Economy may ‘overheat’ as unemployment falls

Efforts to boost house building could end up in a bloated construction industry and the economy ultimately overheating if the Government were to fail to rein in spending, the Economic and Social Research Institute has warned.

In its latest economic outlook, the think-tank believes the conditions that ended in the disastrous property crash a decade ago could start fermenting again as the economy sucks in more jobs to build houses.

Research professor Kieran McQuinn said the fast-growing construction industry could place the economy “on the horns of a dilemma”. That’s because new homes are needed to meet current huge shortages but the economy could not again risk devoting a lot of resources on construction.

Citing surveys showing a large pick-up in construction jobs, he said the trigger could be as the jobless rate fell in the coming years below 5.5%, at a time when building houses could continue to attract more workers.

Amid strong growth in employment, the jobless rate currently stands at 6.6%. The think-tank had focused on the housing market to “flag up” the potential that construction would again go through the same cycle when in the past it drove everything, Mr McQuinn said.

For that reason, politicians should avoid the temptations to ramp up spending even as the domestic economy generates more tax revenues. Instead of tapping the revenues, spending may need to be reined in.

It forecasts housing completions of 18,500 units this year and 25,000 completions in 2018.

The ESRI said: “It is more than likely that the construction sector will assume a growing importance in the domestic economy over the medium term.

“While this reflects the fact that housing supply is still somewhat below estimated levels of housing demand in the economy, it is important to remember the imbalances which emerged in the Irish economy prior to 2007.

“Not alone did the housing bubble have severe consequences for the banking sector, but overall economic activity was distorted in a number of ways by the disproportionate significance of the construction sector.”

Nonetheless, the latest quarterly report projects a healthy snapshot of the economy, in the short term. It forecasts GDP will expand at a slightly-faster pace of 3.8% this year and 3.6% in 2018.

Exports will continue to grow in the short term but increasingly, demand at home will drive the economy. Unemployment will fall to 5.6% in the last few months of 2018, it forecast. Once the jobless rate falls below 5.5%, the economy may enter the start of an overheating phase, the think-tank believes.

In the longer term, the economy faces turbulence. The UK’s determination of staying out of the EU’s customs union points to a hard Irish border, implying large effects on food producers, tourism and other industries, North and South.

Dublin may benefit overall from Brexit if it were to lure banks leaving London, but other regions which are dependent on the food industries, including the border counties, north Cork and Tipperary could be adversely affected.

The ‘America First’ trade policies of President Donald Trump’s White House pose further challenges, the ESRI predicts.

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