Ireland's economic fortunes look good - but Brexit, EU tax rules and housing are wildcards

THE MEDIUM-TERM OUTLOOK for the Irish economy is good – but threats to foreign direct investment post-Brexit and the possibility of another housing bubble pose risks.

According to new report from think-tank the ESRI, the Irish economy can sustainably grow by 3% each year until 2025.

The report warns, however, that Britain leaving the EU is likely to have a “significant negative impact” on the country’s output and public finances.

Additionally, a gap between the amount of deposits in banks and the expected levels of lending required for housing could give rise to “concerns about the emergence of another credit-fuelled bubble”.

Growth

The ESRI said that the “sustainable long-term real growth rate” of the Irish economy was around 3%, despite recent warnings from watchdog body the Irish Fiscal Advisory Council that growth projections for were “far from assured”.

This predicted growth will be underpinned by the continued increase in the number of people working, a figure which is expected to rise by 2% each year.

The demand for workers will also reduce the unemployment rate to just over 6% in the medium term, the report said. Inflation, meanwhile, is expected to remain “relatively low” at 2% per year.

Warnings

The latest ESRI report looked at the opportunities and threats that Brexit could throw up for Ireland, especially for foreign direct investment.

It said that while there was potential for Ireland to benefit from foreign direct investment being shifted from the UK after Brexit, this was entirely dependent on global demand.

If the world economy continued to perform well and firms relocated their operations to Ireland, then GDP could increase by 3%.

However, if Brexit was to be accompanied by a downturn in the global economy, these positive effects would be negligible.

Similarly, proposed changes to corporate tax rules across Europe through the introduction of a common consolidated tax base could damage Ireland’s competitiveness and income for the Exchequer.

Housing

The ESRI estimates that, by 2024, housing demand could reach up to 30,000 units per year. Currently, the demand for housing is around 23,000 per year, while only 14,000 housing units are expected to be completed in 2016.

The government has set targets of increasing the number of houses being built annually to 25,000 homes.

However, this increase is likely to place a significant strain on the banking sector, as ESRI analysis suggests that the “traditional deposit base” in Irish banks will be “unable to fund the level of credit required to meet the housing demands of the economy”.

The report said:

“Given the calamitous events of the past decade, a significant expansion in the lending capacity of the domestic banking sector will immediately give rise to concerns about the emergence of another credit fuelled bubble.”

The ESRI added that prudent measures can be adopted to “reflect the changing circumstances in the market” to prevent such a bubble occurring again.

Written by Sean Murray and posted on TheJournal.ie