A looming construction boom could cause the economy to overheat (again)

A new report from the ESRI forecast GDP growth of 3.8% this year.

By TheJournal.ie Team

A BOOM IN construction could lead to the Irish economy overheating, Ireland’s top economic think-tank has warned.

The Economic and Social Research Institute (ESRI) quarterly economic commentary said that growth in the economy would remain strong throughout 2017 and 2018.

The analysis found that GDP growth is forecast at 3.8% this year and 3.6% next year and this growth would be driven by investment in Ireland as well as domestic consumption.

The economy would also be fuelled by increased activity in the construction sector as higher levels of residential and commercial supply come on stream.

An anticipated construction boom could also bring down the unemployment rate faster than previously anticipated.

However, the report warned of Celtic Tiger history repeating, with overproduction in the construction sector potentially causing the economy to overheat if production outpaced demand.

“If unemployment were to fall below 5.5% this would almost certainly confirm that the domestic economy is overheating,” the report said.

Long-term demand

The author of the report, Kieran McQuinn, said: “It is important to continuously compare the actual level of construction in the Irish economy with the underlying, long-run demand for such activity.”

The report also cautioned that the “external environment remains highly uncertain” for this year and next year.

It said the UK’s decision to leave the EU and the chance of the US pursuing protectionist trade policies may result in adverse effects the the Irish economy.

“A small open economy particularly reliant on international trade is highly vulnerable to significant changes in international trading conditions,” said McQuinn.

Written by Cormac Fitzgerald and posted on TheJournal.ie