Ratings firm DBRS says Irish economy not overheating – yet

Credit ratings firm DBRS has concluded that the Irish economy is not overheating yet, though it is keeping a close eye on Irish wages, home prices and consumer inflation for signals of a fresh “boom-bust dynamic” a decade after the financial crash.

"By all metrics, the Irish economy has grown strongly over the last few years and certain indicators may even suggest that it is overheating," DBRS analysts led by Gordon Kerr said in a note published on Wednesday.

“Ireland’s economy grew in each year between 2013 and 2017 at a pace that was well above estimates for potential growth.”

However, the analysts said the economy does not appear to be running ahead of itself, as inflation – running at an annual rate of 0.8 per cent in July – “remains low”, helped by “moderate wage growth and suppressed import costs resulting from the weaker British pound relative to the euro”.

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While Irish property prices rose 12 per cent in June, continuing a double-digit trend experienced in recent times, DBRS noted that valuations remain 20 per below their 2007 peak and, unlike the pre-crisis period, activity has not been fuelled by a spike in bank lending or by households taking on more debt.

Housing undersupply

“The rapid house price increase is more a consequence of persistent housing undersupply, rather than exuberant demand driven by inflated expectations of future price growth,” the analysts said. “There are few indications of overbuilding in the real-estate sector.”

The comments are at odds with the view published this week by the Economist, which pointed to possible overheating of the economy as it concluded that house prices in Dublin are 25 per cent overvalued against incomes.

Although the unemployment rate in the Republic fell to 5.9 per cent in the second quarter from a peak of more than 16 per cent in 2012, this has not been accompanied by rapid wage growth, DBRS said.

“Weekly earnings grew at an annual rate of 2.4 per cent of the first quarter of 2018; historically, wages have grown in the 5 per cent to 8 per cent range when unemployment is near 5 per cent,” the ratings firm said.

Emerging evidence

Still, DBRS said it would continue to monitor any emerging evidence of economic overheating, as the current environment is “not without risks”.

“An extended period of strong economic expansion that is well above the estimates of growth potential, in the context of an existing positive output gap, could drive prices higher and reignite the boom-bust dynamic that has previously beset the Irish economy,” the analysts warned.

“More rapid increases in wages, house prices or consumer prices could signal that the economy is heating up.”