Could a house-building boom again derail the Irish economy? That is one worry the Economic Social Research Institute highlights in its latest quarterly report. More houses than anticipated – 18,000 units – are forecast for completion in 2017.This is, however, far less than the estimated 30,000 needed to meet demand. But with unemployment low and strong economic growth forecast to continue, the ESRI warns the economy could overheat. This would result in wages and prices rising and a loss of competitiveness.
Despite the institute’s caution, it nevertheless expects a 4.2 per cent growth in gross domestic product this year, followed by 3.5 per cent growth in 2017, with more people at work, and fewer people unemployed. Continued strong demand in construction in an economy operating at or close to capacity remains a constraint. Unemployment is expected to fall to 6.7 per cent next year, well below the 15.2 per cent at the peak of the recession.
While strong domestic demand continues to drive growth, a less certain global environment casts a shadow over the domestic economy. Uncertainty surrounds both Brexit and whatever trade arrangements may be agreed and the intentions of US president-elect Donald Trump: on trade, protectionism and lowering the country's corporate tax rate to 15 per cent.
Such major uncertainty in key global markets, the ESRI suggests, will slow the pace of Irish export growth. The decision by the Federal Reserve, the US central bank, to resume raising interest rates – for the second time in a decade – marks a turning point, with further rate rises likely in 2017. The bigger the fiscal stimulus that Mr Trump provides – via lower taxes and higher spending – the more rapidly US rates are likely to increase. The era of historic low interest rates, which for years allowed governments worldwide to borrow cheaply, is over.
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As global rates edge higher, and as the European Central Bank next year scales back its quantitative easing – money printing – programme, Ireland’s borrowing costs are also set to rise. All this underlines the risks for the Irish economy.