Central Bank warns of potential for economy to overheat

The bank is warning of the dangers of a hard Brexit and potential trade wars

Central Bank warns of potential for economy to overheat

A view of Central Bank of Ireland's Dublin Docklands headquarters, 24-04-2017. Image: Niall Carson/PA Archive/PA Images

The Central Bank has warned that the economy could overheat if the current rate of growth continues.

In its latest quarterly bulletin, the regulator said growth will remain strong into 2019 - with the economy expected to expand by 4.7% this year and 4.2% next year.

The bank expects unemployment to dip below 5% next year, with inflation staying low.

However, it issued a warning about the risks of a hard Brexit and potential US trade wars - and said there is also the potential for the economy to overheat.

The bank's head economist Mark Cassidy said overheating would see the “capacity of the economy unable to keep up with demand.”

“That usually means that prices and costs start increasing – which could hit households spending power,” he said.

Employment

He said there is good news on the jobs front however.

“We expect around 100,000 net new jobs to be filled over the next two years,” he said.

“This would mean the unemployment rate falling to an average of around 4.8% next year.

“It is difficult to a number on what exactly is full employment but this is certainly closer to full capacity.”

Risks

He said there are economic risks facing the country “from several fronts that cannot be ignored” and called on the Government to try and achieve a budget surplus to mitigate the dangers.

“It is clear that a “hard” or disruptive Brexit remains a material risk,” he said. “While the threat of potential trade wars and changes to international taxation have not abated.”

“Domestically, the strength of economic growth means our economy risks hitting full capacity, which gives rise to the risk of overheating or boom-bust cycles.

“This underscores the importance of building fiscal buffers during the good times.”

The bank said domestic investment in building and construction continues to rebound, though from a relatively low base.

Forecast for the country’s housing supply has been revised downwards since April – with 17,500 new houses expected this year and 22,000 next.