Brexit ice bucket looms over Ireland’s overheating economy

Chief economist warns overheating could switch to underheating in case of hard Brexit

Department of Finance’s chief economist John McCarthy said the economy was now on the verge of overheating because of the rapid recovery in employment and its corollary, rising wages. Photograph: Crispin Rodwell

Department of Finance’s chief economist John McCarthy said the economy was now on the verge of overheating because of the rapid recovery in employment and its corollary, rising wages. Photograph: Crispin Rodwell

 

The Irish economy could turn from hot to cold in the space of a few months such is the inherent volatility of the current situation, the State’s chief economist has warned.

At budget conference hosted by the Economic and Social Research Institute (ESRI) this week, John McCarthy said the economy was now on the verge of overheating because of the rapid recovery in employment and its corollary, rising wages. Last year, weekly earnings in the private sector rose by 4.4 per cent, a level not seen since before the crash.

However he cautioned that this could rapidly switch to “underheating” should the United Kingdom crash out of the European Union without a deal and a major downturn in trade ensues.

McCarthy said this “extraordinarily complex” and volatile situation was exercising minds in the Department of Finance and making budgetary policy difficult to formulate.

Stabilisers

Economists typically advocate putting money back into the economy in the event of a shock. McCarthy suggested automatic stabilisers such as tax and welfare could offset part of the Brexit shock without direct intervention.

However, he said there might be a role for “discretionary policy to support the economy” if the impact is severe. The timing of October’s budget is not ideal as if falls just before the UK’s scheduled exit. Might this necessitate a supplementary budget? He didn’t elaborate.

He did, however, admit that the current situation bore some similarly to the boom and bust of the previous decade. The Irish economy was violently overheating in 2007 only for whole thing to blow up in a global financial meltdown. “What’s different between then and now is that now we know things are coming down the line. We all know Brexit will happen at some stage, nobody ever saw the global financial crisis, hence we’ve no excuse,” he said.

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