlands to be the highest in the euro area, writes Marc Coleman,Economics Editor
Ireland now has the most indebted private sector in the euro zone, the latest breakdown of credit growth from the Central Bank reveals. The figures also show that almost three-quarters of private-sector credit growth in the 12 months to March was property-related.
However, the rate of credit growth, though still high, continued to decelerate in March, driven by a reduction in lending for real estate and construction purposes.
The quarterly Sectoral Developments in Private Sector Credit, published yesterday by the Central Bank and Financial Services Authority of Ireland, shows total private-sector credit grew by 20.8 per cent in March year-on-year. While still one of the highest rates in the EU, the figure compares with 22.7 per cent recorded last December and is significantly slower than the 28.7 per cent rate recorded in March 2006.
The total stock of debt stood at €327.1 billion at the end of the first quarter of this year, of which the largest component - almost €136 billion - was accounted for by personal borrowing including residential mortgages.
The second largest component, €73.1 billion, was accounted for by the commercial real estate sector.
Personal borrowing is overwhelmingly dominated by house mortgage finance, which accounts for €112.1 billion, or about 80 per cent of all personal borrowing.
The fact that growth rates remain high is also due to the property sector, according to the statistics. Credit extended under the Real Estate Activities heading rose by 50.7 per cent in the year to March.
Credit extended for construction continues to grow strongly, by 37.1 per cent, though that rate has slowed sharply from the 48.5 per cent recorded in December.
This coincides with evidence suggesting that the momentum of construction activity is slowing. Housing completions data for April, published by the Department of the Environment last Tuesday, suggest that the number of houses completed fell to 5,964 compared with 6,326 completed in April 2006 while data on the numbers of houses commenced - available for March - show the numbers at 5,237 compared with some 7,000 commenced in March 2006.
The Central Bank attributed slower construction lending to a normalisation of activity rather than any collapse. "The increase in credit to construction during the first quarter of 2006 was exceptionally strong, which explains some of the slowdown in the annual growth rate in the first quarter 2007," the study states.
The new figures also reveal that the share of residential mortgage lending accounted for by this category rose to 26 per cent in March, up from 25.1 per cent in December, a trend sustained over recent years. Compared with other euro zone states, Ireland's private sector indebtedness as a share of the whole economy has now surpassed the Netherlands to be the highest in the euro area.
From 83 per cent in March 2006, private-sector credit as a share of Gross National Product (GNP) - which measures the annual output of goods and services produced by domestically owned entities - has risen to 88 per cent.
This compares with the Netherlands where private sector debt is 80 per cent of Gross Domestic Product (GDP), a similar concept which includes output of foreign-owned firms. "If GNP is substituted for GDP, arguably a more relevant concept for Ireland, Ireland rises to first place," the study states.
