ESRI warns against new construction bubble forming

It expects strong growth in Ireland - but says we run the risk of repeating old mistakes...

ESRI warns against new construction bubble forming

Image: Photocall Ireland

The Economic and Social Research Institute (ESRI) expects the Irish economy to grow by 3.8% in 2017 and 3.6% in 2018.

It believes that this expansion will be driven by consumption, investment, and growth in the construction sector.

The ESRI expects unemployment to fall to 5.6% by the end of 2018 - which is effectively full employment.

It suggests that the Government should take a conservative fiscal stance as the economy runs the risk of "overheating" as Ireland's recovery continues.

"In light of the uncertainties confronting the domestic economy over the medium term, a prudent policy would suggest that the Government adopts a more cautious fiscal stance than it otherwise would.

"Given that we expect unemployment to be at or close to potential by the end of 2018, a budgetary surplus would be advisable in such a context as it would help to prevent overheating in the domestic economy," the report advises.

Building

The author of today's report, Kieran McQuinn, has warned that Ireland's construction sector needs to be monitored as it grows: "The construction sector is set to assume a growing importance in the domestic economy over the medium term. While this reflects the fact that a significant degree of disinvestment occurred in the Irish economy post-2007, it is important to remember the disproportionate influence of the construction sector prior to 2007.

"Consequently, it is important to continuously compare the actual level of construction in the Irish economy with the underlying, long-run demand for such activity."

Risks

He also highlighted Ireland's exposure to shifts in the global economy, "In light of external risks, the Irish economy must seek to minimise the impacts of trade-related adverse shocks. This entails maintaining competitiveness in labour markets and strengthening productivity growth in general.

Brexit and sterling fluctuations are highlighted in the report as the main threat to Irish trade in the coming years

"A small open economy particularly reliant on international trade is highly vulnerable to significant changes in international trading conditions," he continued.

The report warns that the "external environment remains highly uncertain in 2017 and 2018" as the UK heads for a Hard Brexit and US President Donald Trump promises a return to protectionist policies in the US.