The economy is heading for a soft landing, but only if policy measures are taken to address risks that may threaten its well-being. That is the core message of the Medium Term Review published today by the Economic and Social Research Institute (ESRI).
Disconcertingly, the review underlines that for all the success of the Irish economy in recent years, its outlook will still be determined largely by events elsewhere, particularly in the United States. The economy has the potential to continue growing by between 4 and 5 per cent but only for as long as the US continues on its current path of what economists largely agree is unsustainable growth. Should the US adjust, Ireland's open economy will feel the pain - especially on jobs, with the unemployment rate climbing significantly from its current benign level of 4.3 per cent.
On the upside, the analysis to 2020 suggests that the fundamental factors driving the economy remain reasonably favourable. Yet there are things the Government should consider to ensure it is as well-placed as possible to meet any challenges that may lie ahead. Uppermost of these is over-dependence on the construction sector and a dangerous "insouciance" among households that just because things have gone right for so long they can never go wrong.
The ESRI is the latest agency to warn that the economy is vulnerable to a housing shock, especially in the event of a rise in unemployment. Construction in the housing sector now accounts for an overweight 14 per cent of GNP - twice the level of the US. The institute states that the property market's rapid growth has been a key driver of wage pressure which, in turn, has driven up the cost of property, creating a circle of dependency that undermines Ireland's ability to address changing circumstances.
It is never easy for government to address economic threats from emerging imbalances at a time of high consumer confidence. But it is precisely when the economy is strong enough to take the necessary medicine that action should be taken. The Government has tried to curtail property market incentives, if only on a phased basis. It has also acted to address the infrastructural deficit and has signalled its awareness of the requirement to invest in the transition to a services economy.
Ireland has many of the elements in place to ensure sustained growth into the foreseeable future. If the necessary adjustments are made now, the ESRI believes there is no reason to fear our ability to continue to grow at a sustainable level.