Economy could be overheating by end of the year, says think tank

The Nevin Economic Research Institute (NERI) has warned that the Irish economy could be overheating by the end of this year assuming a benign outcome to Brexit.

In its latest quarterly report, the trade union-backed think tank said the economy’s “cyclical upswing” has been ongoing for several years and shows no sign of abating.

It predicts growth will continue to be strong this year with gross domestic product (GDP) expanding by 4.6 per cent on the back of strong employment growth, which will see the creation of an additional 70,000 jobs, assuming a soft Brexit.

However, it warned that several indicators suggested the economy was close to overheating. In particular it noted the rapid growth in employment, which was running above the long-term trend, and the more recent pick-up in wage growth.

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“The economy will be overheating by the end of our forecast horizon, and perhaps even by the end of this year, assuming a benign, or at least delayed, outcome to the Brexit crisis,” it said.

A no-deal Brexit, it said, could send the economy in a different direction, “severely damaging” growth in the short term.

In a no-deal scenario, NERI said the impact on economic growth this year would be marginal as significant stockpiling ahead of the deadline would cancel out lower growth in November and December. However, in 2020 and 2021 it said economic growth could be anywhere between one and four percentage points lower, which is in keeping with the Government’s own projections. “Brexit remains by far the most significant source of short-term uncertainty.”

Public finances

It said the public finances should be marginally in surplus in 2019 and 2020, while the gross debt level will continue to decline as a percentage of output. However, a no-deal Brexit would “plunge” the headline general government balance into deficit.

Even so, it said, this occurrence should not precipitate a contractionary fiscal policy. The think tank believes the economy’s automatic stabilisers, the reduction in tax and increase in welfare payment that occurs naturally in a downturn, can cushion the economy “without compromising the medium-term budgetary position”.