A new report has warned the most substantial risk facing the economy is the outcome of the Brexit negotiations.

The Economic and Social Research Institute (ESRI) has revised its growth upwards for this year and next.

It says strong growth is likely to persist through 2019 - indicated by rising private consumption, increases in taxation receipts and continued declines in unemployment rates.

Its latest Quarterly Economic Commentary says that GDP is expected to grow by 8.9% in 2018, followed by 4.5% growth in 2019.

Unemployment is expected to drop to 5.7% n 2018 and 5.1% in 2019.

However the ESRI adds that their forecasts for 2019 "are subject to the technical assumption that an agreement along the lines of the European Economic Area will exist between the UK and the EU after March 2019."

It says: "If a no-deal Brexit were to materialise in March 2019 the economy could be confronted by a highly adverse economic shock.

"Either way, given the strong pace of current economic activity and the possibility of a highly adverse shock, a neutral budget is the optimal policy choice at this point."

No-deal outcome "a real possibility"

The think-tank adds: "The summit of European Union leaders in October may provide some clarity concerning the nature of the UK withdrawal, however at this stage it is prudent to assume that a no-deal outcome is a real possibility.

"This has significant implications for the forthcoming budgetary process.

"In a small open economy such as Ireland, at this point in the cycle, the most prudent policy would be to run budgetary surpluses and reduce the level of indebtedness.

"This would provide buffers to withstand future economic shocks.

"However, with the infrastructural deficits in areas such as housing, and the potential adverse implications of Brexit, there is a case that Budget 2019 should be a 'holding
budget' and should, therefore, look to neither inflate nor delate the economy."

Spending and construction

The revision to the growth outlook is due to two factors: the faster than expected rate of growth in domestic activity, and multi-national related activity - which has had significant implications for the Irish trade balance.

On the domestic economy, it says the underlying rate of activity appears to be growing "at a faster pace in 2018 than previously expected".

Consumer spending has also strengthened throughout 2018, and construction investment has accelerated.

Housing completions of 18,655 units and 24,500 units are forecast for 2018 and 2019, respectively.