House prices and rents will continue to rise as the economy continues to expand rapidly in the next two years boosted by house building, the European Commission has predicted.
Its new forecasts project that GDP will grow rapidly, by 4.8% this year, and then 3.9% and 3.1% in 2018 and 2019.
Shorn of the accounting distortions caused by multinationals involving contract manufacturing and intellectual property transfers, the underlying economy driven by consumer spending and construction will power ahead, by an average of 4% to 2019, the commission projects.
Without providing specific forecasts, the commission signalled that housing costs would likely rise sharply.
“Insufficient housing supply remains a challenge and is expected to show up in house prices and rents,” it said in the autumn forecasts.
“Investment in construction is projected to contribute substantially to growth in domestic demand, with strong momentum in residential property investment in 2016 expected to continue in the medium term, supported by Government policies,” the commission said.
A number of forecasters such as the Economic and Social Research Institute (ESRI) have warned about the potential for the huge increase in housing construction to destabilise the economy over the coming years. The ESRI has said, however, that the economy was not at present overheating.
The spectre of Brexit looms large over the commission’s forecasts.
It warns that uncertainty about the eventual deal between the UK and the EU and “potential changes to the international taxation environment and US tax and trade policies” could weigh on Government revenues.
The commission forecasts Irish prices as measured by its harmonised index will rise only slightly over the coming years. Prices will rise 0.8% next year and 1.2% in 2019, it predicts.
Jobs growth will continue at a fast pace, helping push the average annual rate of unemployment to 5.5% next year and to 5.3% in 2019.
The commission said growth in the eurozone will expand 2.2% this year, up from 1.8% in 2016. In May, the commission forecast 2017 growth at 1.7%.
“The European economy has performed significantly better than expected this year, propelled by resilient private consumption, stronger growth around the world, and falling unemployment,” the commission said.
“Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded,” it said.
Growth in 2018 is to slow to 2.1% and to 1.9% in 2019.
Meanwhile, British economic growth will slow sharply over the next two years as companies are likely to put investment on hold because of uncertainty over the outcome of Brexit negotiations with EU, the commission forecast.
It slashed its forecast for economic growth in the UK for this year to 1.5% from 1.8% projected earlier this year and forecast growth of 1.3% in 2018 and 1.1% in 2019, the year the UK leaves the EU.
“Investment growth is forecast to weaken in 2018, as many firms are likely to continue deferring investments in the face of uncertainty,” the commission said.
Additional reporting Reuters