State economist warns of overheating economy and severe Brexit shock

The Department of Finance's chief economist John McCarthy

The Government's top economist has said the State may have to take special measures - including providing short-term finance - in order to protect businesses in the event of a disorderly Brexit delivering a severe economic shock.

Speaking at the Economic and Social Research Institute's Budget Perspectives conference, the Department of Finance's chief economist John McCarthy said there is heightened concern that the Irish economy could overheat.

He said the biggest threat to Ireland's current prosperity could be a combination of a hard Brexit and "a sharp deleveraging in the global economy".

He also suggested the threats to Ireland from the US-China trade spat could be being understated.

Mr McCarthy warned the impacts of a hard Brexit could be "frontloaded" and "severe".

He said a degree of complacency among firms may have set in after the March 31 Brexit deadline passed and was postponed to the end of October.

In the event of a disorderly Brexit, the Government may have to take special measures to protect people in particularly vulnerable sectors, Mr McCarthy said.

Such measures could include the provision of short-term finance and investment in reskilling so as to assist people in moving to more thriving parts of the economy.

He said the Department is focusing more than is usually the case on developments outside Ireland as a mixture of threats emerges.

"We are possibly looking at an overheating in the domestic economy," Mr McCarthy said, and described the ongoing Brexit process as "the root canal that will not go away."

Mr McCarthy highlighted a number of areas of concern, including the possible re-emergence of the sovereign debt crisis in the eurozone, financial troubles in China and a downturn in the US where the debt markets are now sending warning signals.

He warned that the impact of the trade war between the US and China on Ireland may be being understated and he expressed concern about the impact of deglobalisation in capital markets on both the cost and availability of capital.

He described Italy as "a weak link in the chain". Its output is still below pre-crisis levels. Its public debt is the third highest in the world and its banks are "stuffed with Italian sovereign bonds". "You have a potentially explosive dynamic," he said.

Closer to home, Mr McCarthy singled out health expenditure as a particular area of concern.

"It is becoming problematic, though it is not yet systemic. Notwithstanding the big increase in inputs, there is a fractional increase in output. There are value for money issues," he said.

The Department's economist also acknowledged that the current reliance on corporation tax receipts is "a big concern" for the Irish economy.

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