Continued strong growth could overheat Irish economy

08 Jun, 2016 8:36 am

DUBLIN – There is little evidence that Ireland’s rapidly recovering economy is overheating but continuing strong growth could raise sustainability concerns within a few years, the country’s independent fiscal watchdog said on Wednesday.

Ireland’s economy is set to be the fastest growing in the European Union for the third successive year in 2016 after expanding by 7.8 percent in 2015, just two years after emerging from an international bailout programme.

Ireland’s Fiscal Advisory Council said that, with little to no inflation and no clear wage pressures yet apparent, the labour market and current account balance did not appear to be showing signs of an overheating economy at present.

However, expected growth of 4.9 percent this year means there is unlikely to be a large shortfall in demand in the economy by the end of 2016, the council said. That could raise risks if growth does not moderate, as anticipated, to an average of around 3 percent in the years that follow.

“Although there is much uncertainty surrounding the cyclical position of the economy at the moment, continuing strong growth could, within a few years, raise concerns around overheating and sustainability,” its biannual assessment of the economy said.

The European Central Bank’s accommodative monetary policy, which was among a number of favourable external factors to help Ireland out of a deep recession, could also soon be looser than would be ideal for the euro zone’s top economy, it added.

The council, which assesses government forecasts and compliance with budgetary rules, said that tighter fiscal policy would be required if signs of overheating emerge, backing the government’s plans to set up a “rainy day fund” to deal with potential future fiscal pressures.

As it stands, the watchdog considered the government’s plans to introduce a 900 million euro package of spending increases and tax cuts in its budget for 2017 as fiscally prudent, though there is a limited case for anything more expansionary.

Echoing recent warnings from Ireland’s finance ministry, it added that while the near-term prospects for the economy are strong, substantial external risks surround the outlook, chief among them neighbouring Britain’s referendum on EU membership.

It said a British vote to leave the EU on June 23 could have many different impacts for Ireland, in particular leading to a drag on Irish exports. -Reuters

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