Analysis: Institute's latest commentary raises concerns about possible pitfalls in the economic strategies of the political parties, writes Marc Coleman, Economics Editor.
By normal standards, the Economic and Social Research Institute's (ESRI) latest commentary differs in only a subtle way from its predecessor. Whereas its winter Quarterly Economic Commentary was a raising of the eyebrows, the latest spring commentary is a clearing of the throat.
But the change is significant. By commenting more directly than before on issues central to the economy, the institute is treading into an arena that political parties will also be playing on as the next general election approaches. While its forecast for growth remains positive, the ESRI has become more concerned about how, rather than by how much, the economy is growing.
Growth will hover at around 5 per cent over the next two years and job creation, although falling slightly from 67,000 this year to 60,000 next year, will remain strong.
Immigration will also fall slightly, from 53,000 to 48,000, allowing the unemployment rate to decline from 4.4 to 4.3 per cent, despite slower job growth.
But by noting how over one in eight workers in the economy now works in construction, the ESRI has qualified its forecasts for employment growth.
Citing last year's study by the Organisation for Economic Co-operation and Development (OECD) - which estimated that house prices were overvalued by 15 per cent - the ESRI notes that since then and despite higher interest rates, house price inflation has accelerated. If there is a bubble, it is bigger than before.
Dr Alan Barrett, the ESRI's senior research officer, puts it quite directly: "It is impossible not to conclude that the probability of a bubble has increased. We feel obliged to add our voices to those expressing concern."
The ESRI also worries that growth is too driven by domestic activity at the expense of export growth.
An "unsustainable" rate of wage growth, 5 per cent, is behind this, it feels. That rate compares poorly with 2 per cent for the euro area and inflation - the root cause of this differential.
But what is to be done? In a chart not contained in main commentary but in its press pack, the ESRI has shown how the rate of Government spending increases jumped sharply in the years preceding the last election.
This should not be repeated now that inflation is on the rise again, says Barrett. He nonetheless concedes that it probably will.
"We are also expecting Government expenditure to rise in the run-up to the general election although we warn against this."
But these comments are not partisan or ideological. Rather than being against raising public expenditure per se, they are against raising spending when it may cause inflationary pressure. And there is equal concern in relation to PD proposals to cut income tax. Cut taxes if you must or raise spending if you must, but avoid doing both at a time when inflation is rising, it appears to be saying.
With next year's election bringing the end of the present political cycle to a close, the ESRI is in danger of becoming a bit more interesting than before.
