Economy risks overheating due to house-building rise, ESRI warns

The economy runs the risk of overheating next year on the back of a spike in residential construction, the Economic and Social Research Institute (ESRI) has warned.

In its latest quarterly outlook the economic think-tank said there had been a significant upturn in house-building in recent months, and it now expected up to 18,000 units would be built next year, significantly more than previously forecast.

While this is still below the 30,000 needed to meet demand, it could push the economy close to capacity, potentially driving up wages and prices, which could in turn lead to a loss in competitiveness.

An overheating economy could also derail the Government’s future spending and tax plans, the institute warned.

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It said the key metric to watch was unemployment, which is expected to drop to 6.7 per cent next year, down from a recessionary high of 15.2 per cent.

“If unemployment starts to come down to 6 per cent and below then you are beginning to go back into overheating territory,” the ESRI’s Kieran McQuinn said.

On the Government’s rental strategy, the institute sounded a note of caution, suggesting greater “rent certainty” could negatively affect supply, especially from small investors.

Minister for Housing Simon Coveney’s plan, announced this week, would see landlords restricted to a 4 per cent rent cap per year in so-called rent pressure zones.“We need rental supply across the board, and the danger of bringing in measures like rent certainty is that it can have a negative impact on supply,” Mr McQuinn said.

Growth forecasts

In its report the ESRI revised down its main growth forecasts for the economy, with gross domestic product (GDP) now expected to expand 4.2 per cent this year and by 3.5 per cent in 2017.

However, gross national product (GNP), which strips out the effects of multinational profit flows, was forecast to rise 8.5 per cent this year and 3.5 per cent in 2017. The elevated level of GNP growth for this year was put down to increased levels of multinational profitability.

Overall, the ESRI said the economy was continuing to grow strongly on the back of robust domestic demand, with consumption and investment the key drivers. However, increasing global uncertainty, now mainly centred around Brexit, was likely to see export growth soften to 5 per cent next year, down from an expected 6.5 per cent this year.

Trade arrangements

“The outcome of the Brexit referendum was the most significant international development for the Irish economy in 2016. It is increasingly apparent at this stage that it may take some time before the necessary trade arrangements are concluded,” Mr McQuinn said.

“Until that happens variables such as exchange rates, stock market returns, producer and consumer sentiment may continue to display heightened volatility. This, inevitably, impacts on our assessment of the trade performance of the Irish economy.”

The impact of Donald Trump's election in the US and the prospect of greater trade difficulties between the US and China and more US trade protectionism were also highlighted as a concern.

In its report the ESRI also noted the increasing number of pay disputes in the economy. It said an understanding of the differential between public sector and private sector wage levels had to be central to fresh pay demands. It was clear from current debates that there was a lack of clarity about the public-private sector pay premium.