Central Bank dials down overheating threat

A few parts of the economy exposed to the international economy are back at boom-time levels but many other areas are not overheating despite rapid economic growth, according to the latest economic outlook from the Central Bank.

The bank said that even though unemployment will continue to fall next year and was getting closer to the 5% level that had in the past signalled an overheating economy, there may be more slack in the economy than may at first appear.

Bank officials at a press briefing would make no comment on whether the €1.2bn budget package unveiled by Finance Minister Paschal Donohoe would increase or leave unchanged the risk levels facing the economy.

And despite the bank again increasing its growth forecasts, the latest review effectively marks a lowering of the warnings that the economy will overheat in 2018 — the forecasting period for the bank in its report.

Uncertainty about the EU and UK Brexit deal continues to weigh on the outlook for the economy here, but a transition period that involves the UK staying in the EU to 2021 would help the Irish economy somewhat, officials said.

Some parts of the economy exposed to international trade were “at boom levels” but it would be wrong to suggest that the economy as a whole was overheating.

The bank’s chief economist, Gabriel Fagan, who is to retire soon, said the economy was on the path but was still some distance from reaching full employment.

Employment levels had risen as workers who were “involuntarily” working part-time secured full- time jobs in an expanding economy. Wage growth was still at modest levels across the economy providing further evidence that there was slack in the economy.

The Central Bank forecast unemployment will reach 5% by the end of 2018, but officials said that the drop from the current rate of 6.1% would not necessarily mean the economy would be overheating at that time.

And there was no evidence of a credit-fuelled boom that led the economy into peril.

“Credit outstanding is still falling — so that is one important differentiating factor from the previous episode,” Mr Fagan said.

“We have to be very cautious in drawing parallels”, he said, adding that US and UK wages had not accelerated despite unemployment touching record lows.

“Noting that we don’t go beyond 2018 in the forecast, it’s still a bit too early to be calling a return of the boom,” Mr Fagan said.

There were 150,000 construction workers in employment compared with 300,000 working in the industry on the eve of the property market crash 10 years ago, Central Bank officials said.

Central Bank officials re-iterated the potential risks from the US and the EU to Ireland’s corporate tax regime.

The Central Bank raised its economic growth forecasts.

GDP will grow 4.9% this year, and expand 3.9% in 2018, boosted by an additional 90,000 at work by the end of next year.

Goods exports may also grow because demand from key trading countries is holding up well.

Modified domestic demand — a growth measure that attempts to get an underlying picture of the economy free of distortions by multinationals — also signals strong growth, of 4.2% this year and 3.9% in 2018, the bank said.

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